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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 March 31, 2011

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) 925-5501

(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 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 May 11, 2011, there were 2,849,841 outstanding shares of Registrants common stock.

This Form 10-Q has 51 pages.









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##### Table of Contents

Table of Contents



|                                                                                                           |  |                                                                                       |    |  |    | 
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | -- |  | -- | 
|Index                                                                                                      |  | Beginson Page                                                                         |   
|                                                                                                           | 
|Part 1  Financial Information                                                                             |  |                                                                                       |    | 
|                                                                                                           |  |                                                                                      
|Item 1.                                                                                                    |  | Financial Statements:                                                                 |    |  |    | 
|                                                                                                           | 
|Consolidated Balance Sheets at March 31, 2011 and December 31, 2010                                        |  |                                                                                       | 3  | 
|Consolidated Results of Operations for Three Months Ended March 31, 2011 and
2010                          |  |                                                                                       | 4  | 
|Consolidated Statements of Changes in Shareholders Equity for Three Months Ended March 31, 2011
 and 2010 |  |                                                                                       | 5  | 
|Consolidated Statements of Cash Flows for Three Months Ended March 31, 2011 and
2010                       |  |                                                                                       | 6  | 
|Notes to Consolidated Financial Statements                                                                 |  |                                                                                       | 7  | 
|                                                                                                           |  |                                                                                      
|Item 2.                                                                                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |  | 31 | 
|Item 3.                                                                                                    |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |  | 44 | 
|Item 4.                                                                                                    |  | Controls and Procedures                                                               |    |  | 44 | 
|                                                                                                           | 
|Part II  Other Information                                                                                |  |                                                                                       |    | 
|                                                                                                           |  |                                                                                      
|Item 1.                                                                                                    |  | Legal Proceedings                                                                     |    |  | 45 | 
|Item 1A.                                                                                                   |  | Risk Factors                                                                          |    |  | 45 | 
|Item 2.                                                                                                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |    |  | 45 | 
|Item 3.                                                                                                    |  | Defaults upon Senior Securities                                                       |    |  | 45 | 
|Item 4.                                                                                                    |  | Removed and Reserved                                                                  |    |  | 45 | 
|Item 5.                                                                                                    |  | Other Information                                                                     |    |  | 45 | 
|Item 6.                                                                                                    |  | Exhibits                                                                              |    |  | 45 | 
|                                                                                                           | 
|Signatures                                                                                                 |  |                                                                                       | 46 | 
|Exhibit Index                                                                                              |  |                                                                                       | 47 | 
|Certifications                                                                                             |  |                                                                                       | 48 | 



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2011 and December 31, 2010

(Dollars in thousands, except per
share data)



|                                                                                                                          |  |               |            |   |                   |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                          |  | March 31,2011 |            |   | December 31,2010* |  
|Assets                                                                                                                    |  |               |            |   |                   |   |            |  
|Non-interest bearing deposits and cash                                                                                    |  | $             | 10,176     |   |                   | $ | 11,731     |  
|Interest bearing deposits                                                                                                 |  |               | 30         |   |                   |   | 20         |  
|Overnight investments                                                                                                     |  |               |           |   |                   |   | 8,415      |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total cash and cash equivalents                                                                                           |  |               | 10,206     |   |                   |   | 20,166     |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Investment securities                                                                                                     |  |               |            |   |                   |   |            |  
|Available-for-sale, at market value (cost of $307,812 and $275,883 at March 31, 2011 and December 31, 2010,
respectively) |  |               | 304,975    |   |                   |   | 273,229    |  
|                                                                                                                          |  |              
|Loans held for sale                                                                                                       |  |               | 623        |   |                   |   | 4,136      |  
|                                                                                                                          |  |              
|Loans                                                                                                                     |  |               | 546,641    |   |                   |   | 567,631    |  
|Allowance for loan losses                                                                                                 |  |               | (15,219    | ) |                   |   | (13,247    | )
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Loans, net                                                                                                                |  |               | 531,422    |   |                   |   | 554,384    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Real estate and repossessions acquired in settlement of loans, net                                                        |  |               | 7,258      |   |                   |   | 4,536      |  
|Federal Home Loan Bank common stock, at cost                                                                              |  |               | 4,571      |   |                   |   | 4,571      |  
|Bank premises and equipment, net                                                                                          |  |               | 26,716     |   |                   |   | 26,636     |  
|Accrued interest receivable                                                                                               |  |               | 4,808      |   |                   |   | 5,243      |  
|Bank owned life insurance                                                                                                 |  |               | 9,028      |   |                   |   | 8,954      |  
|Other assets                                                                                                              |  |               | 16,964     |   |                   |   | 18,014     |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total                                                                                                                     |  | $             | 916,571    |   |                   | $ | 919,869    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Liabilities and Shareholders Equity                                                                                      |  |               |            |   |                   |   |            |  
|Deposits                                                                                                                  |  |               |            |   |                   |   |            |  
|Demand, noninterest bearing                                                                                               |  | $             | 106,898    |   |                   | $ | 104,932    |  
|Demand, interest bearing                                                                                                  |  |               | 251,474    |   |                   |   | 262,977    |  
|Savings                                                                                                                   |  |               | 36,314     |   |                   |   | 29,938     |  
|Time                                                                                                                      |  |               | 392,068    |   |                   |   | 388,094    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total deposits                                                                                                            |  |               | 786,754    |   |                   |   | 785,941    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Accrued interest payable                                                                                                  |  |               | 639        |   |                   |   | 631        |  
|Short-term borrowings                                                                                                     |  |               | 17,421     |   |                   |   | 11,509     |  
|Long-term obligations                                                                                                     |  |               | 27,500     |   |                   |   | 34,500     |  
|Other liabilities                                                                                                         |  |               | 5,044      |   |                   |   | 6,394      |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total liabilities                                                                                                         |  |               | 837,358    |   |                   |   | 838,975    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Shareholders equity                                                                                                      |  |               |            |   |                   |   |            |  
|Preferred stock, Series A                                                                                                 |  |               | 17,329     |   |                   |   | 17,288     |  
|Common stock, par value $3.50 per share                                                                                   |  |               | 9,974      |   |                   |   | 9,974      |  
|Capital surplus                                                                                                           |  |               | 25,858     |   |                   |   | 25,852     |  
|Warrants                                                                                                                  |  |               | 878        |   |                   |   | 878        |  
|Retained earnings                                                                                                         |  |               | 27,006     |   |                   |   | 28,554     |  
|Accumulated other comprehensive loss                                                                                      |  |               | (1,832     | ) |                   |   | (1,652     | )
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total shareholders equity                                                                                                |  |               | 79,213     |   |                   |   | 80,894     |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|Total                                                                                                                     |  | $             | 916,571    |   |                   | $ | 919,869    |  
|                                                                                                                          |  |               |            |   |                   |   |            |  
|                                                                                                                          |  |              
|Common shares outstanding                                                                                                 |  |               | 2,849,841  |   |                   |   | 2,849,841  |  
|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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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Results of Operations

For the three months ended March 31, 2011 and 2010

(Dollars in thousands,
except per share data)



|                                                                          |  |                              |           |   |      |   |           |  
|------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                                                          |  | Three months ended March 31, |          
|                                                                          |  | 2011                         |           |   | 2010 |  
|Interest income:                                                          |  |                              |           |   |      |   |           |  
|Interest and fees on loans                                                |  | $                            | 7,357     |   |      | $ | 7,632     |  
|Interest on investment securities:                                        |  |                              |           |   |      |   |           |  
|Interest exempt from federal income taxes                                 |  |                              | 128       |   |      |   | 462       |  
|Taxable interest income                                                   |  |                              | 1,937     |   |      |   | 1,897     |  
|Dividend income                                                           |  |                              | 9         |   |      |   | 27        |  
|Other interest income                                                     |  |                              | 7         |   |      |   | 2         |  
|                                                                          |  |                              |           |   |      |   |           |  
|Total interest income                                                     |  |                              | 9,438     |   |      |   | 10,020    |  
|                                                                          |  |                              |           |   |      |   |           |  
|Interest expense:                                                         |  |                              |           |   |      |   |           |  
|Deposits:                                                                 |  |                              |           |   |      |   |           |  
|Demand accounts                                                           |  |                              | 557       |   |      |   | 317       |  
|Savings                                                                   |  |                              | 53        |   |      |   | 12        |  
|Time                                                                      |  |                              | 1,811     |   |      |   | 2,489     |  
|Short-term borrowings                                                     |  |                              | 69        |   |      |   | 56        |  
|Long-term obligations                                                     |  |                              | 180       |   |      |   | 151       |  
|                                                                          |  |                              |           |   |      |   |           |  
|Total interest expense                                                    |  |                              | 2,670     |   |      |   | 3,025     |  
|                                                                          |  |                              |           |   |      |   |           |  
|                                                                          |  |                             
|Net interest income                                                       |  |                              | 6,768     |   |      |   | 6,995     |  
|Provision for loan losses                                                 |  |                              | 3,930     |   |      |   | 3,000     |  
|                                                                          |  |                              |           |   |      |   |           |  
|Net interest income after provision for loan losses                       |  |                              | 2,838     |   |      |   | 3,995     |  
|                                                                          |  |                              |           |   |      |   |           |  
|                                                                          |  |                             
|Noninterest income:                                                       |  |                              |           |   |      |   |           |  
|Service charges on deposit accounts                                       |  |                              | 765       |   |      |   | 823       |  
|Other service charges and fees                                            |  |                              | 244       |   |      |   | 265       |  
|Mortgage origination fees                                                 |  |                              | 326       |   |      |   | 212       |  
|Net gain on sale of securities                                            |  |                              | 26        |   |      |   | 1,289     |  
|Income from bank owned life insurance                                     |  |                              | 74        |   |      |   | 74        |  
|Other operating income (expense)                                          |  |                              | (4        | ) |      |   | 5         |  
|                                                                          |  |                              |           |   |      |   |           |  
|Total noninterest income                                                  |  |                              | 1,431     |   |      |   | 2,668     |  
|                                                                          |  |                              |           |   |      |   |           |  
|                                                                          |  |                             
|Noninterest expenses:                                                     |  |                              |           |   |      |   |           |  
|Salaries                                                                  |  |                              | 2,564     |   |      |   | 2,319     |  
|Retirement and other employee benefits                                    |  |                              | 676       |   |      |   | 730       |  
|Occupancy                                                                 |  |                              | 483       |   |      |   | 457       |  
|Equipment                                                                 |  |                              | 559       |   |      |   | 467       |  
|Professional fees                                                         |  |                              | 271       |   |      |   | 288       |  
|Supplies                                                                  |  |                              | 51        |   |      |   | 52        |  
|Telephone/data communications                                             |  |                              | 169       |   |      |   | 183       |  
|FDIC insurance                                                            |  |                              | 326       |   |      |   | 333       |  
|Other outside services                                                    |  |                              | 181       |   |      |   | 118       |  
|Net cost of real estate and repossessions acquired in settlement of loans |  |                              | 18        |   |      |   | 334       |  
|Other operating expenses                                                  |  |                              | 946       |   |      |   | 957       |  
|                                                                          |  |                              |           |   |      |   |           |  
|Total noninterest expenses                                                |  |                              | 6,244     |   |      |   | 6,238     |  
|                                                                          |  |                              |           |   |      |   |           |  
|Income (loss) before income taxes                                         |  |                              | (1,975    | ) |      |   | 425       |  
|Income tax benefit                                                        |  |                              | (891      | ) |      |   | (62       | )
|                                                                          |  |                              |           |   |      |   |           |  
|Net income (loss)                                                         |  |                              | (1,084    | ) |      |   | 487       |  
|                                                                          |  |                              |           |   |      |   |           |  
|Preferred stock dividends                                                 |  |                              | 224       |   |      |   | 224       |  
|Accretion of discount                                                     |  |                              | 41        |   |      |   | 41        |  
|                                                                          |  |                              |           |   |      |   |           |  
|Income (loss) available to common shareholders                            |  | ($                           | 1,349     | ) |      | $ | 222       |  
|                                                                          |  |                              |           |   |      |   |           |  
|                                                                          |  |                             
|Net income (loss) per share - basic                                       |  | ($                           | 0.47      | ) |      | $ | 0.08      |  
|                                                                          |  |                              |           |   |      |   |           |  
|Net income (loss) per share - diluted                                     |  | ($                           | 0.47      | ) |      | $ | 0.08      |  
|                                                                          |  |                              |           |   |      |   |           |  
|Weighted average shares outstanding - basic                               |  |                              | 2,849,841 |   |      |   | 2,848,839 |  
|                                                                          |  |                              |           |   |      |   |           |  
|Weighted average shares outstanding - diluted                             |  |                              | 2,849,841 |   |      |   | 2,848,969 |  
|                                                                          |  |                              |           |   |      |   |           |  



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Three months ended March 31, 2011 and 2010

(Dollars in thousands, except per
share data)



|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------- | ------ |  | ------------ |  | --------- | ----------- |  | - | -------- |  |  | -------- | --- |  | ----------------------------- | - | ------ | ------------- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                       |  | Preferredstock, |        |  | Common Stock |  |           | Commonstock |  |   | Capital  |  |  | Retained |     |  | Accumulatedothercomprehensive |   |        | Comprehensive |  |   |        |  
|                                                                                       |  | Series A        |        |  | Number       |  |           | Amount      |  |   | warrants |  |  | surplus  |     |  | earnings                      |   |        | income        |  |   | income |   |  | Total |       
|Balance January 1, 2010                                                                |  | $               | 17,122 |  |              |  | 2,847,881 |             |  | $ | 9,968    |  |  | $        | 878 |  |                               | $ | 25,803 |               |  | $ | 29,555 |   |  | $     | 1,049  |   |  |   |        |   |  | $ | 84,375 |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Unrealized loss, net of income tax benefit of $ 110                                    |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       | (176   | ) |  | $ | (176   | ) |  |   | (176   | )
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Net income                                                                             |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | 487    |   |  |       |        |   |  |   | 487    |   |  |   | 487    |  
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Total comprehensive income                                                             |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  | $ | 311    |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Stock based compensation                                                               |  |                 |        |  |              |  |           |             |  |   |         |  |  |          |     |  |                               |   | 11     |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   | 11     |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Stock options exercised                                                                |  |                 |        |  |              |  | 1,960     |             |  |   | 6        |  |  |          |     |  |                               |   | 13     |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   | 19     |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Preferred stock accretion                                                              |  |                 | 41     |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (41    | ) |  |       |        |   |  |   |        |   |  |   |       |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Cash dividends on preferred stock                                                      |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (224   | ) |  |       |        |   |  |   |        |   |  |   | (224   | )
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Cash dividends ($0.07 per share)                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (200   | ) |  |       |        |   |  |   |        |   |  |   | (200   | )
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Balance March 31, 2010                                                                 |  | $               | 17,163 |  |              |  | 2,849,841 |             |  | $ | 9,974    |  |  | $        | 878 |  |                               | $ | 25,827 |               |  | $ | 29,577 |   |  | $     | 873    |   |  |   |        |   |  | $ | 84,292 |  
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |            
|                                                                                       |  | Preferredstock, |        |  | Common Stock |  |           | Commonstock |  |   | Capital  |  |  | Retained |     |  | Accumulatedothercomprehensive |   |        | Comprehensive |  |   |        |  
|                                                                                       |  | Series A        |        |  | Number       |  |           | Amount      |  |   | warrants |  |  | surplus  |     |  | earnings                      |   |        | loss          |  |   | loss   |   |  | Total |       
|Balance January 1, 2011                                                                |  | $               | 17,288 |  |              |  | 2,849,841 |             |  | $ | 9,974    |  |  | $        | 878 |  |                               | $ | 25,852 |               |  | $ | 28,554 |   |  | $     | (1,652 | ) |  |   |        |   |  | $ | 80,894 |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Unrealized loss, net of income tax benefit of $ 70                                     |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       | (113   | ) |  | $ | (113   | ) |  |   | (113   | )
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Post retirement health insurance benefit adjustment, net of income tax benefit of $ 42 |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       | (67    | ) |  |   | (67    | ) |  |   | (67    | )
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Net loss                                                                               |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (1,084 | ) |  |       |        |   |  |   | (1,084 | ) |  |   | (1,084 | )
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Total comprehensive income                                                             |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  | $ | (1,264 | ) |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Stock based compensation                                                               |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   | 6      |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   | 6      |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Preferred stock accretion                                                              |  |                 | 41     |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (41    | ) |  |       |        |   |  |   |        |   |  |   |       |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Cash dividends on preferred stock                                                      |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (224   | ) |  |       |        |   |  |   |        |   |  |   | (224   | )
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Cash dividends ($0.07 per share)                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   | (199   | ) |  |       |        |   |  |   |        |   |  |   | (199   | )
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  
|                                                                                       |  |                 |        |  |              |  |           |             | 
|Balance March 31, 2011                                                                 |  | $               | 17,329 |  |              |  | 2,849,841 |             |  | $ | 9,974    |  |  | $        | 878 |  |                               | $ | 25,858 |               |  | $ | 27,006 |   |  | $     | (1,832 | ) |  |   |        |   |  | $ | 79,213 |  
|                                                                                       |  |                 |        |  |              |  |           |             |  |   |          |  |  |          |     |  |                               |   |        |               |  |   |        |   |  |       |        |   |  |   |        |   |  |   |        |  



