----

| Maryland                        | 52-1974638          |
|---------------------------------|---------------------|
| (State or Other Jurisdiction of | (I.R.S. Employer    |
| Incorporation or Organization)  | Identification No.) |

| 18 East Dover Street, Easton, Maryland   | 21601      |
|------------------------------------------|------------|
| (Address of Principal Executive Offices) | (Zip Code) |

| Title of Each Class:                   | Name of Each Exchange on Which Registered: |
|----------------------------------------|--------------------------------------------|
| Common stock, par value $.01 per share | Nasdaq Global Select Market                |

| Large accelerated filer £ | Accelerated filer R | Non-accelerated filer £ | Smaller Reporting Company £ |
|--------------------------------|---------------------|------------------------------|----------------------------------|

----

| Part I       |                                                                                                               |   |   |
|--------------|--------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.      | Business                                                                                                           |   | 2      |
| Item 1A.     | Risk Factors                                                                                                       |   | 10     |
| Item 1B.     | Unresolved Staff Comments                                                                                          |   | 17     |
| Item 2.      | Properties                                                                                                         |   | 17     |
| Item 3.      | Legal Proceedings                                                                                                  |   | 19     |
| Item 4.      | [Removed and Reserved]                                                                                             |   | 19     |
|         |                                                                                                               |   |   |
| Part II      |                                                                                                               |   |   |
| Item 5.      | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |   | 19     |
| Item 6.      | Selected Financial Data                                                                                            |   | 21     |
| Item 7.      | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        |   | 22     |
| Item 7A.     | Quantitative and Qualitative Disclosures About Market Risk                                                         |   | 38     |
| Item 8.      | Financial Statements and Supplementary Data                                                                        |   | 38     |
| Item 9.      | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                               |   | 75     |
| Item 9A.     | Controls and Procedures                                                                                            |   | 75     |
| Item 9B.     | Other Information                                                                                                  |   | 75     |
|         |                                                                                                               |   |   |
| Part III     |                                                                                                               |   |   |
| Item 10.     | Directors, Executive Officers and Corporate Governance                                                             |   | 75     |
| Item 11.     | Executive Compensation                                                                                             |   | 75     |
| Item 12.     | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                     |   | 76     |
| Item 13.     | Certain Relationships and Related Transactions, and Director Independence                                          |   | 76     |
| Item 14.     | Principal Accountant Fees and Services                                                                             |   | 76     |
|         |                                                                                                               |   |   |
| Part IV      |                                                                                                               |   |   |
| Item 15.     | Exhibits and Financial Statement Schedules                                                                         |   | 77     |
| SIGNATURES   |                                                                                                               | 77     |
|         |                                                                                                               |   |   |
| EXHIBIT LIST |                                                                                                               | 78     |

----

| Item 1. | Business. |
|---------|-----------|

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----

----

|                                  |   |           |    |   | % of   |   |
|---------------------------------------|--------|----------------|---------|--------|--------|--------|
| Kent County, Maryland                 |   | Deposits       |    |   | Total  |   |
|                                  |   | (in thousands) |    |   |   |   |
| Peoples Bank of Kent County, Maryland |   | $              | 180,815 |   |   |   | 35.07 | % |
| PNC Bank, NA                          |   |           | 145,993 |   |   |   | 28.31 |   |
| Chesapeake Bank and Trust Co.         |   |           | 66,443  |   |   |   | 12.89 |   |
| Branch Banking & Trust            |   |           | 47,960  |   |   |   | 9.30 |   |
| CNB                                   |   |           | 43,545  |   |   |   | 8.44 |   |
| SunTrust Bank                         |   |           | 30,886  |   |   |   | 5.99 |   |
| Total                                 |   | $              | 515,642 |   |   |   | 100.00 | % |

|                                |   |           |    |   | % of   |   |
|-------------------------------------|--------|----------------|---------|--------|--------|--------|
| Queen Anne’s County, Maryland |   | Deposits       |    |   | Total  |   |
|                                |   | (in thousands) |    |   |   |   |
| The Queenstown Bank of Maryland     |   | $              | 354,227 |   |   |   | 43.27 | % |
| CNB                                 |   |           | 200,455 |   |   |   | 24.49 |   |
| Bank of America, NA                 |   |           | 65,122  |   |   |   | 7.95 |   |
| PNC Bank, NA                        |   |           | 60,805  |   |   |   | 7.43 |   |
| Bank Annapolis                      |   |           | 45,593  |   |   |   | 5.57 |   |
| M&T                             |   |           | 43,498  |   |   |   | 5.31 |   |
| Branch Banking & Trust          |   |           | 23,983  |   |   |   | 2.93 |   |
| SunTrust Bank                       |   |           | 8,828   |   |   |   | 1.08 |   |
| Capital One Bank                    |   |           | 8,596   |   |   |   | 1.05 |   |
| Peoples Bank                        |   |           | 7,527   |   |   |   | 0.92 |   |
| Total                               |   | $              | 818,634 |   |   |   | 100.00 | % |

|                            |   |           |    |   | % of   |   |
|---------------------------------|--------|----------------|---------|--------|--------|--------|
| Caroline County, Maryland       |   | Deposits       |    |   | Total  |   |
|                            |   | (in thousands) |    |   |   |   |
| Provident State Bank, Inc       |   | $              | 151,782 |   |   |   | 38.32 | % |
| PNC Bank, NA                    |   |           | 101,084 |   |   |   | 25.52 |   |
| CNB                             |   |           | 57,106  |   |   |   | 14.42 |   |
| Branch Banking & Trust      |   |           | 30,788  |   |   |   | 7.77 |   |
| M&T                         |   |           | 23,997  |   |   |   | 6.06 |   |
| Bank of America, NA             |   |           | 16,749  |   |   |   | 4.23 |   |
| Easton Bank & Trust         |   |           | 11,722  |   |   |   | 2.96 |   |
| The Queenstown Bank of Maryland |   |           | 2,820   |   |   |   | 0.71 |   |
| Total                           |   | $              | 396,048 |   |   |   | 100.00 | % |

----

|                                |   |           |      |   | % of   |   |
|-------------------------------------|--------|----------------|-----------|--------|--------|--------|
| Talbot County, Maryland             |   | Deposits       |      |   | Total  |   |
|                                |   | (in thousands) |      |   |   |   |
| The Talbot Bank of Easton, Maryland |   | $              | 580,928   |   |   |   | 49.96 | % |
| PNC Bank, NA                        |   |           | 131,775   |   |   |   | 11.33 |   |
| Easton Bank & Trust             |   |           | 126,394   |   |   |   | 10.87 |   |
| Bank of America, NA                 |   |           | 92,389    |   |   |   | 7.95 |   |
| Branch Banking & Trust          |   |           | 54,401    |   |   |   | 4.68 |   |
| SunTrust Bank                       |   |           | 44,925    |   |   |   | 3.86 |   |
| The Queenstown Bank of Maryland     |   |           | 43,328    |   |   |   | 3.73 |   |
| M&T                             |   |           | 31,897    |   |   |   | 2.74 |   |
| Provident State Bank, Inc           |   |           | 20,863    |   |   |   | 1.79 |   |
| First Mariner Bank                  |   |           | 18,589    |   |   |   | 1.60 |   |
| Capital One Bank                    |   |           | 17,258    |   |   |   | 1.48 |   |
| Total                               |   | $              | 1,162,747 |   |   |   | 100.00 | % |