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2011 and 2010

(Dollar amounts in thousands)



|                                                                                                                      |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                      |  | Three months endedMarch 31, |        
|                                                                                                                      |  | 2011                        |         |   | 2010 |  
|Cash flows from operating activities:                                                                                 |  |                             |         |   |      |   |         |  
|Net income (loss)                                                                                                     |  | $                           | (1,084  | ) |      | $ | 487     |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |                             |         |   |      |   |         |  
|Depreciation                                                                                                          |  |                             | 374     |   |      |   | 317     |  
|Amortization of premium on investment securities, net                                                                 |  |                             | 749     |   |      |   | 337     |  
|Provision for loan losses                                                                                             |  |                             | 3,930   |   |      |   | 3,000   |  
|Gain on sale of securities                                                                                            |  |                             | (26     | ) |      |   | (1,289  | )
|Stock based compensation                                                                                              |  |                             | 6       |   |      |   | 11      |  
|Decrease in accrued interest receivable                                                                               |  |                             | 435     |   |      |   | 261     |  
|(Gain) loss on sale of real estate and repossessions acquired in settlement of loans                                  |  |                             | (13     | ) |      |   | 405     |  
|Income from Bank owned life insurance                                                                                 |  |                             | (74     | ) |      |   | (74     | )
|Originations of mortgage loans held for sale                                                                          |  |                             | (15,910 | ) |      |   | (627    | )
|Proceeds from sale of loans held for sale                                                                             |  |                             | 19,423  |   |      |   |        |  
|Decrease in other assets                                                                                              |  |                             | 1,162   |   |      |   | 168     |  
|(Decrease) increase in accrued interest payable                                                                       |  |                             | 8       |   |      |   | (79     | )
|Decrease in other liabilities, net                                                                                    |  |                             | (1,459  | ) |      |   | (38     | )
|                                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                                             |  |                             | 7,521   |   |      |   | 2,879   |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                                      |  |                            
|Cash flows from investing activities:                                                                                 |  |                             |         |   |      |   |         |  
|Proceeds from sales of investment securities classified as available-for-sale                                         |  |                             | 4,902   |   |      |   | 47,243  |  
|Proceeds from maturities of investment securities classified as available-for-sale                                    |  |                             | 10,991  |   |      |   | 14,599  |  
|Purchases of investment securities classified as available-for-sale                                                   |  |                             | (48,545 | ) |      |   | (19,614 | )
|Purchases of premises and equipment                                                                                   |  |                             | (454    | ) |      |   | (102    | )
|Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for
sale |  |                             | 802     |   |      |   | 561     |  
|Net loan originations (repayments)                                                                                    |  |                             | 15,521  |   |      |   | (2,066  | )
|                                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided (used) by investing activities                                                                      |  |                             | (16,783 | ) |      |   | 40,621  |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                                      |  |                            
|Cash flows from financing activities:                                                                                 |  |                             |         |   |      |   |         |  
|Net increase in deposits                                                                                              |  |                             | 813     |   |      |   | 18,197  |  
|Net decrease in borrowings                                                                                            |  |                             | (1,088  | ) |      |   | (8,533  | )
|Dividends paid to common shareholders                                                                                 |  |                             | (199    | ) |      |   | (520    | )
|Dividends paid on preferred stock                                                                                     |  |                             | (224    | ) |      |   | (224    | )
|Net proceeds from issuance of common stock                                                                            |  |                             |        |   |      |   | 19      |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided (used) by financing activities                                                                      |  |                             | (698    | ) |      |   | 8,939   |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                                      |  |                            
|Increase (decrease) in cash and cash equivalents                                                                      |  |                             | (9,960  | ) |      |   | 52,439  |  
|Cash and cash equivalents at beginning of period                                                                      |  |                             | 20,166  |   |      |   | 17,811  |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                            |  | $                           | 10,206  |   |      | $ | 70,250  |  
|                                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                                      |  |                            
|Cash paid during the period:                                                                                          |  |                             |         |   |      |   |         |  
|Interest                                                                                                              |  | $                           | 2,662   |   |      | $ | 3,104   |  
|Taxes                                                                                                                 |  |                             |        |   |      |   |        |  
|                                                                                                                      |  |                            
|Supplemental disclosures of noncash financing and investing activities:                                               |  |                             |         |   |      |   |         |  
|Cash dividends declared but not paid                                                                                  |  | $                           | 199     |   |      | $ | 199     |  
|Unrealized gains (losses) on available-for-sale securities, net of deferred taxes                                     |  |                             | (113    | ) |      |   | (176    | )
|Transfer from loans to real estate and repossessions acquired in settlement of loans                                  |  |                             | 3,511   |   |      |   | 497     |  
|Transfer from long-term to short-term borrowings                                                                      |  |                             | 7,000   |   |      |   | 6,500   |  
|Transfer from investments to other assets                                                                             |  |                             |        |   |      |   | 250     |  

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 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 and 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. 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 financial statements. Operating results for the period ended March 31, 2011, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2011.

Loans

Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any
deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.

Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the
contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.

Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in managements judgment, the collection of
interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms
over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries,
if any, are credited to the allowance. The AFLL represents managements estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Managements periodic evaluation of the adequacy of the allowance is based
on individual loan reviews, past loan loss experience, economic conditions in the Companys market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is
inherently subjective as it requires material estimates, including the amounts and timing of future cash flows



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##### Table of Contents

expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about
information available to them at the time of their examination.

In evaluating the allowance for loan losses, the Company
prepares an analysis of its current loan portfolio 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. Most loans risk rated substandard, doubtful and
loss are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated substandard, doubtful and loss with balances less than $100 thousand are not
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 portion determined through general qualitative and quantitative internal and external factors, the general
portion 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. While the Company believes 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 in full against the
Company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.



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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.

(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 three months ended March 31, 2011 and March 31, 2010.

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. Diluted weighted average shares outstanding did not increase for the three month ended March 31, 2011 as there was no dilutive impact of
options for the period. For the three months ended March 31, 2010, diluted weighted average shares outstanding increased by 130 due to the dilutive impact of options. As of March 31, 2011, the warrant, covering approximately
145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted earnings per share as the effect would have been anti-dilutive. There were 55,375 options outstanding for the three
months ended March 31, 2010, with an exercise price above the average market value of the Companys stock for that period. As of March 31, 2010, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury
Department was not included in the computation of net income per share because its exercise price exceeded the average market price of the companys stock for the periods.



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##### Table of Contents

The following is a reconciliation of the numerators and denominators used in computing
basic and diluted net income per share.



|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|----------------------------- |  | ---------------------------------------------------------------------------------------- | ------ | - | ------------------- |  | --------- | --------------- |  | - | ----- | -
|                              |  | Three months ended March 31,
2011(Dollars in thousands, except share and per share data) |       
|                              |  | Income(Numerator)                                                                        |        |   | Shares(Denominator) |  |           | Per ShareAmount | 
|                              |  |                                                                                          |       
|Basic net loss per share      |  | $                                                                                        | (1,349 | ) |                     |  | 2,849,841 |                 |  | $ | (0.47 | )
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|                              |  |                                                                                          |       
|Effect of dilutive securities |  |                                                                                          |       |   |                     |  |          |                 |  |   |       |  
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|                              |  |                                                                                          |       
|Diluted net loss per share    |  | $                                                                                        | (1,349 | ) |                     |  | 2,849,841 |                 |  | $ | (0.47 | )
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|                              | 
|                              |  | Three months ended March 31,
2010(Dollars in thousands, except share and per share data) |       
|                              |  | Income(Numerator)                                                                        |        |   | Shares(Denominator) |  |           | Per ShareAmount | 
|                              |  |                                                                                          |       
|Basic net income per share    |  | $                                                                                        | 222    |   |                     |  | 2,848,839 |                 |  | $ | 0.08  |  
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|                              |  |                                                                                          |       
|Effect of dilutive securities |  |                                                                                          |       |   |                     |  | 130       |                 |  |   |       |  
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  
|                              |  |                                                                                          |       
|Diluted net income per share  |  | $                                                                                        | 222    |   |                     |  | 2,848,969 |                 |  | $ | 0.08  |  
|                              |  |                                                                                          |        |   |                     |  |           |                 |  |   |       |  

(3) 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 three months ended March 31, 2011 and 2010 includes the following components.



|                                         |  |                              |    |  |      |   |    |  
|---------------------------------------- |  | ---------------------------- | -- |  | ---- | - | -- | -
|                                         |  | Three months endedMarch 
31, |   
|Components of Net Periodic Benefit Cost  |  | 2011                         |    |  | 2010 |  
|                                         |  | (Dollars in thousands)       |   
|Service cost                             |  | $                            | 2  |  |      | $ | 1  |  
|Interest cost                            |  |                              | 9  |  |      |   | 10 |  
|Prior service cost                       |  |                              |   |  |      |   | (2 | )
|                                         |  |                              |    |  |      |   |    |  
|Net periodic postretirement benefit cost |  | $                            | 11 |  |      | $ | 9  |  
|                                         |  |                              |    |  |      |   |    |  

The Company expects to contribute $43 thousand to its postretirement benefit plan in 2011. No contributions
were made in the first quarter of 2011.



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(4) Investment Securities

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



|                                                 |  |                        |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|------------------------------------------------ |  | ---------------------- | ------- |  | -------------------- | - | ----- | --------------------- |  | - | --------- | - |  | - | ------- | 
|                                                 |  | March 31, 2011         |        
|                                                 |  | AmortizedCost          |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | FairValue |  
|                                                 |  | (Dollars in thousands) |        
|Securities available-for-sale:                   |  |                        |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 23,266  |  |                      | $ | 69    |                       |  | $ | (829      | ) |  | $ | 22,506  | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 12,407  |  |                      |   | 279   |                       |  |   | (19       | ) |  |   | 12,667  | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 164,499 |  |                      |   | 730   |                       |  |   | (1,431    | ) |  |   | 163,798 | 
|                                                 |  |                        |         | 
|SBA-backed securities                            |  |                        | 78,328  |  |                      |   | 250   |                       |  |   | (858      | ) |  |   | 77,720  | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 29,312  |  |                      |   | 173   |                       |  |   | (1,201    | ) |  |   | 28,284  | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|                                                 |  | $                      | 307,812 |  |                      | $ | 1,501 |                       |  | $ | (4,338    | ) |  | $ | 304,975 | 
|                                                 | 
|                                                 |  | December 31, 2010      |        
|                                                 |  | AmortizedCost          |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | FairValue |  
|                                                 |  | (Dollars in thousands) |        
|Securities available-for-sale:                   |  |                        |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 25,466  |  |                      | $ | 183   |                       |  | $ | (868      | ) |  | $ | 24,781  | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 12,818  |  |                      |   | 240   |                       |  |   | (80       | ) |  |   | 12,978  | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 150,850 |  |                      |   | 837   |                       |  |   | (1,597    | ) |  |   | 150,090 | 
|                                                 |  |                        |         | 
|SBA-backed securities                            |  |                        | 57,362  |  |                      |   | 258   |                       |  |   | (767      | ) |  |   | 56,853  | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 29,387  |  |                      |   | 77    |                       |  |   | (937      | ) |  |   | 28,527  | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|                                                 |  | $                      | 275,883 |  |                      | $ | 1,595 |                       |  | $ | (4,249    | ) |  | $ | 273,229 | 

Gross realized gains
and losses on sales of securities for the three months ended March 31, 2011 and March 31, 2010 were as follows (dollars in thousands):



|                            |  |                                                     |    |  |      |   |       | 
|--------------------------- |  | --------------------------------------------------- | -- |  | ---- | - | ----- | 
|                            |  | Three months ended
March 31, (Dollars in thousands) |   
|                            |  | 2011                                                |    |  | 2010 |  
|                            |  |                                                    
|Gross realized gains        |  | $                                                   | 26 |  |      | $ | 1,289 | 
|                            |  |                                                    
|Gross realized losses       |  |                                                     |   |  |      |   |      | 
|                            |  |                                                     |    |  |      |   |       | 
|                            |  |                                                    
|Net realized (losses) gains |  | $                                                   | 26 |  |      | $ | 1,289 | 
|                            |  |                                                     |    |  |      |   |       | 



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

The following tables set forth the amount of unrealized losses at March 31, 2011 and December 31, 2010 (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 tables are segregated into investments that
have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer.

March 31, 2011



|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------------------- | - | ----- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------- |  |  | - | ----- | 
|                                                 |  | Less Than 12 Months    |         |  | 12 Months or longer |   |       | Total     | 
|                                                 |  | FairValue              |         |  | UnrealizedLosses    |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                                                 |  | (Dollars in thousands) |        
|                                                 |  |                        |         |  |                     |  
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 17,433  |  |                     | $ | 829   |           |  | $ |                 |  |  | $         |    |  |                  | $ | 17,433  |  |  | $ | 829   | 
|                                                 |  |                        |         |  |                     |  
|Obligations of states and political subdivisions |  |                        | 1,729   |  |                     |   | 19    |           |  |   |                 |  |  |           |    |  |                  |   | 1,729   |  |  |   | 19    | 
|                                                 |  |                        |         |  |                     |  
|Mortgage-backed securities                       |  |                        | 93,738  |  |                     |   | 1,431 |           |  |   |                 |  |  |           |    |  |                  |   | 93,738  |  |  |   | 1,431 | 
|                                                 |  |                        |         |  |                     |  
|SBA-backed securities                            |  |                        | 36,213  |  |                     |   | 858   |           |  |   |                 |  |  |           |    |  |                  |   | 36,213  |  |  |   | 858   | 
|                                                 |  |                        |         |  |                     |  
|Corporate bonds                                  |  |                        | 23,411  |  |                     |   | 525   |           |  |   | 1,324            |  |  |           | 676 |  |                  |   | 24,735  |  |  |   | 1,201 | 
|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 
|                                                 |  |                        |         |  |                     |  
|Total                                            |  | $                      | 172,524 |  |                     | $ | 3,662 |           |  | $ | 1,324            |  |  | $         | 676 |  |                  | $ | 173,848 |  |  | $ | 4,338 | 
|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 

December 31, 2010



|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------------------- | - | ----- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------- |  |  | - | ----- | 
|                                                 |  | Less Than 12 Months    |         |  | 12 Months or longer |   |       | Total     | 
|                                                 |  | FairValue              |         |  | UnrealizedLosses    |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                                                 |  | (Dollars in thousands) |        
|                                                 |  |                        |         |  |                     |  
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 17,410  |  |                     | $ | 868   |           |  | $ |                 |  |  | $         |    |  |                  | $ | 17,410  |  |  | $ | 868   | 
|                                                 |  |                        |         |  |                     |  
|Obligations of states and political subdivisions |  |                        | 3,548   |  |                     |   | 80    |           |  |   |                 |  |  |           |    |  |                  |   | 3,548   |  |  |   | 80    | 
|                                                 |  |                        |         |  |                     |  
|Mortgage-backed securities                       |  |                        | 99,549  |  |                     |   | 1,597 |           |  |   |                 |  |  |           |    |  |                  |   | 99,549  |  |  |   | 1,597 | 
|                                                 |  |                        |         |  |                     |  
|SBA-backed securities                            |  |                        | 31,963  |  |                     |   | 767   |           |  |   |                 |  |  |           |    |  |                  |   | 31,963  |  |  |   | 767   | 
|                                                 |  |                        |         |  |                     |  
|Corporate bonds                                  |  |                        | 20,815  |  |                     |   | 654   |           |  |   | 1,717            |  |  |           | 283 |  |                  |   | 22,532  |  |  |   | 937   | 
|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 
|                                                 |  |                        |         |  |                     |  
|Total                                            |  | $                      | 173,285 |  |                     | $ | 3,966 |           |  | $ | 1,717            |  |  | $         | 283 |  |                  | $ | 175,002 |  |  | $ | 4,249 | 
|                                                 |  |                        |         |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |         |  |  |   |       | 



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As of March 31, 2011 and December 31, 2010, 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 are on debt securities that have contractual maturity dates and are primarily related to market interest rates. Municipal losses are 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 March 31, 2011 and December 31, 2010, the balance of Federal Home Loan Bank (FHLB) of Atlanta stock held by the
Company was $4.6 million for both periods. On March 31, 2011, FHLB paid a dividend for the fourth quarter of 2010 with an annualized rate of 0.79%. The dividend rate was equal to average three-month LIBOR for the period of October 1,
2010 to December 31, 2010 plus 0.50%, 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 March 31, 2011 or December 31,
2010. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not 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 March 31, 2011 by remaining
contractual maturity are as follows:



|                                                  |  |                        |         |  |           |   |         | 
|------------------------------------------------- |  | ---------------------- | ------- |  | --------- | - | ------- | 
|                                                  |  | AmortizedCost          |         |  | FairValue |  
|                                                  |  | (Dollars in thousands) |        
|Government-sponsored enterprises and FFCB bonds:  |  |                        |         | 
|                                                  |  |                       
|Due in one through five years                     |  | $                      | 2,000   |  |           | $ | 1,980   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 21,266  |  |           |   | 20,526  | 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one year or less                           |  |                        | 370     |  |           |   | 371     | 
|                                                  |  |                       
|Due in one through five years                     |  |                        | 151     |  |           |   | 152     | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 5,149   |  |           |   | 5,302   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 6,737   |  |           |   | 6,841   | 
|                                                  |  |                       
|Mortgage-backed securities:                       |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 8,920   |  |           |   | 9,105   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 155,579 |  |           |   | 154,694 | 
|                                                  |  |                       
|SBA-backed securities:                            |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 5,444   |  |           |   | 5,537   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 72,884  |  |           |   | 72,183  | 
|                                                  |  |                       
|Corporate bonds:                                  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one through five years                     |  |                        | 8,754   |  |           |   | 8,746   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 20,558  |  |           |   | 19,538  | 
|                                                  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Total securities                                  |  | $                      | 307,812 |  |           | $ | 304,975 | 
|                                                  |  |                        |         |  |           |   |         | 



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Securities with an amortized cost of $200.7 million at March 31, 2011 are pledged as
collateral. Of this total, securities with an amortized cost of $49.7 million and fair value of $49.0 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, 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                     |  | $                      | 2,000   |  |           | $ | 1,972   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 16,108  |  |           |   | 15,982  | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 7,358   |  |           |   | 6,827   | 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one year or less                           |  |                        | 370     |  |           |   | 373     | 
|                                                  |  |                       
|Due in one through five years                     |  |                        | 252     |  |           |   | 253     | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 5,203   |  |           |   | 5,354   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 6,993   |  |           |   | 6,998   | 
|                                                  |  |                       
|Mortgage-backed securities:                       |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 4,307   |  |           |   | 4,551   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 146,543 |  |           |   | 145,539 | 
|                                                  |  |                       
|SBA-backed securities:                            |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 5,889   |  |           |   | 5,973   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 51,473  |  |           |   | 50,880  | 
|                                                  |  |                       
|Corporate bonds:                                  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one year through five years                |  |                        | 8,779   |  |           |   | 8,712   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 17,421  |  |           |   | 16,767  | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 3,187   |  |           |   | 3,048   | 
|                                                  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Total securities                                  |  | $                      | 275,883 |  |           | $ | 273,229 | 
|                                                  |  |                        |         |  |           |   |         | 

Securities with an amortized cost of $212.2 million at December 31, 2010 were pledged as collateral. Of
this total, securities with an amortized cost of $52.9 million and fair value of $52.2 million were pledged as collateral for FHLB advances.

(5) Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income (loss) for the periods presented are as follows:



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|                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three months ended
March 31 |       
|                                                    |  | 2011                        |        |   | 2010 |  
|                                                    |  | (Dollars in thousands)      |       
|                                                    |  |                            
|Net income (loss)                                   |  | $                           | (1,084 | ) |      | $ | 487    |  
|                                                    |  |                            
|Other comprehensive income (loss):                  |  |                             |        |   |      |   |        |  
|                                                    |  |                            
|Unrealized gains (losses) arising during the period |  |                             | (158   | ) |      |   | 1,003  |  
|                                                    |  |                            
|Tax (expense) benefit                               |  |                             | 61     |   |      |   | (386   | )
|                                                    |  |                            
|Reclassification to realized (gains) losses         |  |                             | (26    | ) |      |   | (1,289 | )
|                                                    |  |                            
|Tax expense                                         |  |                             | 10     |   |      |   | 496    |  
|                                                    |  |                            
|Defined benefit pension adjustment, net of taxes    |  |                             | (67    | ) |      |   |       |  
|                                                    |  |                             |        |   |      |   |        |  
|                                                    |  |                            
|Total other comprehensive income (loss)             |  |                             | (180   | ) |      |   | (176   | )
|                                                    |  |                             |        |   |      |   |        |  
|                                                    |  |                            
|Total comprehensive income (loss)                   |  | $                           | (1,264 | ) |      | $ | 311    |  
|                                                    |  |                             |        |   |      |   |        |  

(6) 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 July 2010, the Receivables topic of the Accounting Standards Codification (ASC) was amended by Accounting Standards Update
(ASU) 2010-20 to require expanded disclosures related to a companys allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated
basis. The Company is required to include these disclosures in its interim and annual consolidated financial statements. See Note 9.

Disclosures about Troubled Debt Restructurings (TDRs) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (FASB) in ASU 2011-01 issued in January
2011. In April 2011, FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing
financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for
reporting periods beginning after June 15, 2011.

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.

(7) 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.



15



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##### Table of Contents

The following table presents the carrying values and estimated fair values of the
Companys financial instruments at March 31, 2011 and December 31, 2010:



|                            |  |                        |         |  |                      |   |         |               |  |   |                      |  |  |   |         | 
|--------------------------- |  | ---------------------- | ------- |  | -------------------- | - | ------- | ------------- |  | - | -------------------- |  |  | - | ------- | 
|                            |  | March 31, 2011         |         |  | December 31, 2010    |  
|                            |  | CarryingValue          |         |  | Estimated 
FairValue |   |         | CarryingValue |  |   | Estimated 
FairValue | 
|                            |  | (Dollars in thousands) |        
|Financial assets:           |  |                        |         | 
|                            |  |                        |         | 
|Cash and cash equivalents   |  | $                      | 10,206  |  |                      | $ | 10,206  |               |  | $ | 20,166               |  |  | $ | 20,166  | 
|                            |  |                        |         | 
|Investment securities       |  |                        | 304,975 |  |                      |   | 304,975 |               |  |   | 273,229              |  |  |   | 273,229 | 
|                            |  |                        |         | 
|FHLB stock                  |  |                        | 4,571   |  |                      |   | 4,571   |               |  |   | 4,571                |  |  |   | 4,571   | 
|                            |  |                        |         | 
|Accrued interest receivable |  |                        | 4,808   |  |                      |   | 4,808   |               |  |   | 5,243                |  |  |   | 5,243   | 
|                            |  |                        |         | 
|Net loans                   |  |                        | 531,422 |  |                      |   | 527,808 |               |  |   | 554,384              |  |  |   | 550,614 | 
|                            |  |                        |         | 
|Loans held for sale         |  |                        | 623     |  |                      |   | 623     |               |  |   | 4,136                |  |  |   | 4,136   | 
|                            |  |                        |         | 
|Financial liabilities:      |  |                        |         |  |                      |   |         |               |  |   |                      |  |  |   |         | 
|                            |  |                        |         | 
|Deposits                    |  | $                      | 786,754 |  |                      | $ | 793,374 |               |  | $ | 785,941              |  |  | $ | 790,105 | 
|                            |  |                        |         | 
|Short-term borrowings       |  |                        | 17,421  |  |                      |   | 17,421  |               |  |   | 11,509               |  |  |   | 11,509  | 
|                            |  |                        |         | 
|Accrued interest payable    |  |                        | 639     |  |                      |   | 639     |               |  |   | 631                  |  |  |   | 631     | 
|                            |  |                        |         | 
|Long-term obligations       |  |                        | 27,500  |  |                      |   | 27,814  |               |  |   | 34,500               |  |  |   | 34,954  | 

The fair value of net
loans is based on estimated cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This does not include consideration of liquidity that market
participants would use to value such loans. The estimated fair values of deposits and long-term obligations at March 31, 2011 and December 31, 2010 are based on estimated cash flows discounted at market interest rates. The carrying values
of other financial instruments, including various receivables and payables, approximate fair value. 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.



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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.

Mortgage Banking Activity

The Company enters into interest rate lock commitments and commitments to sell mortgages. At March 31, 2011, the amount of fair value associated with these interest rate lock commitments was $95
thousand, which is included in other assets. At December 31, 2010, the amount of fair value associated with these interest rate lock commitments was $101 thousand, which was included in other assets. Forward loan sale commitments have been
deemed insignificant for both periods.

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 March 31, 2011, the majority of the total 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 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.



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##### Table of Contents

Assets recorded at fair value on a recurring basis



|                                                 |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------- | - | ------ | ------- |  | - | ------- |  |  | - | ----- | 
|March 31, 2011                                   |  | Total                  |         |  | Level 1 |   |        | Level 2 |  |   | Level 3 | 
|                                                 |  | (Dollars in thousands) |        
|Investment Securities Available-for-Sale         |  |                        |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 22,506  |  |         | $ |       |         |  | $ | 22,506  |  |  | $ |      | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 12,667  |  |         |   |       |         |  |   | 12,667  |  |  |   |      | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 163,798 |  |         |   | 18,711 |         |  |   | 145,087 |  |  |   |      | 
|                                                 |  |                        |         | 
|SBA-backed securities                            |  |                        | 77,720  |  |         |   | 77,720 |         |  |   |        |  |  |   |      | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 28,284  |  |         |   |       |         |  |   | 26,960  |  |  |   | 1,324 | 
|                                                 |  |                        |         | 
|Total Securities                                 |  | $                      | 304,975 |  |         | $ | 96,431 |         |  | $ | 207,220 |  |  | $ | 1,324 | 
|                                                 |  |                        |         | 
|Interest rate lock commitments                   |  | $                      | 95      |  |         | $ |       |         |  | $ |        |  |  | $ | 95    | 
|                                                 |  |                        |         | 
|Total assets at fair value                       |  | $                      | 305,070 |  |         | $ | 96,431 |         |  | $ | 207,220 |  |  | $ | 1,419 | 

Assets recorded at fair value
on a recurring basis, continued



|                                                 |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------- | - | ------ | ------- |  | - | ------- |  |  | - | ----- | 
|December 31, 2010                                |  | Total                  |         |  | Level 1 |   |        | Level 2 |  |   | Level 3 | 
|                                                 |  | (Dollars in thousands) |        
|Investment Securities Available-for-Sale         |  |                        |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 24,781  |  |         | $ |       |         |  | $ | 24,781  |  |  | $ |      | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 12,978  |  |         |   |       |         |  |   | 12,978  |  |  |   |      | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 150,090 |  |         |   | 4,200  |         |  |   | 145,890 |  |  |   |      | 
|                                                 |  |                        |         | 
|SBA-backed securities                            |  |                        | 56,853  |  |         |   | 55,422 |         |  |   | 1,431   |  |  |   |      | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 28,527  |  |         |   |       |         |  |   | 26,811  |  |  |   | 1,716 | 
|                                                 |  |                        |         | 
|Total Securities                                 |  | $                      | 273,229 |  |         | $ | 59,622 |         |  | $ | 211,891 |  |  | $ | 1,716 | 
|                                                 |  |                        |         | 
|Interest rate lock commitments                   |  | $                      | 101     |  |         | $ |       |         |  | $ |        |  |  | $ | 101   | 
|                                                 |  |                        |         | 
|Total assets at fair value                       |  | $                      | 273,330 |  |         | $ | 59,622 |         |  | $ | 211,891 |  |  | $ | 1,817 | 



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##### Table of Contents

Assets recorded at fair value on a nonrecurring basis



|                                                                    |  |                        |        |  |         |   |   |         |  |   |         |  |  |   |        | 
|------------------------------------------------------------------- |  | ---------------------- | ------ |  | ------- | - | - | ------- |  | - | ------- |  |  | - | ------ | 
|March 31, 2011                                                      |  | Total                  |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|                                                                    |  | (Dollars in thousands) |       
|Impaired Loans                                                      |  |                        |        | 
|                                                                    |  |                        |        | 
|Real estateconstruction and land development                       |  | $                      | 12,155 |  |         | $ |  |         |  | $ | 2,548   |  |  | $ | 9,607  | 
|                                                                    |  |                        |        | 
|Real estatesecured by residential properties                       |  |                        | 3,788  |  |         |   |  |         |  |   | 2,509   |  |  |   | 1,279  | 
|                                                                    |  |                        |        | 
|Real estatesecured by nonfarm nonresidential properties            |  |                        | 2,460  |  |         |   |  |         |  |   | 1,064   |  |  |   | 1,396  | 
|                                                                    |  |                        |        | 
|Commercial and industrial                                           |  |                        | 237    |  |         |   |  |         |  |   | 36      |  |  |   | 201    | 
|                                                                    |  |                        |        | 
|Credit cards and related plans                                      |  |                        | 30     |  |         |   |  |         |  |   |        |  |  |   | 30     | 
|                                                                    |  |                        |        | 
|Total impaired loans                                                |  | $                      | 18,670 |  |         | $ |  |         |  | $ | 6,157   |  |  | $ | 12,513 | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  |                        |        |  |         |   |   |         |  |   |         |  |  |   |        | 
|                                                                    |  |                        |        | 
|Total real estate and repossessions acquired in settlement of loans |  | $                      | 7,258  |  |         | $ |  |         |  | $ | 5,080   |  |  | $ | 2,178  | 
|                                                                    |  |                        |        | 
|Total assets at fair value                                          |  | $                      | 25,928 |  |         | $ |  |         |  | $ | 11,237  |  |  | $ | 14,691 | 
|                                                                    |  |                        |        | 
|December 31, 2010                                                   |  | Total                  |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|                                                                    |  | (Dollars in thousands) |       
|Impaired Loans                                                      |  |                        |        | 
|                                                                    |  |                        |        | 
|Real estateconstruction and land development                       |  | $                      | 11,077 |  |         | $ |  |         |  | $ | 3,027   |  |  | $ | 8,050  | 
|                                                                    |  |                        |        | 
|Real estatesecured by residential properties                       |  |                        | 3,834  |  |         |   |  |         |  |   | 3,666   |  |  |   | 168    | 
|                                                                    |  |                        |        | 
|Real estatesecured by nonfarm nonresidential properties            |  |                        | 2,550  |  |         |   |  |         |  |   | 2,467   |  |  |   | 83     | 
|                                                                    |  |                        |        | 
|Commercial and industrial                                           |  |                        | 77     |  |         |   |  |         |  |   |        |  |  |   | 77     | 
|                                                                    |  |                        |        | 
|Total impaired loans                                                |  | $                      | 17,538 |  |         | $ |  |         |  | $ | 9,160   |  |  | $ | 8,378  | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  |                        |        |  |         |   |   |         |  |   |         |  |  |   |        | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  | $                      | 4,536  |  |         | $ |  |         |  | $ | 2,277   |  |  | $ | 2,259  | 
|                                                                    |  |                        |        | 
|Total assets at fair value                                          |  | $                      | 22,074 |  |         | $ |  |         |  | $ | 11,437  |  |  | $ | 10,637 | 



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As of March 31, 2011 there were $4.2 million of Level 2 investment securities
available for sale that were reported as Level 1 as of December 31, 2010. The bonds were transferred from Level 1 to Level 2 during the year of 2011 because the December 31, 2010 pricing was based on the Companys actual trades for
the securities at initial purchase while the March 31, 2011 pricing was through a pricing system.