|                                |   |           |    |   | % of   |   |
|-------------------------------------|--------|----------------|---------|--------|--------|--------|
| Dorchester County, Maryland         |   | Deposits       |    |   | Total  |   |
|                                |   | (in thousands) |    |   |   |   |
| The National Bank of Cambridge      |   | $              | 197,275 |   |   |   | 32.30 | % |
| Bank of the Eastern Shore           |   |           | 187,630 |   |   |   | 30.72 |   |
| Hebron Savings Bank                 |   |           | 56,171  |   |   |   | 9.20 |   |
| Branch Banking & Trust          |   |           | 44,004  |   |   |   | 7.21 |   |
| Provident State Bank, Inc           |   |           | 39,729  |   |   |   | 6.51 |   |
| Bank of America, NA                 |   |           | 25,359  |   |   |   | 4.15 |   |
| SunTrust Bank                       |   |           | 21,994  |   |   |   | 3.60 |   |
| M&T                             |   |           | 21,000  |   |   |   | 3.44 |   |
| The Talbot Bank of Easton, Maryland |   |           | 17,532  |   |   |   | 2.87 |   |
| Total                               |   | $              | 610,694 |   |   |   | 100.00 | % |

|                            |   |           |      |   | % of   |   |
|---------------------------------|--------|----------------|-----------|--------|--------|--------|
| Kent County, Delaware           |   | Deposits       |      |   | Total  |   |
|                            |   | (in thousands) |      |   |   |   |
| Wilmington Trust                |   | $              | 548,818   |   |   |   | 31.64 | % |
| PNC Bank Delaware               |   |           | 252,719   |   |   |   | 14.57 |   |
| First NB of Wyoming             |   |           | 238,823   |   |   |   | 13.77 |   |
| RBS Citizens NA                 |   |           | 186,751   |   |   |   | 10.77 |   |
| Wells Fargo                     |   |           | 157,370   |   |   |   | 9.07 |   |
| Wilmington Savings Fund Society |   |           | 111,444   |   |   |   | 6.42 |   |
| The Felton Bank                 |   |           | 73,984    |   |   |   | 4.27 |   |
| Artisans Bank                   |   |           | 59,881    |   |   |   | 3.45 |   |
| TD Bank NA                      |   |           | 43,395    |   |   |   | 2.50 |   |
| County Bank                     |   |           | 37,878    |   |   |   | 2.18 |   |
| Midcoast Community Bank         |   |           | 19,298    |   |   |   | 1.11 |   |
| Fort Sill National Bank         |   |           | 4,311     |   |   |   | 0.25 |   |
| Total                           |   | $              | 1,734,672 |   |   |   | 100.00 | % |

----

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| The Talbot Bank of Easton, Maryland                                          |
|------------------------------------------------------------------------------|
|                                                                         |
| Branches                                                                     |
|                                                                         |
| Main Office18 East Dover StreetEaston, Maryland 21601                        | Tred Avon Square Branch212 Marlboro RoadEaston, Maryland 21601 | St. Michaels Branch1013 South Talbot StreetSt. Michaels, Maryland 21663 |
|                                                                         |   |   |
| Elliott Road Branch8275 Elliott RoadEaston, Maryland 21601                   | Sunburst Branch424 Dorchester AvenueCambridge, Maryland 21613 | Tilghman Branch5804 Tilghman Island RoadTilghman, Maryland 21671 |
|                                                                         |   |   |
|                                                                         | Trappe Branch29349 Maple Avenue, Suite 1Trappe, Maryland  21673 |   |
|                                                                         |   |   |
|                                                                         | ATMs |   |
|                                                                         |   |   |
| Memorial Hospital at Easton219 South Washington StreetEaston, Maryland 21601 | Talbottown218 North Washington StreetEaston, Maryland 21601 |   |

----

| CNB                                                                                                  |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| Branches                                                                                             |
|                                                                                                 |
| Main Office109 North Commerce StreetCentreville, Maryland 21617                                      | Route 213 South Branch2609 Centreville RoadCentreville, Maryland 21617 | Chester Branch300 Castle Marina RoadChester, Maryland 21619 |
|                                                                                                 |   |   |
| Chestertown Branch305 High StreetChestertown, Maryland 21620                                         | Denton Branch850 South 5th AvenueDenton, Maryland 21629 | Grasonville Branch202 Pullman CrossingGrasonville, Maryland 21638 |
|                                                                                                 |   |   |
| Stevensville Branch408 Thompson Creek RoadStevensville, Maryland 21666                               | Tuckahoe Branch22151 WES StreetRidgely, Maryland  21660 | Washington Square Branch899 Washington AvenueChestertown, Maryland 21620  |
|                                                                                                 |   |   |
| Felton Branch120 West Main StreetFelton, Delaware 19943(formerly Felton Bank)                        | Milford Branch698-A  North Dupont BoulevardMilford, Delaware 19963(formerly Felton Bank) | Camden Wal-Mart Supercenter263 Wal-Mart DriveCamden, Delaware 19934(formerly Felton Bank) |
|                                                                                                 |   |   |
| Division Office - Wye Financial & Trust16 North Washington Street, Suite 1Easton, Maryland 21601 |
|                                                                                                 |
| ATMQueenstown Harbor Golf LinksQueenstown, Maryland 21658                                            |

| The Avon-Dixon Agency, LLC                                                                     |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Headquarters28969 Information LaneEaston, Maryland 21601                                       | Easton Office106 North Harrison StreetEaston, Maryland 21601 | Chestertown Office899 Washington AvenueChestertown, Maryland 21620 |
|                                                                                           |   |   |
| Grasonville Office202 Pullman CrossingGrasonville, Maryland 21638                              | Centreville Office105 Lawyers RowCentreville, Maryland 21617 |   |
|                                                                                           |   |   |
| Elliott-Wilson Insurance, LLC106 North Harrison Street  Easton, Maryland 21601       | Mubell Finance, LLC106 North Harrison Street  Easton, Maryland 21601 | Wye Mortgage Group17 East Dover Street, Suite 101 Easton, Maryland 21601 |
|                                                                                           |   |   |
| Jack Martin & Associates, Inc.135 Old Solomon’s Island RoadAnnapolis, Maryland 21401 | Tri-State General Insurance Agencies and ESFS, Inc.One Plaza East, 4th FloorSalisbury, Maryland 21802 |   |