During the first
quarter of 2011 there were no investment securities transferred in or out of Level 3. During the first quarter of 2010, there was one Level 3 investment security that was transferred to Level 2 given that the March 31, 2010 valuation was based
on a third party market valuation that was based on quoted prices for similar instruments in active markets versus the December 31, 2009 valuation which was based on book value. The tables below present a reconciliation for all assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first quarter of 2011 and the first quarter of 2010.



|                                             |  |                                               |        |   |                              |   |       |       |  |   |        |  
|-------------------------------------------- |  | --------------------------------------------- | ------ | - | ---------------------------- | - | ----- | ----- |  | - | ------ | -
|                                             |  | CorporateBonds                                |        |   | Interest RateLockCommitments |   |       | Total | 
|                                             |  | (Dollars in thousands)                        |       
|                                             |  |                                               |       
|Balance, December 31, 2010                   |  | $                                             | 1,716  |   |                              | $ | 101   |       |  | $ | 1,817  |  
|                                             |  |                                               |       
|Total gains or losses (realized/unrealized): |  |                                               |        |   |                              |   |       |       |  |   |        |  
|                                             |  |                                               |       
|Included in earnings                         |  |                                               |       |   |                              |   | (6    | )     |  |   | (6     | )
|                                             |  |                                               |       
|Included in other comprehensive income       |  |                                               | (392   | ) |                              |   |      |       |  |   | (392   | )
|                                             |  |                                               |       
|Purchases, issuances, and settlements        |  |                                               |       |   |                              |   |      |       |  |   |       |  
|                                             |  |                                               |       
|Transfers in to/out of Level 3               |  |                                               |       |   |                              |   |      |       |  |   |       |  
|                                             |  |                                               |       
|Balance, March 31, 2011                      |  | $                                             | 1,324  |   |                              | $ | 95    |       |  | $ | 1,419  |  
|                                             |  |                                               |       
|                                             |  | Government-sponsoredenterprises andFFCB bonds |        |   | CorporateBonds               |   |       | Total | 
|                                             |  | (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       |  |                                               |       |   |                              |   | (5    | )     |  |   | (5     | )
|                                             |  |                                               |       
|Purchases, issuances, and settlements        |  |                                               |        |   |                              |   |       |       |  |   |       |  
|                                             |  |                                               |       
|Transfers in to/out of Level 3               |  |                                               | (2,480 | ) |                              |   |       |       |  |   | (2,480 | )
|                                             |  |                                               |       
|Balance, March 31, 2010                      |  | $                                             |       |   |                              | $ | 1,866 |       |  | $ | 1,866  |  



20



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##### Table of Contents

(8) LOANS

Loans at March 31, 2011 and December 31, 2010 classified by type are as follows (dollars in thousands):



|                                              |  |               |         |  |                  |   |         | 
|--------------------------------------------- |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                              |  | March 31,2011 |         |  | December 31,2010 |  
|                                              |  |              
|Real estate loans:                            |  |               |         |  |                  |   |         | 
|                                              |  |              
|Construction and land development             |  | $             | 84,170  |  |                  | $ | 90,267  | 
|                                              |  |              
|Secured by farmland                           |  |               | 27,857  |  |                  |   | 26,694  | 
|                                              |  |              
|Secured by residential properties             |  |               | 119,089 |  |                  |   | 120,183 | 
|                                              |  |              
|Secured by nonfarm, nonresidential properties |  |               | 216,285 |  |                  |   | 218,028 | 
|                                              |  |              
|Consumer installment                          |  |               | 4,090   |  |                  |   | 4,096   | 
|                                              |  |              
|Credit cards and related plans                |  |               | 2,366   |  |                  |   | 2,261   | 
|                                              |  |              
|Commercial and all other loans:               |  |               |         |  |                  |   |         | 
|                                              |  |              
|Commercial and industrial                     |  |               | 55,147  |  |                  |   | 60,242  | 
|                                              |  |              
|Loans to finance agricultural production      |  |               | 22,097  |  |                  |   | 28,217  | 
|                                              |  |              
|All other loans                               |  |               | 15,761  |  |                  |   | 17,863  | 
|                                              |  |               |         |  |                  |   |         | 
|                                              |  |               | 546,862 |  |                  |   | 567,851 | 
|                                              |  |              
|Less deferred fees and costs, net             |  |               | 221     |  |                  |   | 220     | 
|                                              |  |               |         |  |                  |   |         | 
|                                              |  | $             | 546,641 |  |                  | $ | 567,631 | 
|                                              |  |               |         |  |                  |   |         | 
|                                              |  |              
|Included in the above:                        |  |               |         |  |                  |   |         | 
|                                              |  |              
|Nonaccrual loans                              |  | $             | 16,801  |  |                  | $ | 15,896  | 
|                                              |  |              
|Restructured loans1                           |  |               | 5,296   |  |                  |   | 6,193   | 



|1. | Restructured loans include loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

(8) LOANS, continued



At March 31, 2011 $8.4 million of the recorded investment in impaired loans were
loans that were written down through partial charge-offs of $5.5 million. At December 31, 2010 $11.8 million of the recorded investment in impaired loans were loans that were written down through partial charge-offs of $7.3 million.

The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the
Eastern region of North Carolina, where its offices are located. The Companys policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of
repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.

At March 31, 2011 and December 31, 2010, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $52.0
million and $55.5 million, respectively.

Loans with a book value of approximately $24.5 million at March 31, 2011 are
pledged as eligible collateral for FHLB advances. Loans with a book value of approximately $30.1 million at December 31, 2010 were pledged as eligible collateral for FHLB advances.

(9) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

An analysis of
the allowance for loan losses for the quarters ended March 31, 2011, and March 31, 2010 follows (dollars in thousands):



|                          |  |               |        |   |               |   |        |  
|------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | -
|                          |  | March 31,2011 |        |   | March 31,2010 |  
|                          |  |              
|Beginning balance         |  | $             | 13,247 |   |               | $ | 9,725  |  
|                          |  |              
|Provision for loan losses |  |               | 3,930  |   |               |   | 3,000  |  
|                          |  |              
|Recoveries                |  |               | 102    |   |               |   | 47     |  
|                          |  |              
|Loans charged off         |  |               | (2,060 | ) |               |   | (1,443 | )
|                          |  |               |        |   |               |   |        |  
|                          |  |              
|Ending balance            |  | $             | 15,219 |   |               | $ | 11,329 |  
|                          |  |               |        |   |               |   |        |  



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(9) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued



The following tables summarizes the balances by loan category of the allowance for loan
losses with changes arising from charge-offs, recoveries and provision expense for the quarter ending March 31, 2011 and for the year ending December 31, 2010 (dollars in thousands):

Allowance for Loan Losses

As of March 31, 2011



|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------------ | ------ | - | ----------------------------- | - | ------ | ------------------------------------------ |  | - | ------------------------------------------ | - |  | ------------------- | ------- | - | --------------------------- | - | ----- | ----------------------- |  | - | ------------------------------------- | - |  | ------------- | ------ | - | -------------------------------------- | - | ------ | ----- |  | - | ------ | - |  | - | ----- | - |  | - | ------- | -
|Allowance forCredit Losses                            |  | Real EstateConstructionand LandDevelopment |        |   | Real EstateSecured byFarmland |   |        | Real EstateSecured byResidentialProperties |  |   | Real EstateSecured byNonfarmNonresidential |   |  | ConsumerInstallment |         |   | CreditCards andRelatedPlans |   |       | CommercialandIndustrial |  |   | Loans toFinanceAgriculturalProduction |   |  | AllOtherLoans |        |   | GeneralQualitative&QuantitativePortion |   |        | Total | 
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Beginning balance                                     |  | $                                          | 6,168  |   |                               | $ | 28     |                                            |  | $ | 3,450                                      |   |  | $                   | 1,007   |   |                             | $ | 12    |                         |  | $ | 21                                    |   |  | $             | 882    |   |                                        | $ | 18     |       |  | $ | 139    |   |  | $ | 1,522 |   |  | $ | 13,247  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Charge-offs                                           |  |                                            | (1,273 | ) |                               |   | (     | )                                          |  |   | (449                                       | ) |  |                     | (      | ) |                             |   | (9    | )                       |  |   | (9                                    | ) |  |               | (254   | ) |                                        |   | (     | )     |  |   | (66    | ) |  |   | (    | ) |  |   | (2,060  | )
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Recoveries                                            |  |                                            |       |   |                               |   |       |                                            |  |   | 1                                          |   |  |                     |        |   |                             |   | 2     |                         |  |   |                                      |   |  |               | 63     |   |                                        |   |       |       |  |   | 36     |   |  |   |      |   |  |   | 102     |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Provisions                                            |  |                                            | 2,692  |   |                               |   | 1      |                                            |  |   | 1,000                                      |   |  |                     | 111     |   |                             |   | 11    |                         |  |   | 177                                   |   |  |               | 441    |   |                                        |   | (3     | )     |  |   | 21     |   |  |   | (521  | ) |  |   | 3,930   |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance                                        |  | $                                          | 7,587  |   |                               | $ | 29     |                                            |  | $ | 4,002                                      |   |  | $                   | 1,118   |   |                             | $ | 16    |                         |  | $ | 189                                   |   |  | $             | 1,132  |   |                                        | $ | 15     |       |  | $ | 130    |   |  | $ | 1,001 |   |  | $ | 15,219  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: individually evaluated for impairment |  | $                                          | 2,113  |   |                               | $ |       |                                            |  | $ | 751                                        |   |  | $                   | 594     |   |                             | $ |      |                         |  | $ | 169                                   |   |  | $             | 362    |   |                                        | $ |       |       |  | $ |       |   |  | $ |      |   |  | $ | 3,989   |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: collectively evaluated for impairment |  | $                                          | 5,474  |   |                               | $ | 29     |                                            |  | $ | 3,251                                      |   |  | $                   | 524     |   |                             | $ | 16    |                         |  | $ | 20                                    |   |  | $             | 770    |   |                                        | $ | 15     |       |  | $ | 130    |   |  | $ | 1,001 |   |  | $ | 11,230  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Loans                                                 |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance                                        |  | $                                          | 84,045 |   |                               | $ | 27,812 |                                            |  | $ | 119,202                                    |   |  | $                   | 215,979 |   |                             | $ | 4,192 |                         |  | $ | 2,366                                 |   |  | $             | 55,150 |   |                                        | $ | 22,086 |       |  | $ | 15,809 |   |  | $ |      |   |  | $ | 546,641 |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: individually evaluated for impairment |  | $                                          | 15,642 |   |                               | $ |       |                                            |  | $ | 7,285                                      |   |  | $                   | 4,573   |   |                             | $ |      |                         |  | $ | 200                                   |   |  | $             | 843    |   |                                        | $ |       |       |  | $ |       |   |  | $ |      |   |  | $ | 28,543  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: collectively evaluated for impairment |  | $                                          | 68,403 |   |                               | $ | 27,812 |                                            |  | $ | 111,917                                    |   |  | $                   | 211,406 |   |                             | $ | 4,192 |                         |  | $ | 2,166                                 |   |  | $             | 54,307 |   |                                        | $ | 22,086 |       |  | $ | 15,809 |   |  | $ |      |   |  | $ | 518,098 |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  



23



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Allowance for Loan Losses

As of December 31, 2010



|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------------ | ------ | - | ----------------------------- | - | ------ | ------------------------------------------ |  | - | ------------------------------------------ | - |  | ------------------- | ------- | - | --------------------------- | - | ----- | ----------------------- |  | - | ------------------------------------- | - |  | ------------- | ------ | - | -------------------------------------- | - | ------ | ----- |  | - | ------ | - |  | - | ----- | - |  | - | ------- | -
|Allowance forCredit Losses                            |  | Real EstateConstructionand LandDevelopment |        |   | Real EstateSecured byFarmland |   |        | Real EstateSecured byResidentialProperties |  |   | Real EstateSecured byNonfarmNonresidential |   |  | ConsumerInstallment |         |   | CreditCards andRelatedPlans |   |       | CommercialandIndustrial |  |   | Loans toFinanceAgriculturalProduction |   |  | AllOtherLoans |        |   | GeneralQualitative&QuantitativePortion |   |        | Total | 
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Beginning balance                                     |  | $                                          | 4,623  |   |                               | $ | 25     |                                            |  | $ | 2,383                                      |   |  | $                   | 541     |   |                             | $ | 23    |                         |  | $ | 13                                    |   |  | $             | 523    |   |                                        | $ | 16     |       |  | $ | 169    |   |  | $ | 1,409 |   |  | $ | 9,725   |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Charge-offs                                           |  |                                            | (5,977 | ) |                               |   | (     | )                                          |  |   | (2,022                                     | ) |  |                     | (213    | ) |                             |   | (54   | )                       |  |   | (11                                   | ) |  |               | (1,191 | ) |                                        |   | (     | )     |  |   | (277   | ) |  |   | (    | ) |  |   | (9,745  | )
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Recoveries                                            |  |                                            | 111    |   |                               |   |       |                                            |  |   | 19                                         |   |  |                     |        |   |                             |   | 7     |                         |  |   | 1                                     |   |  |               | 19     |   |                                        |   |       |       |  |   | 130    |   |  |   |      |   |  |   | 287     |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Provisions                                            |  |                                            | 7,411  |   |                               |   | 3      |                                            |  |   | 3,070                                      |   |  |                     | 679     |   |                             |   | 36    |                         |  |   | 18                                    |   |  |               | 1,531  |   |                                        |   | 2      |       |  |   | 117    |   |  |   | 113   |   |  |   | 12,980  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance                                        |  | $                                          | 6,168  |   |                               | $ | 28     |                                            |  | $ | 3,450                                      |   |  | $                   | 1,007   |   |                             | $ | 12    |                         |  | $ | 21                                    |   |  | $             | 882    |   |                                        | $ | 18     |       |  | $ | 139    |   |  | $ | 1,522 |   |  | $ | 13,247  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: individually evaluated for impairment |  | $                                          | 803    |   |                               | $ |       |                                            |  | $ | 916                                        |   |  | $                   | 546     |   |                             | $ |      |                         |  | $ |                                      |   |  | $             | 102    |   |                                        | $ |       |       |  | $ |       |   |  | $ |      |   |  | $ | 2,367   |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: collectively evaluated for impairment |  | $                                          | 5,365  |   |                               | $ | 28     |                                            |  | $ | 2,534                                      |   |  | $                   | 461     |   |                             | $ | 12    |                         |  | $ | 21                                    |   |  | $             | 780    |   |                                        | $ | 18     |       |  | $ | 139    |   |  | $ | 1,522 |   |  | $ | 10,880  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Loans                                                 |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance                                        |  | $                                          | 90,145 |   |                               | $ | 26,661 |                                            |  | $ | 120,278                                    |   |  | $                   | 217,709 |   |                             | $ | 4,209 |                         |  | $ | 2,261                                 |   |  | $             | 60,238 |   |                                        | $ | 28,215 |       |  | $ | 17,915 |   |  | $ |      |   |  | $ | 567,631 |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: individually evaluated for impairment |  | $                                          | 15,940 |   |                               | $ |       |                                            |  | $ | 6,103                                      |   |  | $                   | 3,812   |   |                             | $ |      |                         |  | $ |                                      |   |  | $             | 397    |   |                                        | $ |       |       |  | $ |       |   |  | $ |      |   |  | $ | 26,252  |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                           
|Ending Balance: collectively evaluated for impairment |  | $                                          | 74,205 |   |                               | $ | 26,661 |                                            |  | $ | 114,175                                    |   |  | $                   | 213,897 |   |                             | $ | 4,209 |                         |  | $ | 2,261                                 |   |  | $             | 59,841 |   |                                        | $ | 28,215 |       |  | $ | 17,915 |   |  | $ |      |   |  | $ | 541,379 |  
|                                                      |  |                                            |        |   |                               |   |        |                                            |  |   |                                            |   |  |                     |         |   |                             |   |       |                         |  |   |                                       |   |  |               |        |   |                                        |   |        |       |  |   |        |   |  |   |       |   |  |   |         |  



24



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##### Table of Contents

(9) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued



Loans are closely monitored by management for changes in quality. This monitoring
includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings.

Pass:Include loans that are risk rated one through three. The primary source of repayment for pass loans is very
likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.

Weak Pass:Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable.
Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above
average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.

Special Mention:Include loans that are risk rated five. A special mention asset is considered to
be high risk due to potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Companys credit
position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately
protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by
the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The
following tables present loans as of March 31, 2011 and December 31, 2010 classified by risk type (dollars in thousands):

Credit Quality Indicators

As of March 31, 2011



|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 
|----------------------------------------------------- |  | ---- | ------- |  | --------- | - | ------- | -------------- |  | - | ----------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                                      |  | Pass |         |  | Weak Pass |   |         | SpecialMention |  |   | Substandard |  |  | Total |       
|                                                      |  |      |         |  |          
|Real Estate  Construction and Land Development Loans |  | $    | 34,371  |  |           | $ | 26,042  |                |  | $ | 5,809       |  |  | $     | 17,823 |  |  | $ | 84,045  | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Farmland                     |  |      | 19,873  |  |           |   | 3,661   |                |  |   | 4,276       |  |  |       | 2      |  |  |   | 27,812  | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Residential Properties       |  |      | 63,051  |  |           |   | 35,435  |                |  |   | 10,206      |  |  |       | 10,510 |  |  |   | 119,202 | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Nonfarm Nonresidential       |  |      | 92,863  |  |           |   | 81,780  |                |  |   | 29,844      |  |  |       | 11,492 |  |  |   | 215,979 | 
|                                                      |  |      |         |  |          
|Consumer Installment                                  |  |      | 2,534   |  |           |   | 1,310   |                |  |   | 243         |  |  |       | 105    |  |  |   | 4,192   | 
|                                                      |  |      |         |  |          
|Credit Cards and Related Plans                        |  |      | 1,266   |  |           |   | 684     |                |  |   | 125         |  |  |       | 291    |  |  |   | 2,366   | 
|                                                      |  |      |         |  |          
|Commercial and Industrial                             |  |      | 31,736  |  |           |   | 20,202  |                |  |   | 2,185       |  |  |       | 1,027  |  |  |   | 55,150  | 
|                                                      |  |      |         |  |          
|Loans to Finance Agriculture Production               |  |      | 14,857  |  |           |   | 4,121   |                |  |   | 3,108       |  |  |       |       |  |  |   | 22,086  | 
|                                                      |  |      |         |  |          
|All Other Loans                                       |  |      | 6,631   |  |           |   | 9,064   |                |  |   | 105         |  |  |       | 9      |  |  |   | 15,809  | 
|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |      |         |  |          
|Total                                                 |  | $    | 267,182 |  |           | $ | 182,299 |                |  | $ | 55,901      |  |  | $     | 41,259 |  |  | $ | 546,641 | 
|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 



25



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##### Table of Contents

Credit Quality Indicators

As of December 31, 2010



|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 
|----------------------------------------------------- |  | ---- | ------- |  | --------- | - | ------- | -------------- |  | - | ----------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                                      |  | Pass |         |  | Weak Pass |   |         | SpecialMention |  |   | Substandard |  |  | Total |       
|                                                      |  |      |         |  |          
|Real Estate  Construction and Land Development Loans |  | $    | 35,356  |  |           | $ | 27,978  |                |  | $ | 9,466       |  |  | $     | 17,345 |  |  | $ | 90,145  | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Farmland                     |  |      | 17,869  |  |           |   | 6,294   |                |  |   | 2,495       |  |  |       | 3      |  |  |   | 26,661  | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Residential Properties       |  |      | 64,457  |  |           |   | 43,364  |                |  |   | 3,469       |  |  |       | 8,988  |  |  |   | 120,278 | 
|                                                      |  |      |         |  |          
|Real Estate  Secured by Nonfarm Nonresidential       |  |      | 94,208  |  |           |   | 96,287  |                |  |   | 20,107      |  |  |       | 7,107  |  |  |   | 217,709 | 
|                                                      |  |      |         |  |          
|Consumer Installment                                  |  |      | 2,466   |  |           |   | 1,460   |                |  |   | 265         |  |  |       | 18     |  |  |   | 4,209   | 
|                                                      |  |      |         |  |          
|Credit Cards and Related Plans                        |  |      | 1,211   |  |           |   | 869     |                |  |   | 89          |  |  |       | 92     |  |  |   | 2,261   | 
|                                                      |  |      |         |  |          
|Commercial and Industrial                             |  |      | 33,416  |  |           |   | 22,805  |                |  |   | 3,292       |  |  |       | 725    |  |  |   | 60,238  | 
|                                                      |  |      |         |  |          
|Loans to Finance Agriculture Production               |  |      | 18,346  |  |           |   | 7,230   |                |  |   | 2,639       |  |  |       |       |  |  |   | 28,215  | 
|                                                      |  |      |         |  |          
|All Other Loans                                       |  |      | 8,442   |  |           |   | 9,341   |                |  |   | 119         |  |  |       | 13     |  |  |   | 17,915  | 
|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |      |         |  |          
|Total                                                 |  | $    | 275,771 |  |           | $ | 215,628 |                |  | $ | 41,941      |  |  | $     | 34,291 |  |  | $ | 567,631 | 
|                                                      |  |      |         |  |           |   |         |                |  |   |             |  |  |       |        |  |  |   |         | 

The following tables summarize the past due loans by category as of March 31, 2011
and December 31, 2010 (dollars in thousands):

Past Due Loans

As of March 31, 2011



|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|--------------------------------------------- |  | ------------------- | ----- |  | ------------------- | - | ----- | ------------------- |  | - | ------------- |  |  | ------- | ------ |  | ----- | - | ------- |  |  | - | ------- | 
|                                              |  | 30 -59 DaysPast Due |       |  | 60 -89 DaysPast Due |   |       | Greater than90 Days |  |   | Total PastDue |  |  | Current |        |  | Total |  
|                                              |  |                     |       |  |                     |  
|Real Estate Construction and Land Development |  | $                   | 748   |  |                     | $ | 519   |                     |  | $ | 6,447         |  |  | $       | 7,714  |  |       | $ | 76,331  |  |  | $ | 84,045  | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Farmland               |  |                     |      |  |                     |   |      |                     |  |   |              |  |  |         |       |  |       |   | 27,812  |  |  |   | 27,812  | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Residential Properties |  |                     | 501   |  |                     |   | 6     |                     |  |   | 2,872         |  |  |         | 3,379  |  |       |   | 115,823 |  |  |   | 119,202 | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Nonfarm Nonresidential |  |                     | 1,162 |  |                     |   | 940   |                     |  |   | 914           |  |  |         | 3,016  |  |       |   | 212,963 |  |  |   | 215,979 | 
|                                              |  |                     |       |  |                     |  
|Consumer Installment                          |  |                     | 12    |  |                     |   |      |                     |  |   | 5             |  |  |         | 17     |  |       |   | 4,175   |  |  |   | 4,192   | 
|                                              |  |                     |       |  |                     |  
|Credit Cards and Related Plans                |  |                     |      |  |                     |   |      |                     |  |   |              |  |  |         |       |  |       |   | 2,366   |  |  |   | 2,366   | 
|                                              |  |                     |       |  |                     |  
|Commercial and Industrial                     |  |                     | 50    |  |                     |   |      |                     |  |   | 314           |  |  |         | 364    |  |       |   | 54,786  |  |  |   | 55,150  | 
|                                              |  |                     |       |  |                     |  
|Loans to Finance Agricultural Production      |  |                     |      |  |                     |   |      |                     |  |   |              |  |  |         |       |  |       |   | 22,086  |  |  |   | 22,086  | 
|                                              |  |                     |       |  |                     |  
|All Other Loans                               |  |                     | 1     |  |                     |   |      |                     |  |   |              |  |  |         | 1      |  |       |   | 15,808  |  |  |   | 15,809  | 
|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|                                              |  |                     |       |  |                     |  
|Total                                         |  | $                   | 2,474 |  |                     | $ | 1,465 |                     |  | $ | 10,552        |  |  | $       | 14,491 |  |       | $ | 532,150 |  |  | $ | 546,641 | 
|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 



26



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##### Table of Contents

Past Due Loans

As of December 31, 2010



|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|--------------------------------------------- |  | ------------------- | ----- |  | ------------------- | - | ----- | ------------------- |  | - | ------------- |  |  | ------- | ------ |  | ----- | - | ------- |  |  | - | ------- | 
|                                              |  | 30 -59 DaysPast Due |       |  | 60 -89 DaysPast Due |   |       | Greater than90 Days |  |   | Total PastDue |  |  | Current |        |  | Total |  
|                                              |  |                     |       |  |                     |  
|Real Estate Construction and Land Development |  | $                   | 2,997 |  |                     | $ | 929   |                     |  | $ | 9,627         |  |  | $       | 13,553 |  |       | $ | 76,592  |  |  | $ | 90,145  | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Farmland               |  |                     |      |  |                     |   |      |                     |  |   |              |  |  |         |       |  |       |   | 26,661  |  |  |   | 26,661  | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Residential Properties |  |                     | 251   |  |                     |   | 389   |                     |  |   | 2,526         |  |  |         | 3,166  |  |       |   | 117,112 |  |  |   | 120,278 | 
|                                              |  |                     |       |  |                     |  
|Real Estate Secured by Nonfarm Nonresidential |  |                     | 545   |  |                     |   |      |                     |  |   | 919           |  |  |         | 1,464  |  |       |   | 216,245 |  |  |   | 217,709 | 
|                                              |  |                     |       |  |                     |  
|Consumer Installment                          |  |                     | 35    |  |                     |   | 6     |                     |  |   | 5             |  |  |         | 46     |  |       |   | 4,163   |  |  |   | 4,209   | 
|                                              |  |                     |       |  |                     |  
|Credit Cards and Related Plans                |  |                     | 3     |  |                     |   |      |                     |  |   |              |  |  |         | 3      |  |       |   | 2,258   |  |  |   | 2,261   | 
|                                              |  |                     |       |  |                     |  
|Commercial and Industrial                     |  |                     | 111   |  |                     |   | 19    |                     |  |   | 553           |  |  |         | 683    |  |       |   | 59,555  |  |  |   | 60,238  | 
|                                              |  |                     |       |  |                     |  
|Loans to Finance Agricultural Production      |  |                     |      |  |                     |   |      |                     |  |   |              |  |  |         |       |  |       |   | 28,215  |  |  |   | 28,215  | 
|                                              |  |                     |       |  |                     |  
|All Other Loans                               |  |                     | 22    |  |                     |   | 4     |                     |  |   |              |  |  |         | 26     |  |       |   | 17,889  |  |  |   | 17,915  | 
|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 
|                                              |  |                     |       |  |                     |  
|Total                                         |  | $                   | 3,964 |  |                     | $ | 1,347 |                     |  | $ | 13,630        |  |  | $       | 18,941 |  |       | $ | 548,690 |  |  | $ | 567,631 | 
|                                              |  |                     |       |  |                     |   |       |                     |  |   |               |  |  |         |        |  |       |   |         |  |  |   |         | 



27



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##### Table of Contents

(9) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued



The following tables summarize impaired loans as of March 31, 2011
and December 31, 2010 (dollars in thousands). The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material
amounts.

Impaired Loans

As of March 31, 2011



|                                                     |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|---------------------------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ---------------- |  | - | ------------------------- |  |  | ------------------------ | ------ |  |  | - | --- | 
|                                                     |  | RecordedInvestment |        |  | UnpaidPrincipalBalance |   |        | RelatedAllowance |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |       
|                                                     |  |                    |        |  |                       
|With no related allowance recorded:                  |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Real Estate Construction and Land Development        |  | $                  | 6,858  |  |                        | $ | 10,859 |                  |  | $ |                          |  |  | $                        | 8,534  |  |  | $ | 45  | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Farmland                      |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Residential Properties        |  |                    | 4,406  |  |                        |   | 4,694  |                  |  |   |                          |  |  |                          | 3,837  |  |  |   | 15  | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Nonfarm Nonresidential        |  |                    | 1,548  |  |                        |   | 1,546  |                  |  |   |                          |  |  |                          | 851    |  |  |   | 6   | 
|                                                     |  |                    |        |  |                       
|Consumer Installment                                 |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |        |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|Credit Cards and Related Plans                       |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|Commercial and Industrial                            |  |                    | 393    |  |                        |   | 518    |                  |  |   |                          |  |  |                          | 434    |  |  |   | 5   | 
|                                                     |  |                    |        |  |                       
|Loans to Finance Agricultural Production             |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|All Other Loans                                      |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Total impaired loans with no related allowance       |  | $                  | 13,205 |  |                        | $ | 17,617 |                  |  | $ |                          |  |  | $                        | 13,656 |  |  | $ | 71  | 
|                                                     |  |                    |        |  |                       
|With an allowance recorded:                          |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Real Estate Construction and Land Development        |  | $                  | 8,792  |  |                        | $ | 9,796  |                  |  | $ | 2,112                     |  |  | $                        | 7,622  |  |  | $ | 40  | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Farmland                      |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Residential Properties        |  |                    | 2,885  |  |                        |   | 2,880  |                  |  |   | 751                       |  |  |                          | 2,921  |  |  |   | 11  | 
|                                                     |  |                    |        |  |                       
|Real Estate Secured by Nonfarm Nonresidential        |  |                    | 3,030  |  |                        |   | 3,095  |                  |  |   | 594                       |  |  |                          | 3,402  |  |  |   | 22  | 
|                                                     |  |                    |        |  |                       
|Consumer Installment                                 |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|Credit Cards and Related Plans                       |  |                    | 201    |  |                        |   | 200    |                  |  |   | 170                       |  |  |                          | 200    |  |  |   | 3   | 
|                                                     |  |                    |        |  |                       
|Commercial and Industrial                            |  |                    | 452    |  |                        |   | 451    |                  |  |   | 362                       |  |  |                          | 449    |  |  |   | 6   | 
|                                                     |  |                    |        |  |                       
|Loans to Finance Agricultural Production             |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                       
|All Other Loans                                      |  |                    |       |  |                        |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |    | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Total impaired loans with related allowance recorded |  | $                  | 15,360 |  |                        | $ | 16,422 |                  |  | $ | 3,989                     |  |  | $                        | 14,594 |  |  | $ | 82  | 
|                                                     |  |                    |        |  |                       
|Total                                                |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Construction and Land Development                    |  | $                  | 15,650 |  |                        | $ | 20,655 |                  |  | $ | 2,112                     |  |  | $                        | 16,156 |  |  | $ | 85  | 
|                                                     |  |                    |        |  |                       
|Residential                                          |  |                    | 7,291  |  |                        |   | 7,574  |                  |  |   | 751                       |  |  |                          | 6,758  |  |  |   | 26  | 
|                                                     |  |                    |        |  |                       
|Commercial                                           |  |                    | 5,423  |  |                        |   | 5,610  |                  |  |   | 956                       |  |  |                          | 5,136  |  |  |   | 39  | 
|                                                     |  |                    |        |  |                       
|Consumer                                             |  |                    | 201    |  |                        |   | 200    |                  |  |   | 170                       |  |  |                          | 200    |  |  |   | 3   | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |     | 
|                                                     |  |                    |        |  |                       
|Total impaired loans                                 |  | $                  | 28,565 |  |                        | $ | 34,039 |                  |  | $ | 3,989                     |  |  | $                        | 28,250 |  |  | $ | 153 | 