----

| Item 3. | Legal Proceedings. |
|---------|--------------------|

| Item 4. | [Removed and Reserved] |
|---------|------------------------|

| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
|---------|---------------------------------------------------------------------------------------------------------------------|

|           |   | 2010        |   |   | 2009      |   |
|----------------|--------|-------------|--------|--------|-----------|--------|
|           |   | Price Range |   |   | Dividends |   |   | Price Range |   |   | Dividends |   |
|           |   | High        |   |   | Low       |   |   | Paid |   |   | High |   |   | Low |   |   | Paid |   |
| First Quarter  |   | $           | 14.75  |   |      | $      | 10.21 |   |   | $ | 0.06 |   |   | $ | 24.43 |   |   | $ | 11.00 |   |   | $ | 0.16 |   |
| Second Quarter |   |        | 14.80  |   |      |   | 11.75 |   |   |   | 0.06 |   |   |   | 21.46 |   |   |   | 15.18 |   |   |   | 0.16 |   |
| Third Quarter  |   |        | 12.10  |   |      |   | 9.20 |   |   |   | 0.06 |   |   |   | 20.72 |   |   |   | 16.64 |   |   |   | 0.16 |   |
| Fourth Quarter |   |        | 10.73  |   |      |   | 9.25 |   |   |   | 0.06 |   |   |   | 17.71 |   |   |   | 13.52 |   |   |   | 0.16 |   |
|           |   |        |   |   |      |   |   |   |   | $ | 0.24 |   |   |   |   |   |   |   |   |   |   | $ | 0.64 |   |

----

|                   |   |     | Period Ending |   |
|------------------------|--------|----------|---------------|--------|
| Index                  |   | 12/31/05 |          |   | 12/31/06 |   |   | 12/31/07 |   |   | 12/31/08 |   |   | 12/31/09 |   |   | 12/31/10 |   |
| Shore Bancshares, Inc. |   |     | 100.00        |   |   |   | 145.85 |   |   |   | 108.85 |   |   |   | 122.31 |   |   |   | 76.74 |   |   |   | 56.96 |   |
| NASDAQ Composite       |   |     | 100.00        |   |   |   | 110.39 |   |   |   | 122.15 |   |   |   | 73.32 |   |   |   | 106.57 |   |   |   | 125.91 |   |
| NASDAQ Bank            |   |     | 100.00        |   |   |   | 113.82 |   |   |   | 91.16 |   |   |   | 71.52 |   |   |   | 59.87 |   |   |   | 68.34 |   |
| SNL Small Cap Bank     |   |     | 100.00        |   |   |   | 114.14 |   |   |   | 82.53 |   |   |   | 69.37 |   |   |   | 48.76 |   |   |   | 59.56 |   |

----

|                                                       |   | Years Ended December 31, |      |
|------------------------------------------------------------|--------|--------------------------|-----------|
| (Dollars in thousands, except per share data)              |   | 2010                     |      |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| RESULTS OF OPERATIONS:                                     |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                            |   | $                        | 55,461    |   |   | $ | 58,789 |   |   | $ | 61,474 |   |   | $ | 65,141 |   |   | $ | 57,971 |   |
| Interest expense                                           |   |                     | 12,822    |   |   |   | 17,411 |   |   |   | 21,555 |   |   |   | 24,105 |   |   |   | 19,074 |   |
| Net interest income                                        |   |                     | 42,639    |   |   |   | 41,378 |   |   |   | 39,919 |   |   |   | 41,036 |   |   |   | 38,897 |   |
| Provision for credit losses                                |   |                     | 21,119    |   |   |   | 8,986 |   |   |   | 3,337 |   |   |   | 1,724 |   |   |   | 1,493 |   |
| Net interest income after provision for credit losses      |   |                     | 21,520    |   |   |   | 32,392 |   |   |   | 36,582 |   |   |   | 39,312 |   |   |   | 37,404 |   |
| Noninterest income                                         |   |                     | 18,041    |   |   |   | 19,541 |   |   |   | 20,350 |   |   |   | 14,679 |   |   |   | 12,839 |   |
| Noninterest expense                                        |   |                     | 41,720    |   |   |   | 40,248 |   |   |   | 38,370 |   |   |   | 32,539 |   |   |   | 28,535 |   |
| (Loss) income before income taxes                          |   |                     | (2,159    | ) |   |   | 11,685 |   |   |   | 18,562 |   |   |   | 21,452 |   |   |   | 21,708 |   |
| Income tax (benefit) expense                               |   |                     | (492      | ) |   |   | 4,412 |   |   |   | 7,092 |   |   |   | 8,002 |   |   |   | 8,154 |   |
| Net (loss) income                                          |   |                     | (1,667    | ) |   |   | 7,273 |   |   |   | 11,470 |   |   |   | 13,450 |   |   |   | 13,554 |   |
| Preferred stock dividends and discount accretion           |   |                     | -         |   |   |   | 1,876 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Net (loss) income available to common shareholders         |   | $                        | (1,667    | ) |   | $ | 5,397 |   |   | $ | 11,470 |   |   | $ | 13,450 |   |   | $ | 13,554 |   |
|                                                       |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PER COMMON SHARE DATA:                                     |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income – basic                                   |   | $                        | (0.20     | ) |   | $ | 0.64 |   |   | $ | 1.37 |   |   | $ | 1.61 |   |   | $ | 1.62 |   |
| Net income – diluted                                 |   |                     | (0.20     | ) |   |   | 0.64 |   |   |   | 1.37 |   |   |   | 1.60 |   |   |   | 1.61 |   |
| Dividends paid                                             |   |                     | 0.24      |   |   |   | 0.64 |   |   |   | 0.64 |   |   |   | 0.64 |   |   |   | 0.59 |   |
| Book value (at year end)                                   |   |                     | 14.51     |   |   |   | 15.18 |   |   |   | 15.16 |   |   |   | 14.35 |   |   |   | 13.28 |   |
| Tangible book value (at year end)1                         |   |                     | 12.32     |   |   |   | 12.64 |   |   |   | 12.55 |   |   |   | 11.68 |   |   |   | 11.67 |   |
|                                                       |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FINANCIAL CONDITION (at year end):                         |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                      |   | $                        | 895,404   |   |   | $ | 916,557 |   |   | $ | 888,528 |   |   | $ | 776,350 |   |   | $ | 699,719 |   |
| Assets                                                     |   |                     | 1,130,311 |   |   |   | 1,156,516 |   |   |   | 1,044,641 |   |   |   | 956,911 |   |   |   | 945,649 |   |
| Deposits                                                   |   |                     | 979,516   |   |   |   | 990,937 |   |   |   | 845,371 |   |   |   | 765,895 |   |   |   | 774,182 |   |
| Long-term debt                                             |   |                     | 932       |   |   |   | 1,429 |   |   |   | 7,947 |   |   |   | 12,485 |   |   |   | 25,000 |   |
| Stockholders’ equity                                 |   |                     | 122,513   |   |   |   | 127,810 |   |   |   | 127,385 |   |   |   | 120,235 |   |   |   | 111,327 |   |
|                                                       |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PERFORMANCE RATIOS (for the year):                         |   |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Return on average total assets                             |   |                     | (0.15     | )% |   |   | 0.48 | % |   |   | 1.13 | % |   |   | 1.42 | % |   |   | 1.52 | % |
| Return on average stockholders’ equity               |   |                     | (1.33     | ) |   |   | 4.00 |   |   |   | 9.22 |   |   |   | 11.79 |   |   |   | 12.66 |   |
| Net interest margin                                        |   |                     | 4.02      |   |   |   | 3.90 |   |   |   | 4.23 |   |   |   | 4.64 |   |   |   | 4.70 |   |
| Efficiency ratio2                                          |   |                     | 68.75     |   |   |   | 66.07 |   |   |   | 63.66 |   |   |   | 58.40 |   |   |   | 55.15 |   |
| Dividend payout ratio                                      |   |                     | (120.00   | ) |   |   | 100.00 |   |   |   | 46.72 |   |   |   | 39.75 |   |   |   | 36.42 |   |
| Average stockholders’ equity to average total assets |   |                     | 11.05     |   |   |   | 11.96 |   |   |   | 12.30 |   |   |   | 12.04 |   |   |   | 11.98 |   |

----

----

----

|                                        |   | 2010    |      |   | 2009     |   |   | 2008   |   |
|--------------------------------------------------|--------|---------|-----------|--------|----------|--------|--------|--------|--------|
|                                             |   | Average |      |   | Interest |   |   | Yield/ |   |   | Average |   |   | Interest |   |   | Yield/ |   |   | Average |   |   | Interest |   |   | Yield |   |
| (Dollars in thousands)                           |   | Balance |      |   | (1)      |   |   | Rate   |   |   | Balance |   |   | (1) |   |   | Rate |   |   | Balance |   |   | (1) |   |   | /Rate |   |
| Earning assets                                   |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (2) (3)                                    |   | $       | 906,732   |   |     | $      | 52,118 |   |   |   | 5.75 | % |   | $ | 913,631 |   |   | $ | 55,369 |   |   |   | 6.06 | % |   | $ | 837,739 |   |   | $ | 57,041 |   |   |   | 6.81 | % |
| Investment securities:                           |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          |   |    | 101,162   |   |     |   | 3,209  |   |   |   | 3.17 |   |   |   | 84,283 |   |   |   | 3,184 |   |   |   | 3.78 |   |   |   | 85,105 |   |   |   | 3,788 |   |   |   | 4.45 |   |
| Tax-exempt                                       |   |    | 6,080     |   |     |   | 321    |   |   |   | 5.29 |   |   |   | 8,071 |   |   |   | 458 |   |   |   | 5.67 |   |   |   | 11,031 |   |   |   | 646 |   |   |   | 5.86 |   |
| Federal funds sold                               |   |    | 39,770    |   |     |   | 60     |   |   |   | 0.15 |   |   |   | 59,416 |   |   |   | 84 |   |   |   | 0.14 |   |   |   | 16,427 |   |   |   | 308 |   |   |   | 1.87 |   |
| Interest-bearing deposits                        |   |    | 14,520    |   |     |   | 18     |   |   |   | 0.12 |   |   |   | 3,200 |   |   |   | 11 |   |   |   | 0.35 |   |   |   | 3,666 |   |   |   | 92 |   |   |   | 2.51 |   |
| Total earning assets                             |   |    | 1,068,264 |   |     |   | 55,726 |   |   |   | 5.22 | % |   |   | 1,068,601 |   |   |   | 59,106 |   |   |   | 5.53 | % |   |   | 953,968 |   |   |   | 61,875 |   |   |   | 6.49 | % |
| Cash and due from banks                          |   |    | 16,567    |   |     |   |   |   |   |   |   |   |   |   | 17,049 |   |   |   |   |   |   |   |   |   |   |   | 14,829 |   |   |   |   |   |   |   |   |   |
| Other assets                                     |   |    | 65,774    |   |     |   |   |   |   |   |   |   |   |   | 54,016 |   |   |   |   |   |   |   |   |   |   |   | 50,275 |   |   |   |   |   |   |   |   |   |
| Allowance for credit losses                      |   |    | (13,689   | )      |     |   |   |   |   |   |   |   |   |   | (10,754 | ) |   |   |   |   |   |   |   |   |   |   | (8,270 | ) |   |   |   |   |   |   |   |   |
| Total assets                                     |   | $       | 1,136,916 |   |     |   |   |   |   |   |   |   |   | $ | 1,128,912 |   |   |   |   |   |   |   |   |   |   | $ | 1,010,802 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                     |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | $       | 130,297   |   |     |   | 315    |   |   |   | 0.24 | % |   | $ | 124,758 |   |   |   | 315 |   |   |   | 0.25 | % |   | $ | 113,002 |   |   |   | 437 |   |   |   | 0.39 | % |
| Money market and savings deposits                |   |    | 258,650   |   |     |   | 1,970  |   |   |   | 0.76 |   |   |   | 218,125 |   |   |   | 1,354 |   |   |   | 0.62 |   |   |   | 175,376 |   |   |   | 2,406 |   |   |   | 1.37 |   |
| Certificates of deposit, $100,000 or more        |   |    | 256,393   |   |     |   | 5,128  |   |   |   | 2.00 |   |   |   | 258,879 |   |   |   | 7,670 |   |   |   | 2.96 |   |   |   | 193,678 |   |   |   | 7,955 |   |   |   | 4.11 |   |
| Other time deposits                              |   |    | 214,121   |   |     |   | 5,268  |   |   |   | 2.46 |   |   |   | 234,468 |   |   |   | 7,679 |   |   |   | 3.28 |   |   |   | 226,201 |   |   |   | 9,079 |   |   |   | 4.01 |   |
| Interest-bearing deposits                        |   |    | 859,461   |   |     |   | 12,681 |   |   |   | 1.48 |   |   |   | 836,230 |   |   |   | 17,018 |   |   |   | 2.04 |   |   |   | 708,257 |   |   |   | 19,877 |   |   |   | 2.81 |   |
| Short-term borrowings                            |   |    | 16,348    |   |     |   | 83     |   |   |   | 0.51 |   |   |   | 25,519 |   |   |   | 127 |   |   |   | 0.50 |   |   |   | 47,765 |   |   |   | 1,147 |   |   |   | 2.40 |   |
| Long-term debt                                   |   |    | 1,304     |   |     |   | 58     |   |   |   | 4.41 |   |   |   | 4,792 |   |   |   | 266 |   |   |   | 5.55 |   |   |   | 11,598 |   |   |   | 531 |   |   |   | 4.58 |   |
| Total interest-bearing liabilities               |   |    | 877,113   |   |     |   | 12,822 |   |   |   | 1.46 | % |   |   | 866,541 |   |   |   | 17,411 |   |   |   | 2.01 | % |   |   | 767,620 |   |   |   | 21,555 |   |   |   | 2.81 | % |
|                                             |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                     |   |    | 120,871   |   |     |   |   |   |   |   |   |   |   |   | 113,430 |   |   |   |   |   |   |   |   |   |   |   | 107,430 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                |   |    | 13,346    |   |     |   |   |   |   |   |   |   |   |   | 13,963 |   |   |   |   |   |   |   |   |   |   |   | 11,388 |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |    | 125,586   |   |     |   |   |   |   |   |   |   |   |   | 134,978 |   |   |   |   |   |   |   |   |   |   |   | 124,364 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $       | 1,136,916 |   |     |   |   |   |   |   |   |   |   | $ | 1,128,912 |   |   |   |   |   |   |   |   |   |   | $ | 1,010,802 |   |   |   |   |   |   |   |   |   |
|                                             |   |    |      |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                              |   |    |      |   |     | $      | 42,904 |   |   |   | 3.76 | % |   |   |   |   |   | $ | 41,695 |   |   |   | 3.52 | % |   |   |   |   |   | $ | 40,320 |   |   |   | 3.68 | % |
| Net interest margin                              |   |    |      |   |     |   |   |   |   |   | 4.02 | % |   |   |   |   |   |   |   |   |   |   | 3.90 | % |   |   |   |   |   |   |   |   |   |   | 4.23 | % |