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##### Table of Contents

(9) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued



Impaired Loans

As of December 31, 2010



|                                                     |  |                    |        |  |                        |   |        |                  |  |   |       | 
|---------------------------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ---------------- |  | - | ----- | 
|                                                     |  | RecordedInvestment |        |  | UnpaidPrincipalBalance |   |        | RelatedAllowance | 
|                                                     |  |                    |       
|With no related allowance recorded:                  |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Real Estate Construction and Land Development        |  | $                  | 9,212  |  |                        | $ | 13,354 |                  |  | $ |      | 
|                                                     |  |                    |       
|Real Estate Secured by Farmland                      |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Real Estate Secured by Residential Properties        |  |                    | 2,700  |  |                        |   | 2,972  |                  |  |   |      | 
|                                                     |  |                    |       
|Real Estate Secured by Nonfarm Nonresidential        |  |                    | 1,029  |  |                        |   | 1,097  |                  |  |   |      | 
|                                                     |  |                    |       
|Consumer Installment                                 |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Credit Cards and Related Plans                       |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Commercial and Industrial                            |  |                    | 218    |  |                        |   | 217    |                  |  |   |      | 
|                                                     |  |                    |       
|Loans to Finance Agricultural Production             |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|All Other Loans                                      |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Total impaired loans with no related allowance       |  | $                  | 13,159 |  |                        | $ | 17,640 |                  |  | $ |      | 
|                                                     |  |                    |       
|With an allowance recorded:                          |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Real Estate Construction and Land Development        |  | $                  | 6,771  |  |                        | $ | 9,497  |                  |  | $ | 803   | 
|                                                     |  |                    |       
|Real Estate Secured by Farmland                      |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Real Estate Secured by Residential Properties        |  |                    | 3,411  |  |                        |   | 3,405  |                  |  |   | 915   | 
|                                                     |  |                    |       
|Real Estate Secured by Nonfarm Nonresidential        |  |                    | 2,794  |  |                        |   | 2,784  |                  |  |   | 546   | 
|                                                     |  |                    |       
|Consumer Installment                                 |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Credit Cards and Related Plans                       |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|Commercial and Industrial                            |  |                    | 179    |  |                        |   | 199    |                  |  |   | 102   | 
|                                                     |  |                    |       
|Loans to Finance Agricultural Production             |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |       
|All Other Loans                                      |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Total impaired loans with related allowance recorded |  | $                  | 13,155 |  |                        | $ | 15,885 |                  |  | $ | 2,366 | 
|                                                     |  |                    |       
|Total                                                |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Construction and Land Development                    |  | $                  | 15,983 |  |                        | $ | 22,851 |                  |  | $ | 803   | 
|                                                     |  |                    |       
|Residential                                          |  |                    | 6,111  |  |                        |   | 6,377  |                  |  |   | 915   | 
|                                                     |  |                    |       
|Commercial                                           |  |                    | 4,220  |  |                        |   | 4,297  |                  |  |   | 648   | 
|                                                     |  |                    |       
|Consumer                                             |  |                    |       |  |                        |   |       |                  |  |   |      | 
|                                                     |  |                    |        |  |                        |   |        |                  |  |   |       | 
|                                                     |  |                    |       
|Total impaired loans                                 |  | $                  | 26,314 |  |                        | $ | 33,525 |                  |  | $ | 2,366 | 

The following table
presents nonaccrual loans as of March 31, 2011 and December 31, 2010 by loan category (dollars in thousands):



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##### Table of Contents

Nonaccrual Loans



|                                              |  |               |        |  |                  |   |        | 
|--------------------------------------------- |  | ------------- | ------ |  | ---------------- | - | ------ | 
|                                              |  | March 31,2011 |        |  | December 31,2010 |  
|Real Estate Construction and Land Development |  | $             | 9,932  |  |                  | $ | 10,839 | 
|                                              |  |              
|Real Estate Secured by Farmland               |  |               |       |  |                  |   |       | 
|                                              |  |              
|Real Estate Secured by Residential Properties |  |               | 4,952  |  |                  |   | 3,268  | 
|                                              |  |              
|Real Estate Secured by Nonfarm Nonresidential |  |               | 1,374  |  |                  |   | 1,231  | 
|                                              |  |              
|Consumer Installment                          |  |               | 5      |  |                  |   | 5      | 
|                                              |  |              
|Credit Cards and Related Plans                |  |               |       |  |                  |   |       | 
|                                              |  |              
|Commercial and Industrial                     |  |               | 538    |  |                  |   | 553    | 
|                                              |  |              
|Loans to Finance Agricultural Production      |  |               |       |  |                  |   |       | 
|                                              |  |              
|All Other Loans                               |  |               |       |  |                  |   |       | 
|                                              |  |               |        |  |                  |   |        | 
|                                              |  |              
|Total                                         |  | $             | 16,801 |  |                  | $ | 15,896 | 
|                                              |  |               |        |  |                  |   |        | 

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

On January 16, 2009, we issued Series A Preferred Stock in the amount of $17,949,000 and a warrant to purchase 144,984 shares
of our common stock 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 we have 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. Treasury will be required for us to, among other things, increase our common stock dividend above $0.1825 per share or repurchase our common stock except in limited circumstances. In addition, until the U.S. Treasury ceases to
own our securities sold under the TARP Capital Purchase Program, the compensation arrangements for our senior executive officers must comply in all respects with the U.S. Emergency Economic Stabilization Act of 2008 and the rules and regulations
thereunder.

(11) Regulatory Matters

Bancorps and the Banks actual capital ratios for purposes of bank regulatory capital guidelines are presented in the following table:



|                                         |  |                                                                             |          |   |                                                   |  |        |                |  |  |             |   |  |  |       |  
|---------------------------------------- |  | --------------------------------------------------------------------------- | -------- | - | ------------------------------------------------- |  | ------ | -------------- |  |  | ----------- | - |  |  | ----- | -
|                                         |  | Ratio required to bewell capitalizedunder
promptcorrective actionprovisions |          |   | Minimum ratiorequired forcapital adequacypurposes |  |        | BancorpsRatio |  |  | BanksRatio |  
|As of March 31, 2011:                    |  |                                                                             |          |   |                                                   |  |        |                |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Average Assets)       |  |                                                                             | 3   5.00 | % |                                                   |  | 3 3.00 | %              |  |  | 8.42        | % |  |  | 8.42  | %
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Risk Weighted Assets) |  |                                                                             | 3   6.00 | % |                                                   |  | 3 4.00 | %              |  |  | 11.97       |   |  |  | 11.97 |  
|                                         |  |                                                                             |          |  
|Total Capital (to Risk Weighted Assets)  |  |                                                                             | 3 10.00  | % |                                                   |  | 3 8.00 | %              |  |  | 13.24       |   |  |  | 13.24 |  
|                                         |  |                                                                             |          |  
|As of December 31, 2010:                 |  |                                                                             |          |   |                                                   |  |        |                |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Average Assets)       |  |                                                                             | 3   5.00 | % |                                                   |  | 3 3.00 | %              |  |  | 8.66        | % |  |  | 8.66  | %
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Risk Weighted Assets) |  |                                                                             | 3   6.00 | % |                                                   |  | 3 4.00 | %              |  |  | 12.08       |   |  |  | 12.08 |  
|                                         |  |                                                                             |          |  
|Total Capital (to Risk Weighted Assets)  |  |                                                                             | 3 10.00  | % |                                                   |  | 3 8.00 | %              |  |  | 13.34       |   |  |  | 13.34 |  
|                                         |  |                                                                             |          |  
|As of March 31, 2010:                    |  |                                                                             |          |   |                                                   |  |        |                |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Average Assets)       |  |                                                                             | 3   5.00 | % |                                                   |  | 3 3.00 | %              |  |  | 9.26        | % |  |  | 7.25  | %
|                                         |  |                                                                             |          |  
|Tier 1 Capital (to Risk Weighted Assets) |  |                                                                             | 3   6.00 | % |                                                   |  | 3 4.00 | %              |  |  | 12.69       |   |  |  | 9.91  |  
|                                         |  |                                                                             |          |  
|Total Capital (to Risk Weighted Assets)  |  |                                                                             | 3 10.00  | % |                                                   |  | 3 8.00 | %              |  |  | 13.95       |   |  |  | 11.17 |  

During April 2011,
the Banks Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take various actions designed to address issues related to the Banks
operations. The Resolution provides that, among other things, the Bank will (1) establish and continue to maintain an adequate reserve for loan losses, and review the adequacy of the reserve with the Board prior to each quarter-end and make
appropriate provisions to the reserve; (2) in order to maintain sufficient capital levels, establish and document a prudent policy regarding cash dividends the Bank pays to Bancorp, document an analysis of amounts to be paid by each quarter-end
prior to payment, and not pay any cash dividend to Bancorp without seeking the prior approval of the FDIC and N.C. Commissioner of Banks; (3) implement various recommendations regarding risk management policies and practices for the Banks
funds management and investment functions; (4) provide for the internal audit program to include a review and coverage of activities sufficient to determine compliance with the Banks policies, applicable laws and regulations and sound
banking principles, and identification of audit personnel who periodically report directly to the Board; (5) correct or eliminate various credit administration weaknesses and establish an effective credit administration function, and ascertain
that all necessary supporting documentation is obtained and evaluated before loans are extended; and (6) correct violations of and ensure further compliance with applicable laws, rules and regulations.



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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 March 31, 2011, we had consolidated assets of
approximately $916.6 million, total loans of approximately $546.6 million, total deposits of approximately $786.8 million and shareholders equity of approximately $79.2 million. For the three months ended March 31, 2011, we had a net loss
attributable to common shareholders of $1.3 million or $0.47 basic and diluted loss per share, compared to income available to common shareholders of $0.2 million, or $0.08 basic and diluted earnings per share for the three months ended
March 31, 2010.

Recent Developments

During April 2011, the Banks Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take
various actions designed to address issues related to the Banks operations. More detailed information is described in Note 11 of the unaudited consolidated financial statements included in Item 1 of this Report.



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##### Table of Contents

Critical Accounting Policies

Our 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, 2010. Of these significant accounting policies, we consider our policy regarding the allowance for loan losses to be our 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. We have 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 our loan portfolio. Our 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 our allowance for loan losses and related matters, see Asset Quality.

Comparison of the Results of Operations for the Three Month Periods Ended March 31, 2011 and 2010

Results of Operations

The following table summarizes components of income and expense and the changes in those components for the three-month period ended
March 31, 2011 as compared to the same period in 2010.

Condensed Consolidated Results of Operations



|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|--------------------------------------------------- |  | ------------------------- | ------ | - | ------------------------- | - | ------ | -------------------------- |  | - | ------ | - |  |  | -------- | -
|                                                    |  | For theThree months ended |        |   | For theThree months ended |   |        | Changes from thePrior Year | 
|                                                    |  | March 31, 2011            |        |   | March 31, 2010            |   |        | Amount                     |  |   | %      |  
|                                                    |  | (Dollars in thousands)    |       
|Gross interest income                               |  | $                         | 9,438  |   |                           | $ | 10,020 |                            |  | $ | (582   | ) |  |  | (5.8     | )
|Gross interest expense                              |  |                           | 2,670  |   |                           |   | 3,025  |                            |  |   | (355   | ) |  |  | (11.7    | )
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|                                                    |  |                           |        |  
|Net interest income                                 |  |                           | 6,768  |   |                           |   | 6,995  |                            |  |   | (227   | ) |  |  | (3.2     | )
|Provision for loan losses                           |  |                           | 3,930  |   |                           |   | 3,000  |                            |  |   | 930    |   |  |  | 31.0     |  
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|Net interest income after provision for loan losses |  |                           | 2,838  |   |                           |   | 3,995  |                            |  |   | (1,157 | ) |  |  | (29.0    | )
|                                                    |  |                           |        |  
|Noninterest income                                  |  |                           | 1,431  |   |                           |   | 2,668  |                            |  |   | (1,237 | ) |  |  | (46.4    | )
|Noninterest expense                                 |  |                           | 6,244  |   |                           |   | 6,238  |                            |  |   | 6      |   |  |  | 0.1      |  
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|                                                    |  |                           |        |  
|Income (loss) before income taxes                   |  |                           | (1,975 | ) |                           |   | 425    |                            |  |   | (2,400 | ) |  |  | (564.7   | )
|                                                    |  |                           |        |  
|Income tax benefit                                  |  |                           | (891   | ) |                           |   | (62    | )                          |  |   | (829   | ) |  |  | (1,337.1 | )
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|                                                    |  |                           |        |  
|Net income (loss)                                   |  | $                         | (1,084 | ) |                           | $ | 487    |                            |  |   | (1,571 | ) |  |  | (322.6   | )
|                                                    |  |                           |        |  
|Preferred stock dividend and accretion of discount  |  |                           | 265    |   |                           |   | 265    |                            |  |   |       |   |  |  |         |  
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  
|                                                    |  |                           |        |  
|Net income (loss) available to common shareholders  |  | $                         | (1,349 | ) |                           | $ | 222    |                            |  | $ | (1,571 | ) |  |  | (707.7   | )
|                                                    |  |                           |        |   |                           |   |        |                            |  |   |        |   |  |  |          |  

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 March 31, 2011 was $6.8 million compared to $7.0 million for the three months ended March 31, 2010.

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



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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 $582 thousand or 5.8% for the three months ended March 31, 2011 compared to the same three months of 2010. The decrease for the three months ended March 31, 2011 is due
to the decrease in the rates earned on our average earning assets which was partially offset by an increase in the volume of these earning assets. Average earning assets increased $12.1 million as compared to the same period in 2010. We funded the
increases in interest-earning assets primarily with interest-bearing deposits and long-term obligations. The tax equivalent yield on average earning assets decreased 43 basis points for the quarter ended March 31, 2011 to 4.60% from 5.03% for
the same period in 2010. 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 94 basis points for the first
quarter of 2011 as compared to the same period last year as securities sold, called or matured have been replaced with lower yielding securities. Also, approximately $333.2 million or 61.0% of our loan portfolio consists of variable rate loans that
adjust with the movement of the prime rate. As a result of low rates for an extended period of time, these loans yields have remained relatively flat.

Our average cost of funds during the first quarter of 2011 was 1.49%, a decrease of 24 basis points when compared to 1.73% for the first quarter of 2010. Average rates paid on bank certificates of deposit
decreased 20 basis points from 2.09% for the quarter ended March 31, 2010 to 1.89% for the quarter ended March 31, 2011, while our average cost of borrowed funds increased 3 basis points during the first quarter of 2011 compared to the
same period in 2010. The increase in the average cost of borrowed funds occurred because there was a larger percentage of long-term obligations to total borrowing during the first quarter of 2011 as compared to the same period in 2010. Total
interest expense decreased $355 thousand or 11.7% during the first quarter of 2011 compared to the same period in 2010, primarily the result of decreased market rates paid on certificates of deposit.

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 March 31, 2011 was 3.30% compared to 3.55% in the first quarter of 2010 while our net interest spread decreased 19 basis points to 3.11% for the three months ended March 31, 2011 compared to 3.30% during that same
period in 2010. The decrease in our net interest margin is mainly the result of decreased average yield of 94 basis points earned on our taxable securities. Average interest-bearing liabilities, as a percentage of interest-earning assets for the
quarters ended March 31, 2011 and 2010 was 86.4% and 85.8%, respectively.