----

|                                             |   | 2010 over (under) 2009 |   |   | 2009 over (under) 2008 |   |
|--------------------------------------------------|--------|------------------------|--------|--------|------------------------|--------|
|                                             |   | Total                  |   |   | Caused By              |   |   | Total |   |   | Caused By |   |
| (Dollars in thousands)                           |   | Variance               |   |   | Rate                   |   |   | Volume |   |   | Variance |   |   | Rate |   |   | Volume |   |
| Interest income from earning assets:             |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |   | $                      | (3,251 | )      |                   | $      | (2,768 | ) |   | $ | (483 | ) |   | $ | (1,672 | ) |   | $ | (6,583 | ) |   | $ | 4,911 |   |
| Taxable investment securities                    |   |                   | 25     |   |                   |   | (558 | ) |   |   | 583 |   |   |   | (604 | ) |   |   | (568 | ) |   |   | (36 | ) |
| Tax-exempt investment securities                 |   |                   | (137   | )      |                   |   | (29 | ) |   |   | (108 | ) |   |   | (188 | ) |   |   | (20 | ) |   |   | (168 | ) |
| Federal funds sold                               |   |                   | (24    | )      |                   |   | 6 |   |   |   | (30 | ) |   |   | (224 | ) |   |   | (479 | ) |   |   | 255 |   |
| Interest-bearing deposits                        |   |                   | 7      |   |                   |   | (11 | ) |   |   | 18 |   |   |   | (81 | ) |   |   | (71 | ) |   |   | (10 | ) |
| Total interest income                            |   |                   | (3,380 | )      |                   |   | (3,360 | ) |   |   | (20 | ) |   |   | (2,769 | ) |   |   | (7,721 | ) |   |   | 4,952 |   |
|                                             |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense on deposits and borrowed funds: |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand deposits                 |   |                   | -      |   |                   |   | (13 | ) |   |   | 13 |   |   |   | (122 | ) |   |   | (164 | ) |   |   | 42 |   |
| Money market and savings deposits                |   |                   | 616    |   |                   |   | 90 |   |   |   | 526 |   |   |   | (1,052 | ) |   |   | (1,627 | ) |   |   | 575 |   |
| Time deposits                                    |   |                   | (4,953 | )      |                   |   | (4,834 | ) |   |   | (119 | ) |   |   | (1,685 | ) |   |   | (4,278 | ) |   |   | 2,593 |   |
| Short-term borrowings                            |   |                   | (44    | )      |                   |   | 3 |   |   |   | (47 | ) |   |   | (1,020 | ) |   |   | (604 | ) |   |   | (416 | ) |
| Long-term debt                                   |   |                   | (208   | )      |                   |   | (46 | ) |   |   | (162 | ) |   |   | (265 | ) |   |   | 95 |   |   |   | (360 | ) |
| Total interest expense                           |   |                   | (4,589 | )      |                   |   | (4,800 | ) |   |   | 211 |   |   |   | (4,144 | ) |   |   | (6,578 | ) |   |   | 2,434 |   |
| Net interest income                              |   | $                      | 1,209  |   |                   | $      | 1,440 |   |   | $ | (231 | ) |   | $ | 1,375 |   |   | $ | (1,143 | ) |   | $ | 2,518 |   |

----

|                                               |   | Years Ended |   |   | Change from Prior Year |   |
|---------------------------------------------------------|--------|-------------|--------|--------|------------------------|--------|
|                                                    |   |        |   |   |                   |   |   |   |   |   | 2010/09 |   |   | 2009/08 |   |
| (Dollars in thousands)                                  |   | 2010        |   |   | 2009                   |   |   | 2008 |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Service charges on deposit accounts                     |   | $           | 3,257  |   |                   | $      | 3,424 |   |   | $ | 3,600 |   |   | $ | (167 | ) |   |   | (4.9 | )% |   | $ | (176 | ) |   |   | (4.9 | )% |
| Trust and investment fee income                         |   |        | 1,503  |   |                   |   | 1,100 |   |   |   | 951 |   |   |   | 403 |   |   |   | 36.6 |   |   |   | 149 |   |   |   | 15.7 |   |
| Gains (losses) on sales of investment securities        |   |        | -      |   |                   |   | 49 |   |   |   | (15 | ) |   |   | (49 | ) |   |   | (100.0 | ) |   |   | 64 |   |   |   | 426.7 |   |
| Other than temporary impairment of securities           |   |        | -      |   |                   |   | - |   |   |   | (371 | ) |   |   | - |   |   |   | - |   |   |   | 371 |   |   |   | 100.0 |   |
| Insurance agency commissions income                     |   |        | 10,113 |   |                   |   | 11,131 |   |   |   | 12,090 |   |   |   | (1,018 | ) |   |   | (9.1 | ) |   |   | (959 | ) |   |   | (7.9 | ) |
| Gains (losses) on disposals of premises and equipment   |   |        | -      |   |                   |   | - |   |   |   | 1,247 |   |   |   | - |   |   |   | - |   |   |   | (1,247 | ) |   |   | (100.0 | ) |
| Loss on sale of investment in unconsolidated subsidiary |   |        | -      |   |                   |   | - |   |   |   | (337 | ) |   |   | - |   |   |   | - |   |   |   | 337 |   |   |   | 100.0 |   |
| Other noninterest income:                               |   |        |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swaps                                     |   |        | -      |   |                   |   | 420 |   |   |   | - |   |   |   | (420 | ) |   |   | (100.0 | ) |   |   | 420 |   |   |   | - |   |
| Mortgage broker fees                                    |   |        | 182    |   |                   |   | 848 |   |   |   | 575 |   |   |   | (666 | ) |   |   | (78.5 | ) |   |   | 273 |   |   |   | 47.5 |   |
| Other                                                   |   |        | 2,986  |   |                   |   | 2,569 |   |   |   | 2,610 |   |   |   | 417 |   |   |   | 16.2 |   |   |   | (41 | ) |   |   | (1.6 | ) |
| Total                                                   |   |        | 3,168  |   |                   |   | 3,837 |   |   |   | 3,185 |   |   |   | (669 | ) |   |   | (17.4 | ) |   |   | 652 |   |   |   | 20.5 |   |
| Total                                                   |   | $           | 18,041 |   |                   | $      | 19,541 |   |   | $ | 20,350 |   |   | $ | (1,500 | ) |   |   | (7.7 | ) |   | $ | (809 | ) |   |   | (4.0 | ) |

----

|                                       |   | Years Ended |   |   | Change from Prior Year |   |
|-------------------------------------------------|--------|-------------|--------|--------|------------------------|--------|
|                                            |   |        |   |   |                   |   |   |   |   |   | 2010/09 |   |   | 2009/08 |   |
| (Dollars in thousands)                          |   | 2010        |   |   | 2009                   |   |   | 2008 |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Salaries and wages                              |   | $           | 17,477 |   |                   | $      | 18,488 |   |   | $ | 18,426 |   |   | $ | (1,011 | ) |   |   | (5.5 | )% |   | $ | 62 |   |   |   | 0.3 | % |
| Employee benefits                               |   |        | 3,829  |   |                   |   | 4,631 |   |   |   | 4,895 |   |   |   | (802 | ) |   |   | (17.3 | ) |   |   | (264 | ) |   |   | (5.4 | ) |
| Occupancy expense                               |   |        | 2,328  |   |                   |   | 2,324 |   |   |   | 2,179 |   |   |   | 4 |   |   |   | 0.2 |   |   |   | 145 |   |   |   | 6.7 |   |
| Furniture and equipment expense                 |   |        | 1,200  |   |                   |   | 1,183 |   |   |   | 1,185 |   |   |   | 17 |   |   |   | 1.4 |   |   |   | (2 | ) |   |   | (0.2 | ) |
| Data processing                                 |   |        | 2,607  |   |                   |   | 2,463 |   |   |   | 2,323 |   |   |   | 144 |   |   |   | 5.8 |   |   |   | 140 |   |   |   | 6.0 |   |
| Directors’ fees                           |   |        | 412    |   |                   |   | 478 |   |   |   | 558 |   |   |   | (66 | ) |   |   | (13.8 | ) |   |   | (80 | ) |   |   | (14.3 | ) |
| Goodwill and other intangible assets impairment |   |        | 3,051  |   |                   |   | - |   |   |   | - |   |   |   | 3,051 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Amortization of intangible assets               |   |        | 515    |   |                   |   | 515 |   |   |   | 515 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Insurance agency commissions expense            |   |        | 1,569  |   |                   |   | 1,913 |   |   |   | 2,248 |   |   |   | (344 | ) |   |   | (18.0 | ) |   |   | (335 | ) |   |   | (14.9 | ) |
| FDIC insurance premium expense                  |   |        | 1,834  |   |                   |   | 2,078 |   |   |   | 356 |   |   |   | (244 | ) |   |   | (11.7 | ) |   |   | 1,722 |   |   |   | 483.7 |   |
| Other noninterest expense                       |   |        | 6,898  |   |                   |   | 6,175 |   |   |   | 5,685 |   |   |   | 723 |   |   |   | 11.7 |   |   |   | 490 |   |   |   | 8.6 |   |
| Total                                           |   | $           | 41,720 |   |                   | $      | 40,248 |   |   | $ | 38,370 |   |   | $ | 1,472 |   |   |   | 3.7 |   |   | $ | 1,878 |   |   |   | 4.9 |   |

|                                       |   | 2010   |   |   | 2009   |   |   | 2008   |   |   | 2007  |   |   | 2006   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|--------|
| Loans                                      |   |   | 84.9   | %      |   |   | 85.5   | %      |   |   | 87.8  | %      |   |   | 81.6   | % |   |   | 79.6 | % |
| Investment securities                      |   |   | 10.0   |   |   |   | 8.6    |   |   |   | 10.1  |   |   |   | 14.1   |   |   |   | 14.8 |   |
| Federal funds sold                         |   |   | 3.7    |   |   |   | 5.6    |   |   |   | 1.7   |   |   |   | 2.4    |   |   |   | 3.4 |   |
| Interest-bearing deposits with other banks |   |   | 1.4    |   |   |   | 0.3    |   |   |   | 0.4   |   |   |   | 1.9    |   |   |   | 2.2 |   |
|                                       |   |   | 100.0  | %      |   |   | 100.0  | %      |   |   | 100.0 | %      |   |   | 100.0  | % |   |   | 100.0 | % |

----

|                                              |   | 1 Year or Less |   |   | 1-5 Years |   |   | 5-10 Years |   |   | Over 10 Years |   |
|---------------------------------------------------|--------|----------------|--------|--------|-----------|--------|--------|------------|--------|--------|---------------|--------|
|                                              |   | Carrying       |   |   | Average   |   |   | Carrying   |   |   | Average       |   |   | Carrying |   |   | Average |   |   | Carrying |   |   | Average |   |
| (Dollars in thousands)                            |   | Amount         |   |   | Yield     |   |   | Amount     |   |   | Yield         |   |   | Amount |   |   | Yield |   |   | Amount |   |   | Yield |   |
| Available for sale:                               |   |           |   |   |      |   |   |       |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agencies                          |   | $              | 10,185 |   |      |   | 3.16   | %          |   | $      | 28,568        |   |   |   | 2.03 | % |   | $ | 16,996 |   |   |   | 3.68 | % |   | $ | 3,155 |   |   |   | 4.26 | % |
| Mortgage-backed securities                        |   |           | 811    |   |      |   | 3.36   |       |   |   | 10,160        |   |   |   | 4.13 |   |   |   | 7,014 |   |   |   | 3.91 |   |   |   | 21,592 |   |   |   | 3.62 |   |
| Total available for sale                          |   | $              | 10,996 |   |      |   | 3.18   |       |   | $      | 38,728        |   |   |   | 2.57 |   |   | $ | 24,010 |   |   |   | 3.75 |   |   | $ | 24,747 |   |   |   | 3.70 |   |
|                                              |   |           |   |   |      |   |   |       |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to maturity:                                 |   |           |   |   |      |   |   |       |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Obligations of states and political subdivisions1 |   | $              | 1,163  |   |      |   | 5.12   | %          |   | $      | 3,840         |   |   |   | 5.12 | % |   | $ | 1,219 |   |   |   | 4.80 | % |   | $ | 505 |   |   |   | 5.38 | % |

----

|                             |   | December 31, |    |
|----------------------------------|--------|-------------------|---------|
| (Dollars in thousands) |   | 2010              |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Real estate – construction |   | $                 | 143,952 |   |   | $ | 161,437 |   |   | $ | 179,847 |   |   | $ | 155,513 |   |   | $ | 158,943 |   |
| Real estate – residential  |   |              | 333,738 |   |   |   | 327,873 |   |   |   | 289,510 |   |   |   | 256,195 |   |   |   | 222,687 |   |
| Real estate – commercial   |   |              | 318,726 |   |   |   | 315,930 |   |   |   | 304,396 |   |   |   | 248,953 |   |   |   | 217,781 |   |
| Commercial                       |   |              | 82,787  |   |   |   | 91,783 |   |   |   | 91,644 |   |   |   | 92,258 |   |   |   | 80,186 |   |
| Consumer                         |   |              | 16,201  |   |   |   | 19,534 |   |   |   | 23,131 |   |   |   | 23,431 |   |   |   | 20,122 |   |
| Total                            |   | $                 | 895,404 |   |   | $ | 916,557 |   |   | $ | 888,528 |   |   | $ | 776,350 |   |   | $ | 699,719 |   |