33



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##### Table of Contents

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

For the three months ended



|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|----------------------------------------------------- |  | ---------------------- | ------- |  | -------------- |  | ---- | --------------- |  | - | -------------- |  |  | ------------- | ------- |  | --------------- |  | ---- | - |  | - | ------ | 
|                                                      |  | March 31, 2011         |         |  | March 31, 2010 | 
|                                                      |  | Average Balance        |         |  | Yield/Rate(5)  |  |      | Income/ Expense |  |   | AverageBalance |  |  | Yield/Rate(5) |         |  | Income/ Expense | 
|                                                      |  | (Dollars in thousands) |        
|Assets                                                |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Loans  net (1)                                       |  | $                      | 547,223 |  |                |  | 5.45 | %               |  | $ | 7,357          |  |  | $             | 566,921 |  |                 |  | 5.46 | % |  | $ | 7,632  | 
|Taxable securities                                    |  |                        | 267,627 |  |                |  | 2.95 | %               |  |   | 1,946          |  |  |               | 200,750 |  |                 |  | 3.89 | % |  |   | 1,924  | 
|Non-taxable securities (2)                            |  |                        | 12,646  |  |                |  | 6.22 | %               |  |   | 194            |  |  |               | 46,107  |  |                 |  | 6.16 | % |  |   | 700    | 
|Other investments                                     |  |                        | 11,162  |  |                |  | 0.25 | %               |  |   | 7              |  |  |               | 12,785  |  |                 |  | 0.06 | % |  |   | 2      | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Total interest- earning assets                        |  |                        | 838,658 |  |                |  | 4.60 | %               |  | $ | 9,504          |  |  |               | 826,563 |  |                 |  | 5.03 | % |  | $ | 10,258 | 
|Cash and due from banks                               |  |                        | 13,327  |  |                |  |      |                 |  |   |                |  |  |               | 10,295  |  |                 |  |      |   |  |   |        | 
|Bank premises and equipment, net                      |  |                        | 26,773  |  |                |  |      |                 |  |   |                |  |  |               | 25,257  |  |                 |  |      |   |  |   |        | 
|Other assets                                          |  |                        | 34,446  |  |                |  |      |                 |  |   |                |  |  |               | 26,896  |  |                 |  |      |   |  |   |        | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Total assets                                          |  | $                      | 913,204 |  |                |  |      |                 |  |   |                |  |  | $             | 889,011 |  |                 |  |      |   |  |   |        | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|                                                      |  |                        |         |  |                | 
|Liabilities and Shareholders Equity                  |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Interest-bearing deposits                             |  | $                      | 678,570 |  |                |  | 1.45 | %               |  | $ | 2,421          |  |  | $             | 670,409 |  |                 |  | 1.70 | % |  | $ | 2,818  | 
|Short-term borrowings                                 |  |                        | 13,328  |  |                |  | 2.10 | %               |  |   | 69             |  |  |               | 19,034  |  |                 |  | 1.19 | % |  |   | 56     | 
|Long-term obligations                                 |  |                        | 32,811  |  |                |  | 2.22 | %               |  |   | 180            |  |  |               | 19,917  |  |                 |  | 3.07 | % |  |   | 151    | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Total interest- bearing liabilities                   |  |                        | 724,709 |  |                |  | 1.49 | %               |  |   | 2,670          |  |  |               | 709,360 |  |                 |  | 1.73 | % |  |   | 3,025  | 
|Non-interest-bearing deposits                         |  |                        | 101,887 |  |                |  |      |                 |  |   |                |  |  |               | 94,069  |  |                 |  |      |   |  |   |        | 
|Other liabilities                                     |  |                        | 5,949   |  |                |  |      |                 |  |   |                |  |  |               | 282     |  |                 |  |      |   |  |   |        | 
|Shareholders equity                                  |  |                        | 80,659  |  |                |  |      |                 |  |   |                |  |  |               | 85,300  |  |                 |  |      |   |  |   |        | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Total liabilities and shareholders equity            |  | $                      | 913,204 |  |                |  |      |                 |  |   |                |  |  | $             | 889,011 |  |                 |  |      |   |  |   |        | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Net interest income and net interest margin (FTE) (3) |  |                        |         |  |                |  | 3.30 | %               |  | $ | 6,834          |  |  |               |         |  |                 |  | 3.55 | % |  | $ | 7,233  | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 
|Interest rate spread (FTE) (4)                        |  |                        |         |  |                |  | 3.11 | %               |  |   |                |  |  |               |         |  |                 |  | 3.30 | % |  |   |        | 
|                                                      |  |                        |         |  |                |  |      |                 |  |   |                |  |  |               |         |  |                 |  |      |   |  |   |        | 



|(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 $66 thousand and $238 thousand for periods ended March 31, 2011 and 2010, respectively.

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

|(4) | Interest rate spread equals the average yield on total earning assets minus the average rate paid on total interest-bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(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 those 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.



34



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##### Table of Contents

Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended March 31, 2011 and 2010

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



|                           |  |                        |      |   |          |   |      |     |  |   |      |  
|-------------------------- |  | ---------------------- | ---- | - | -------- | - | ---- | --- |  | - | ---- | -
|                           |  | 2011 compared to 2010  |     
|                           |  | Volume (1)             |      |   | Rate (1) |   |      | Net | 
|                           |  | (Dollars in thousands) |     
|Loans                      |  | $                      | (265 | ) |          | $ | (10  | )   |  | $ | (275 | )
|Taxable securities         |  |                        | 564  |   |          |   | (542 | )   |  |   | 22   |  
|Non-taxable securities (2) |  |                        | (511 | ) |          |   | 5    |     |  |   | (506 | )
|Other investments          |  |                        | (1   | ) |          |   | 6    |     |  |   | 5    |  
|                           |  |                        |      |   |          |   |      |     |  |   |      |  
|Interest income            |  |                        | (213 | ) |          |   | (541 | )   |  |   | (754 | )
|                           |  |                        |     
|Interest-bearing deposits  |  |                        | 32   |   |          |   | (429 | )   |  |   | (397 | )
|Short-term borrowings      |  |                        | (23  | ) |          |   | 36   |     |  |   | 13   |  
|Long-term obligations      |  |                        | 85   |   |          |   | (56  | )   |  |   | 29   |  
|                           |  |                        |      |   |          |   |      |     |  |   |      |  
|Interest expense           |  |                        | 94   |   |          |   | (449 | )   |  |   | (355 | )
|                           |  |                        |      |   |          |   |      |     |  |   |      |  
|Net interest income        |  | $                      | (307 | ) |          | $ | (92  | )   |  | $ | (399 | )
|                           |  |                        |      |   |          |   |      |     |  |   |      |  



|(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 $66 thousand and $238 thousand for periods ended March 31, 2011 and 2010, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for
Loan Losses

The provision for loan losses charged to operations during the three months ended March 31, 2011 and 2010
was $3.9 million and $3.0 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 $2.0 million for the
quarter ended March 31, 2011 compared to net charge-offs of $1.4 million during the first quarter of 2010. 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.

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 months ended March 31, 2011 and 2010.



|                                      |  |                        |       |   |               |   |       |  |  |  |        |   
|------------------------------------- |  | ---------------------- | ----- | - | ------------- | - | ----- |  |  |  | ------ | --
|                                      |  | Three months ended     |       |   | PercentChange |  
|                                      |  | March 31,2011          |       |   | March 31,2010 |   |      
|                                      |  | (Dollars in thousands) |       |   |               |  
|Service charges on deposit accounts   |  | $                      | 765   |   |               | $ | 823   |  |  |  | (7.0   | )%
|Other service charges and fees        |  |                        | 244   |   |               |   | 265   |  |  |  | (7.9   | ) 
|Mortgage origination fees             |  |                        | 326   |   |               |   | 212   |  |  |  | 53.8   |   
|Net gain on sale of securities        |  |                        | 26    |   |               |   | 1,289 |  |  |  | (98.0  | ) 
|Income from bank owned life insurance |  |                        | 74    |   |               |   | 74    |  |  |  |       |   
|Other operating income (expense)      |  |                        | (4    | ) |               |   | 5     |  |  |  | (180.0 | ) 
|                                      |  |                        |       |   |               |   |       |  |  |  |        |   
|Total noninterest income              |  | $                      | 1,431 |   |               | $ | 2,668 |  |  |  | (46.4  | )%
|                                      |  |                        |       |   |               |   |       |  |  |  |        |   



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##### Table of Contents

Noninterest income decreased $1.2 million or 46.4% to $1.4 million for the three months
ended March 31, 2011 compared to $2.6 million for the same period in 2010. The decrease is mainly due to a decrease in net gains on sale of securities in the first quarter of 2010 of $1.3 million. Net gains on the sale of securities were $26
thousand in the first quarter of 2011 compared to net gains of $1.3 million in the first quarter of 2010. Certain bonds subject to high price volatility to rising interest rates were sold in the first quarter of 2010 resulting in the net gain.
Service charges on deposit accounts decreased $58 thousand or 7.0% in the first quarter of 2011 relative to the same period in 2010 mainly due to a decrease in overdraft fees. Mortgage origination fees increased $114 thousand or 53.8% in the first
quarter 2011 compared to the same period in 2010. The increase is mainly because we established a correspondent bank platform for our mortgage department near the end of the first quarter of 2010 and we began originating loans in our name and
selling them in the secondary market. This change had minimal impact on the first quarter of 2010 but fully impacted the first quarter of 2011.

Noninterest Expense

Noninterest expense was flat at $6.2 million for the three months ended March 31, 2011 and for the three months ended March 31,
2010. The following table presents the components of noninterest expense for the three months ended March 31, 2011 and 2010.



|                                                                          |  |                        |       |  |               |   |       |  |  |  |       |  
|------------------------------------------------------------------------- |  | ---------------------- | ----- |  | ------------- | - | ----- |  |  |  | ----- | -
|                                                                          |  | Three months ended     |       |  | PercentChange |  
|                                                                          |  | March 31,2011          |       |  | March 31,2010 |   |      
|                                                                          |  | (Dollars in thousands) |       |  |               |  
|Salaries                                                                  |  | $                      | 2,564 |  |               | $ | 2,319 |  |  |  | 10.6  | %
|Retirement and other employee benefits                                    |  |                        | 676   |  |               |   | 730   |  |  |  | (7.4  | )
|Occupancy                                                                 |  |                        | 483   |  |               |   | 457   |  |  |  | 5.7   |  
|Equipment                                                                 |  |                        | 559   |  |               |   | 467   |  |  |  | 19.7  |  
|Professional fees                                                         |  |                        | 271   |  |               |   | 288   |  |  |  | (5.9  | )
|Supplies                                                                  |  |                        | 51    |  |               |   | 52    |  |  |  | (1.9  | )
|Telephone                                                                 |  |                        | 169   |  |               |   | 183   |  |  |  | (7.7  | )
|FDIC Insurance                                                            |  |                        | 326   |  |               |   | 333   |  |  |  | (2.1  | )
|Other outside services                                                    |  |                        | 181   |  |               |   | 118   |  |  |  | 53.4  |  
|Net cost of real estate and repossessions acquired in settlement of loans |  |                        | 18    |  |               |   | 334   |  |  |  | (94.6 | )
|Other operating expenses                                                  |  |                        | 946   |  |               |   | 957   |  |  |  | (1.1  | )
|                                                                          |  |                        |       |  |               |   |       |  |  |  |       |  
|Total noninterest expenses                                                |  | $                      | 6,244 |  |               | $ | 6,238 |  |  |  | 0.1   | %
|                                                                          |  |                        |       |  |               |   |       |  |  |  |       |  

Salary expense for the three months ended March 31, 2011 increased $245 thousand compared to the same
prior year period. The increase is primarily the result of additions made to personnel as we opened a new branch in December 2010 and general cost of living and merit increases. As of March 31, 2011, we had 238 full time equivalent employees
and operated 25 full service banking offices and one mortgage loan origination office. As of March 31, 2010, we had 222 full time equivalent employees and operated 24 full service banking offices and one mortgage loan origination office.

Employee related benefits expense for the three months ended March 31, 2011 decreased $54 thousand over the same prior
year period. The decrease for the three months ended March 31, 2011 is principally due to a decrease in supplemental employee retirement plan expense.

Occupancy expense increased $26 thousand or 5.7% to $483 thousand in the first three months of 2011 compared to $457 thousand in the prior year period. The largest components of the increase in the first
quarter of 2011 relative to the same period of 2010 were building repair and maintenance expense which increased $13 thousand and property tax expense which increased $6 thousand.

Equipment expense increased during the first three months of 2011 by $92 thousand or 19.7% compared to the first quarter of 2010. The
largest component of the increase was equipment and software maintenance expense, which increased $66 thousand.

Professional
fees, which include audit, legal and consulting fees, decreased $17 thousand or 5.9% to $271 thousand for the three months ended March 31, 2011 from $288 thousand in the prior year period. The decrease is the result of a decline in consulting
fees which was offset by an increase in legal fees and audit fees. Audit fees increased approximately $11 thousand and legal fees increased approximately $24 thousand, while consulting fees decreased approximately $52 thousand during the first
quarter of 2011 compared to the same period in 2010.



36



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##### Table of Contents

Other outside services expense increased during the first three months of 2011 by $63
thousand or 53.4% compared to the first quarter of 2010. The increase is the result of additional services contracted for in the first quarter of 2011 as compared to the prior year period.

Net cost of real estate and repossessions acquired in settlement of loans expense decreased $316 thousand to $18 thousand in the first
quarter of 2011 compared to $334 thousand in the same period in 2010. The decrease is attributable to larger losses recognized on disposition of assets during the 2010 period.

Income Taxes

Income tax benefit for the three months ended March 31,
2011 and 2010 was $891 thousand and $62 thousand, respectively, resulting in effective tax rates of 45.1% and (14.6%), respectively.

Financial Condition

Balance Sheet

Our total assets were $916.6 million at March 31, 2011, $919.9 million at December 31, 2010 and $897.8 million at March 31,
2010. Our year-over-year asset growth was primarily funded by deposit growth. For the twelve months ended March 31, 2011, our loans declined $31.4 million while our deposits grew by approximately $13.8 million. Year-over-year, our earning
assets grew mainly through an increase in available-for-sale investment securities as these securities increased by approximately $107.4 million. For the three months ended March 31, 2011, our loans declined $21.0 million or 3.7% and we
experienced flat deposit growth of $0.8 million or 0.1%.

Loans

As of March 31, 2011, total loans declined $21.0 million to $546.6 million, from total loans of $567.6 million at December 31,
2010 and down $31.4 million or 5.4% from total loans of $578.0 million at March 31, 2010. The decline in loans year over year and for the three months ending March 31, 2011 can be attributed to continued weak economic conditions.

Asset Quality

At March 31, 2011, our allowance for loan losses as a percentage of loans was 2.78%, up from 1.96% at March 31, 2010. The
increase in part reflects the increase in our historical loss rate as our charge-offs have increased during the past two years. 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 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. Most loans risk rated substandard, doubtful and
loss are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated substandard, doubtful and loss with balances less than $100 thousand are not
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.



37



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##### Table of Contents

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 portion determined through general qualitative and quantitative internal and external factors, the general portion 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. 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 in full 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.

Net charge-offs for the first quarter of 2011 totaled $2.0 million compared to net charge-offs of $1.4 million during the first quarter
of 2010. The provision for loan losses charged to operations for the three months ended March 31, 2011 and 2010 was $3.9 million and $3.0 million, respectively. The following table presents an analysis of the changes in the allowance for loan
losses for the three months ended March 31, 2011 and 2010.