| (Dollars in thousands) |   | Maturingwithin one year |    |   | Maturing afterone but withinfive years |   |    | Maturing afterfive years |   |   | Total   |   |
|----------------------------------|--------|-----------------------------------|---------|--------|------------------------------------------------------------|--------|---------|------------------------------------|--------|--------|---------|--------|
| Real estate – construction |   | $                                 | 115,590 |   |                                                       | $      | 23,984  |                               |   | $      | 4,378   |   |   | $ | 143,952 |   |
| Real estate – residential  |   |                              | 140,272 |   |                                                       |   | 79,217  |                               |   |   | 114,249 |   |   |   | 333,738 |   |
| Real estate – commercial   |   |                              | 125,998 |   |                                                       |   | 174,954 |                               |   |   | 17,774  |   |   |   | 318,726 |   |
| Commercial                       |   |                              | 45,862  |   |                                                       |   | 26,355  |                               |   |   | 10,570  |   |   |   | 82,787 |   |
| Consumer                         |   |                              | 8,588   |   |                                                       |   | 6,415   |                               |   |   | 1,198   |   |   |   | 16,201 |   |
| Total                            |   | $                                 | 436,310 |   |                                                       | $      | 310,925 |                               |   | $      | 148,169 |   |   | $ | 895,404 |   |
| Rate terms:                      |   |                              |    |   |                                                       |   |    |                               |   |   |    |   |   |   |   |   |
| Fixed-interest rate loans        |   | $                                 | 201,408 |   |                                                       | $      | 241,230 |                               |   | $      | 42,062  |   |   | $ | 484,700 |   |
| Adjustable-interest rate loans   |   |                              | 234,902 |   |                                                       |   | 69,695  |                               |   |   | 106,107 |   |   |   | 410,704 |   |
| Total                            |   | $                                 | 436,310 |   |                                                       | $      | 310,925 |                               |   | $      | 148,169 |   |   | $ | 895,404 |   |

----

|                                      |   | Average Balances |    |
|-------------------------------------------|--------|-----------------------|---------|
| (Dollars in thousands)          |   | 2010                  |    |   | 2009 |   |   | 2008 |   |
| Noninterest-bearing demand                |   | $                     | 120,871 |   |   |   | 12.3 | % |   | $ | 113,430 |   |   |   | 11.9 | % |   | $ | 107,430 |   |   |   | 13.2 | % |
| Interest-bearing deposits                 |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                                    |   |                  | 130,297 |   |   |   | 13.3 |   |   |   | 124,758 |   |   |   | 13.1 |   |   |   | 113,002 |   |   |   | 13.9 |   |
| Money market and savings                  |   |                  | 258,650 |   |   |   | 26.4 |   |   |   | 218,125 |   |   |   | 23.0 |   |   |   | 175,376 |   |   |   | 21.5 |   |
| Certificates of deposit, $100,000 or more |   |                  | 256,393 |   |   |   | 26.2 |   |   |   | 258,879 |   |   |   | 27.3 |   |   |   | 193,678 |   |   |   | 23.7 |   |
| Other time deposits                       |   |                  | 214,121 |   |   |   | 21.8 |   |   |   | 234,468 |   |   |   | 24.7 |   |   |   | 226,201 |   |   |   | 27.7 |   |
| Total                                     |   | $                     | 980,332 |   |   |   | 100.0 | % |   | $ | 949,660 |   |   |   | 100.0 | % |   | $ | 815,687 |   |   |   | 100.0 | % |

| (Dollars in thousands) |   |   |    |
|----------------------------------|--------|--------|---------|
| Three months or less             |   | $      | 67,896  |   |
| Over three through 12 months     |   |   | 117,323 |   |
| Over 12 months                   |   |   | 78,446  |   |
| Total                            |   | $      | 263,665 |   |

|                                 |   | 2010    |   |   | 2009     |   |   | 2008    |   |
|--------------------------------------|--------|---------|--------|--------|----------|--------|--------|---------|--------|
|                                 |   |    |   |   | Interest |   |   |    |   |   | Interest |   |   |   |   |   | Interest |   |
| (Dollars in thousands)     |   | Balance |   |   | Rate     |   |   | Balance |   |   | Rate |   |   | Balance |   |   | Rate |   |
| Average outstanding for the year     |   | $       | 16,348 |   |     |   | 0.51   | %       |   | $ | 25,519 |   |   |   | 0.50 | % |   | $ | 47,765 |   |   |   | 2.40 | % |
| Outstanding at year end              |   |    | 16,041 |   |     |   | 0.35   |    |   |   | 20,404 |   |   |   | 0.82 |   |   |   | 52,969 |   |   |   | 0.49 |   |
| Maximum outstanding at any month end |   |    | 18,447 |   |     |   | -      |    |   |   | 46,270 |   |   |   | - |   |   |   | 73,094 |   |   |   | - |   |

----

|                          |   |   |      |   |   |   |      |   |   |   | MinimumRegulatory |   |
|-------------------------------|--------|--------|-----------|--------|--------|--------|-----------|--------|--------|--------|-------------------|--------|
| (Dollars in thousands)        |   | 2010   |      |   | 2009   |   |      | 2008   |   |   | Requirements      |   |
| Tier 1 capital                |   | $      | 105,808   |   |   | $      | 106,391   |   |   | $      | 104,117           |   |   |   |   |
| Tier 2 capital                |   |   | 11,249    |   |   |   | 10,537    |   |   |   | 9,755             |   |   |   |   |
| Total risk-based capital      |   |   | 117,057   |   |   |   | 116,928   |   |   |   | 113,872           |   |   |   |   |
| Net risk-weighted assets      |   |   | 895,581   |   |   |   | 928,933   |   |   |   | 894,024           |   |   |   |   |
| Adjusted average total assets |   |   | 1,109,999 |   |   |   | 1,148,077 |   |   |   | 1,013,815         |   |   |   |   |
| Risk-based capital ratios:    |   |   |      |   |   |   |      |   |   |   |              |   |   |   |   |
| Tier 1                        |   |   | 11.81     | %      |   |   | 11.45     | %      |   |   | 11.65             | %      |   |   | 4.0 | % |
| Total capital                 |   |   | 13.07     |   |   |   | 12.59     |   |   |   | 12.74             |   |   |   | 8.0 |   |
| Tier 1 leverage ratio         |   |   | 9.53      |   |   |   | 9.27      |   |   |   | 10.27             |   |   |   | 4.0 |   |