Analysis of Changes in Allowance for Loan Losses



|                                                               |  |                                      |         |   |      |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---- | - | ------- | -
|                                                               |  | For the three months
Ended March 31, |        
|                                                               |  | 2011                                 |         |   | 2010 |  
|                                                               |  | (Dollars in thousands)               |        
|Total loans outstanding at end of period-gross                 |  | $                                    | 546,641 |   |      | $ | 577,964 |  
|                                                               |  |                                      |         |   |      |   |         |  
|Average loans outstanding-gross                                |  | $                                    | 558,264 |   |      | $ | 576,524 |  
|                                                               |  |                                      |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |  | $                                    | 13,247  |   |      | $ | 9,725   |  
|Loans charged-off:                                             |  |                                      |         |   |      |   |         |  
|Real estate                                                    |  |                                      | 1,722   |   |      |   | 1,227   |  
|Installment loans                                              |  |                                      | 9       |   |      |   | 16      |  
|Credit cards and related plans                                 |  |                                      | 9       |   |      |   |         |  
|Commercial and all other loans                                 |  |                                      | 273     |   |      |   | 142     |  
|Demand deposit overdraft program                               |  |                                      | 47      |   |      |   | 58      |  
|                                                               |  |                                      |         |   |      |   |         |  
|Total charge-offs                                              |  |                                      | 2,060   |   |      |   | 1,443   |  
|                                                               |  |                                      |         |   |      |   |         |  
|Recoveries of loans previously charged-off:                    |  |                                      |         |   |      |   |         |  
|Real estate                                                    |  |                                      | 1       |   |      |   | 14      |  
|Installment loans                                              |  |                                      | 2       |   |      |   | 2       |  
|Credit cards and related plans                                 |  |                                      |        |   |      |   |        |  
|Commercial and all other loans                                 |  |                                      | 64      |   |      |   |        |  
|Demand deposit overdraft program                               |  |                                      | 35      |   |      |   | 31      |  
|                                                               |  |                                      |         |   |      |   |         |  
|Total recoveries                                               |  |                                      | 102     |   |      |   | 47      |  
|                                                               |  |                                      |         |   |      |   |         |  
|Net charge-offs                                                |  |                                      | 1,958   |   |      |   | 1,396   |  
|                                                               |  |                                      |         |   |      |   |         |  
|Provision for loan losses                                      |  |                                      | 3,930   |   |      |   | 3,000   |  
|                                                               |  |                                      |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |  | $                                    | 15,219  |   |      | $ | 11,329  |  
|                                                               |  |                                      |         |   |      |   |         |  
|Ratios                                                         |  |                                      |         |   |      |   |         |  
|Annualized net charge-offs to average loans during the period  |  |                                      | 1.40    | % |      |   | 0.97    | %
|Allowance for loan losses to loans at period end               |  |                                      | 2.78    | % |      |   | 1.96    | %
|Allowance for loan losses to nonperforming loans at period end |  |                                      | 69      | % |      |   | 61      | %



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The ratio of annualized net charge-offs to average loans increased to 1.40% at
March 31, 2011 from 0.97% at March 31, 2010 mainly due to an increase in real estate related charge-offs. The increase in the allowance for loan losses to loans to 2.78% at March 31, 2011 from 1.96% at March 31, 2010 reflects the
increase in our historical loss rate as our charge-offs have increased during the past two years. 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 to 69% as of March 31, 2011 compared to 61% at March 31, 2010.

Construction, land and
development (CLD) loans make up 15.4% 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 Banks credit quality.
The table below shows trends of CLD loans, along with ratios relating to their relative credit quality.



|                           |  |                        |        |   |                 |  |      |            |  |   |            |   |  |  |      |   |  |   |         |  
|-------------------------- |  | ---------------------- | ------ | - | --------------- |  | ---- | ---------- |  | - | ---------- | - |  |  | ---- | - |  | - | ------- | -
|                           |  | CLD Loans              |        |   | All Other Loans |  |      | TotalLoans | 
|                           |  | Balance                |        |   | % of Total      |  |      | Balance    |  |   | % of Total |   | 
|                           |  | (Dollars in thousands) |       
|Balances at March 31, 2011 |  | $                      | 84,045 |   |                 |  | 15.4 | %          |  | $ | 462,596    |   |  |  | 84.6 | % |  | $ | 546,641 |  
|Impaired loans             |  |                        | 15,497 |   |                 |  | 54.3 | %          |  |   | 13,046     |   |  |  | 45.7 | % |  |   | 28,543  |  
|Allocated Reserves         |  |                        | 7,586  |   |                 |  | 53.4 | %          |  |   | 6,632      |   |  |  | 46.6 | % |  |   | 14,218  |  
|YTD Net Charge-offs        |  |                        | 1,273  |   |                 |  | 65.0 | %          |  |   | 685        |   |  |  | 35.0 | % |  |   | 1,958   |  
|Nonperforming loans (NPL)  |  |                        | 11,649 |   |                 |  | 52.7 | %          |  |   | 10,448     |   |  |  | 47.3 | % |  |   | 22,097  |  
|NPL as % of loans          |  |                        | 13.9   | % |                 |  |      |            |  |   | 2.3        | % |  |  |      |   |  |   | 4.0     | %

While balances of CLD
loans make up 15.4% of the Banks loan portfolio, they represent 54.3% and 65.0% of the Banks impaired loans and YTD net charge-offs, respectively. CLD loans represent 52.7% of the Banks nonperforming loans and 53.4% of the
Banks allocated reserves are allocated to CLD loans.

Nonperforming Assets

The following table summarizes our nonperforming assets and past due loans at the dates indicated.



|                                              |  |                        |        |  |                  |   |        | 
|--------------------------------------------- |  | ---------------------- | ------ |  | ---------------- | - | ------ | 
|                                              |  | March 31,2011          |        |  | December 31,2010 |  
|                                              |  | (Dollars in thousands) |       
|                                              |  |                       
|Non-accrual loans                             |  | $                      | 16,801 |  |                  | $ | 15,896 | 
|                                              |  |                       
|Loans past due 90 days or more still accruing |  |                        |       |  |                  |   |       | 
|                                              |  |                       
|Restructured loans                            |  |                        | 5,296  |  |                  |   | 6,193  | 
|                                              |  |                       
|Other real estate owned & repossessions       |  |                        | 7,258  |  |                  |   | 4,536  | 
|                                              |  |                        |        |  |                  |   |        | 
|                                              |  |                       
|Total                                         |  | $                      | 29,355 |  |                  | $ | 26,625 | 
|                                              |  |                        |        |  |                  |   |        | 

Nonperforming assets consist of loans not accruing interest, loans past due ninety days and still accruing
interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on non-accrual 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 $29.4 million and $26.6 million, or 3.20% and 2.89% of total assets at March 31, 2011 and December 31, 2010, respectively. On both March 31, 2011 and December 31, 2010
our nonperforming loans (consisting of nonaccruing loans, loans past due ninety days and still accruing interest and restructured loans) amounted to approximately $22.1 million. We had $7.3 million in other real estate owned and repossessions at
March 31, 2011 compared to $4.5 million at December 31, 2010.



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Loans Considered Impaired

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At March 31, 2011, we had loans totaling $28.5 million (which includes $21.1 million in
nonperforming loans) which were considered to be impaired compared to $26.3 million at December 31, 2010. As discussed under the caption 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 a current independent appraisal.

The following table sets forth the number and volume of loans, net of previous charge-offs, that were considered impaired, and their
associated reserve allocation, if any, at March 31, 2011. Eighteen non-accrual loans with a total balance of approximately $1.0 million were not removed from their homogeneous group and individually analyzed for impairment because their
individual loan balances were less than $100 thousand.



|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|-------------------------------------------- |  | --------------------- | -- |  | ----------------------- | - | ---- | ----------------- |  | - | --- | 
|                                             |  | Numberof Loans        |    |  | LoanBalancesOutstanding |   |      | AllocatedReserves | 
|                                             |  | (Dollars in millions) |   
|Non-accrual loans                            |  |                       | 44 |  |                         | $ | 15.8 |                   |  | $ | 1.0 | 
|Restructured loans                           |  |                       | 9  |  |                         |   | 5.3  |                   |  |   | 1.2 | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|Total nonperforming loans                    |  |                       | 53 |  |                         | $ | 21.1 |                   |  | $ | 2.2 | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|Other impaired loans with allocated reserves |  |                       | 16 |  |                         |   | 6.9  |                   |  |   | 1.8 | 
|Impaired loans without allocated reserves    |  |                       | 4  |  |                         |   | 0.5  |                   |  |   |    | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|Total impaired loans                         |  |                       | 73 |  |                         | $ | 28.5 |                   |  | $ | 4.0 | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 

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. While we have no plans to
liquidate a significant amount of our securities, the securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our best interest.

Our investment securities totaled $305.0 million at March 31, 2011, $273.2 million at December 31, 2010 and $197.5 million at
March 31, 2010. 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 March 31, 2011, the securities portfolio had unrealized net losses of approximately $2.8 million, which are reported in
accumulated other comprehensive income (loss) on the consolidated statement of changes in shareholders equity, net of tax. Our securities portfolio at March 31, 2011 consisted of U.S. government sponsored agencies, collateralized mortgage
obligations (CMOs), mortgage-backed securities (MBS), corporate bonds, and municipal securities.

We currently have the
ability to hold our available-for-sale investment securities to maturity except for equity securities. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of
March 31, 2011, we owned securities from issuers as to which our



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##### Table of Contents

aggregate amortized cost exceeded 10% of our common shareholders equity. As of March 31, 2011 the amortized cost and market value of the securities from those issuers were as follows:



|                                         |  |                        |        |  |             |   |        | 
|---------------------------------------- |  | ---------------------- | ------ |  | ----------- | - | ------ | 
|                                         |  | AmortizedCost          |        |  | MarketValue |  
|                                         |  | (Dollars in thousands) |       
|Federal National Mortgage Corporation    |  | $                      | 83,900 |  |             | $ | 83,532 | 
|Federal Home Loan Mortgage Corporation   |  |                        | 48,951 |  |             |   | 48,900 | 
|Government National Mortgage Association |  |                        | 38,129 |  |             |   | 37,765 | 
|Small Business Administration            |  |                        | 78,328 |  |             |   | 77,720 | 
|Federal Home Loan Banks                  |  |                        | 14,141 |  |             |   | 13,534 | 

At March 31,
2011 and December 31, 2010, we held $9.0 million in bank owned life insurance, compared to $8.7 million at March 31, 2010.

Deposits and Other Borrowings

Deposits

Deposits
totaled $786.8 million as of March 31, 2011, up 0.1% compared to deposits of $785.9 million at December 31, 2010 and up 1.8% compared to deposits of $772.9 million at March 31, 2010. We attribute our deposit growth during the twelve
months ended March 31, 2011 to our new Rewards Checking and Savings product, 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

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, repurchase agreements and other borrowings to be repaid this year. Our short-term borrowings totaled $17.4 million at March 31, 2011, compared to $11.5 million on
December 31, 2010, an increase of $5.9 million.

The following table details the maturities and rates of our borrowings
from the FHLB, as of March 31, 2011.



|                       |  |            |  |           |       |  |      |         |      |  |      |          |  |                  
|---------------------- |  | ---------- |  | --------- | ----- |  | ---- | ------- | ---- |  | ---- | -------- |  | -----------------
|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 |  |           | 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: $ 36,000            Composite rate:
2.26%

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 $27.5 million on March 31, 2011, compared to $34.5
million in FHLB advances on December 31, 2010 and $14.5 million on March 31, 2010. The decrease of $7.0 million in long-term FHLB advances as of March 31, 2011, compared to December 31, 2010 is the result of FHLB advances being
reclassed to short-term borrowing because the current time to maturity is less than a year.



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##### Table of Contents

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 local core deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by FHLB advances,
institutional deposits obtained through the internet and 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 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 $183.3 million and $184.0 million of advances from the FHLB at March 31, 2011 and December 31, 2010, respectively. At March 31,
2011 we had outstanding FHLB advances totaling $36.0 million compared to $42.5 million and $31.0 million at December 31, 2010 and March 31, 2010, 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 March 31, 2011, we owned 45,708 shares of the FHLBs $100 par value capital stock, compared to 45,708 and 51,160 shares at December 31, 2010 and March 31, 2010,
respectively. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in
the aggregate amount of $46.0 million available to us at March 31, 2011 under which we can borrow funds to meet short-term liquidity needs. At March 31, 2011, we had $3.4 million 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 three months ended March 31, 2011 totaled $7.5 million, compared to net cash provided by
operations of $2.9 million for the same period in 2010. Net cash used in investing activities decreased to $16.8 million for the three months ended March 31, 2011, as compared to net cash provided in investing activities of $40.6 million for
the same period in 2010 primarily due to less proceeds from the sale of investment securities during the first quarter of 2011 as compared to the first quarter of 2010 and an increase in the purchases of investment securities in the first quarter of
2011 as compared to the first quarter of 2010. Net cash used by financing activities was $0.7 million for the first three months of 2011, compared to net cash provided of $8.9 million for the same period in 2010 due primarily to a smaller increase
in deposits during the first quarter of 2011 as compared to the same period in 2010. Cash and cash equivalents at March 31, 2011 was $10.2 million compared to $70.3 million at March 31, 2010.

As discussed in Note 11, during April 2011, the Banks Board of Directors adopted a resolution at the request of the Federal
Deposit Insurance Corporation to the effect that, among other things, the Bank will not pay any cash dividend to us without the approval of the FDIC and N.C. Commissioner of Banks. Dividends we receive from the Bank is our primary source of funds
with which we can pay dividends on our outstanding common and preferred stock. As a result, if the Banks regulators declined to permit the Bank to dividend funds to us, we would be unable to pay dividends on our common and preferred stock.

Capital Resources

Shareholders Equity

As of March 31, 2011, our total shareholders equity was $79.2 million (consisting of common shareholders equity of $61.9 million and preferred stock of $17.3 million) compared with total
shareholders equity of $80.9 million as of December 31, 2010 (consisting of common shareholders equity of $63.6 million and preferred stock of $17.3 million). Common shareholders equity decreased by approximately $1.7 million
to $61.9 million at March 31, 2011 from $63.6 million at December 31, 2010. We incurred a net loss of $1.1 million, experienced an increase in net unrealized losses on available-for-sale securities of $0.2 million and recognized stock
based compensation of $6 thousand on incentive stock awards. We declared cash dividends of $199 thousand on our common shares or $0.07 per share during the first quarter of 2011 and dividends and accretion of discount of $265 thousand on preferred
shares.



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##### Table of Contents

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 March 31, 2011, we and the Bank met all capital adequacy requirements to which we
are subject.

As of March 31, 2011, we experienced a decrease in our capital ratios when compared to the
December 31, 2010 and March 31, 2010 periods. This decrease is primarily due to a decrease in Tier 1 and total capital.

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 for purposes of bank regulatory capital guidelines are presented in the following table:



|                                         |  |                                                                             |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|---------------------------------------- |  | --------------------------------------------------------------------------- | ----- | - | ------------------------------------------------- | - | ---- | -------- |  |  | ----------- | - |  |  | ----- | -
|                                         |  | Ratio required to bewell capitalizedunder promptcorrective
actionprovisions |       |   | Minimum ratiorequired forcapital adequacypurposes |   |      | OurRatio |  |  | BanksRatio |  
|                                         |  |                                                                             |       |  
|As of March 31, 2011:                    |  |                                                                             |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                           | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 8.42        | % |  |  | 8.42  | %
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                           | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 11.97       |   |  |  | 11.97 |  
|                                         |  |                                                                             |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                           | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 13.24       |   |  |  | 13.24 |  
|                                         |  |                                                                             |       |  
|As of December 31, 2010:                 |  |                                                                             |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                           | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 8.66        | % |  |  | 8.66  | %
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                           | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 12.08       |   |  |  | 12.08 |  
|                                         |  |                                                                             |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                           | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 13.34       |   |  |  | 13.34 |  
|                                         |  |                                                                             |       |  
|As of March 31, 2010:                    |  |                                                                             |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                           | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 9.26        | % |  |  | 7.25  | %
|                                         |  |                                                                             |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                           | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 12.69       |   |  |  | 9.91  |  
|                                         |  |                                                                             |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                           | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 13.95       |   |  |  | 11.17 |  



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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.

Our market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in
interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of our 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 our Annual Report on Form 10-K for
the fiscal year ended December 31, 2010.

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 under 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 March 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the 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, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K 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.

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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##### Table of Contents

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: May 16, 2011 |  |  |  | By:               |  | /s/ A. Dwight Utz               
|                   |  |  |  |                   |  | A. Dwight Utz                   
|                   |  |  |  |                   |  | (President & CEO)               
|                   |  |  | 
|Date: May 16, 2011 |  |  |  | By:               |  | /s/ Thomas M. Crowder           
|                   |  |  |  |                   |  | Thomas M. Crowder               
|                   |  |  |  |                   |  | (Executive Vice President & CFO)



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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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