----

----

| (Dollars in thousands)                                           |   | 2010   |    |   | 2009   |   |    | 2008   |   |   | 2007    |   |   | 2006   |    |
|----------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                                                       |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Balance, beginning of year                                                 |   | $      | 10,876  |   |   | $      | 9,320   |   |   | $      | 7,551   |   |   | $      | 6,300   |   |   | $ | 5,236 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Loans charged off                                                          |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Real estate – construction                                           |   |   | (7,910  | )      |   |   | (674    | )      |   |   | (536    | )      |   |   | -       |   |   |   | - |   |
| Real estate – residential                                            |   |   | (5,818  | )      |   |   | (2,621  | )      |   |   | (316    | )      |   |   | (137    | ) |   |   | - |   |
| Real estate – commercial                                             |   |   | (492    | )      |   |   | (1,695  | )      |   |   | (238    | )      |   |   | -       |   |   |   | (2 | ) |
| Commercial                                                                 |   |   | (3,710  | )      |   |   | (2,304  | )      |   |   | (447    | )      |   |   | (276    | ) |   |   | (539 | ) |
| Consumer                                                                   |   |   | (589    | )      |   |   | (417    | )      |   |   | (276    | )      |   |   | (301    | ) |   |   | (137 | ) |
| Total                                                                      |   |   | (18,519 | )      |   |   | (7,711  | )      |   |   | (1,813  | )      |   |   | (714    | ) |   |   | (678 | ) |
| Recoveries                                                                 |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Real estate – construction                                           |   |   | 14      |   |   |   | 2       |   |   |   | -       |   |   |   | -       |   |   |   | - |   |
| Real estate – residential                                            |   |   | 215     |   |   |   | 70      |   |   |   | 19      |   |   |   | -       |   |   |   | - |   |
| Real estate – commercial                                             |   |   | 108     |   |   |   | 6       |   |   |   | -       |   |   |   | -       |   |   |   | 46 |   |
| Commercial                                                                 |   |   | 214     |   |   |   | 66      |   |   |   | 136     |   |   |   | 165     |   |   |   | 123 |   |
| Consumer                                                                   |   |   | 200     |   |   |   | 137     |   |   |   | 90      |   |   |   | 76      |   |   |   | 80 |   |
| Total                                                                      |   |   | 751     |   |   |   | 281     |   |   |   | 245     |   |   |   | 241     |   |   |   | 249 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Net loans charged off                                                      |   |   | (17,768 | )      |   |   | (7,430  | )      |   |   | (1,568  | )      |   |   | (473    | ) |   |   | (429 | ) |
| Provision for credit losses                                                |   |   | 21,119  |   |   |   | 8,986   |   |   |   | 3,337   |   |   |   | 1,724   |   |   |   | 1,493 |   |
| Balance, end of year                                                       |   | $      | 14,227  |   |   | $      | 10,876  |   |   | $      | 9,320   |   |   | $      | 7,551   |   |   | $ | 6,300 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Average loans outstanding                                                  |   | $      | 906,732 |   |   | $      | 913,631 |   |   | $      | 837,739 |   |   | $      | 728,766 |   |   | $ | 664,244 |   |
|                                                                       |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Percentage of net charge-offs to average loans outstanding during the year |   |   | 1.96    | %      |   |   | 0.81    | %      |   |   | 0.19    | %      |   |   | 0.06    | % |   |   | 0.06 | % |
| Percentage of allowance for credit losses at year end to average loans     |   |   | 1.57    | %      |   |   | 1.19    | %      |   |   | 1.11    | %      |   |   | 1.04    | % |   |   | 0.95 | % |

----

|                             |   | 2010   |   |   | 2009      |   |   | 2008   |   |   | 2007      |   |   | 2006   |   |
|----------------------------------|--------|--------|--------|--------|-----------|--------|--------|--------|--------|--------|-----------|--------|--------|--------|--------|
|                             |   |   |   |   | % of |   |   |   |   |   | % of |   |   |   |   |   | % of |   |   |   |   |   | % of |   |   |   |   |   | % of |   |
| (Dollars in thousands) |   | Amount |   |   | Loans     |   |   | Amount |   |   | Loans     |   |   | Amount |   |   | Loans |   |   | Amount |   |   | Loans |   |   | Amount |   |   | Loans |   |
| Real estate - construction       |   | $      | 3,327  |   |      |   | 16.1   | %      |   | $      | 2,630     |   |   |   | 17.6   | % |   | $ | 2,749 |   |   |   | 20.2 | % |   | $ | 1,398 |   |   |   | 20.0 | % |   | $ | 1,229 |   |   |   | 22.7 | % |
| Real estate - residential        |   |   | 4,833  |   |      |   | 37.3   |   |   |   | 1,528     |   |   |   | 35.8   |   |   |   | 644 |   |   |   | 32.6 |   |   |   | 538 |   |   |   | 33.0 |   |   |   | 467 |   |   |   | 31.8 |   |
| Real estate - commercial         |   |   | 3,665  |   |      |   | 35.6   |   |   |   | 3,947     |   |   |   | 34.5   |   |   |   | 3,357 |   |   |   | 34.3 |   |   |   | 3,537 |   |   |   | 32.1 |   |   |   | 2,808 |   |   |   | 31.1 |   |
| Commercial                       |   |   | 1,422  |   |      |   | 9.2    |   |   |   | 2,132     |   |   |   | 10.0   |   |   |   | 2,073 |   |   |   | 10.3 |   |   |   | 1,826 |   |   |   | 11.9 |   |   |   | 1,525 |   |   |   | 11.5 |   |
| Consumer                         |   |   | 637    |   |      |   | 1.8    |   |   |   | 515       |   |   |   | 2.1    |   |   |   | 281 |   |   |   | 2.6 |   |   |   | 252 |   |   |   | 3.0 |   |   |   | 271 |   |   |   | 2.9 |   |
| Unallocated                      |   |   | 343    |   |      |   | -      |   |   |   | 124       |   |   |   | -      |   |   |   | 216 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total                            |   | $      | 14,227 |   |      |   | 100.0  | %      |   | $      | 10,876    |   |   |   | 100.0  | % |   | $ | 9,320 |   |   |   | 100.0 | % |   | $ | 7,551 |   |   |   | 100.0 | % |   | $ | 6,300 |   |   |   | 100.0 | % |

----

| (Dollars in thousands)                                                                     |   | 2010   |   |   | 2009   |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Nonperforming assets                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonaccrual loans                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate – construction                                                                     |   | $      | 17,261 |   |   | $      | 7,163  |   |   | $      | 5,277  |   |   | $      | 1,668  |   |   | $ | - |   |
| Real estate – residential                                                                      |   |   | 9,969  |   |   |   | 4,246  |   |   |   | 1,015  |   |   |   | 876    |   |   |   | 158 |   |
| Real estate – commercial                                                                       |   |   | 5,133  |   |   |   | 2,828  |   |   |   | 1,682  |   |   |   | 877    |   |   |   | 5,819 |   |
| Commercial                                                                                           |   |   | 3,845  |   |   |   | 2,028  |   |   |   | 137    |   |   |   | 114    |   |   |   | 1,673 |   |
| Consumer                                                                                             |   |   | 30     |   |   |   | 37     |   |   |   | 4      |   |   |   | 5      |   |   |   | 8 |   |
| Total nonaccrual loans                                                                               |   |   | 36,238 |   |   |   | 16,302 |   |   |   | 8,115  |   |   |   | 3,540  |   |   |   | 7,658 |   |
| Other real estate and other assets owned                                                             |   |   | 3,702  |   |   |   | 2,572  |   |   |   | 148    |   |   |   | 176    |   |   |   | 398 |   |
| Total nonperforming assets                                                                           |   |   | 39,940 |   |   |   | 18,874 |   |   |   | 8,263  |   |   |   | 3,716  |   |   |   | 8,056 |   |
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans 90 days past due and still accruing                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate – construction                                                                     |   |   | -      |   |   |   | 5,096  |   |   |   | 64     |   |   |   | 637    |   |   |   | - |   |
| Real estate – residential                                                                      |   |   | 3,454  |   |   |   | 2,274  |   |   |   | 583    |   |   |   | 473    |   |   |   | 352 |   |
| Real estate – commercial                                                                       |   |   | 986    |   |   |   | -      |   |   |   | 726    |   |   |   | 137    |   |   |   | 256 |   |
| Commercial                                                                                           |   |   | 174    |   |   |   | -      |   |   |   | 3      |   |   |   | 337    |   |   |   | 18 |   |
| Consumer                                                                                             |   |   | 88     |   |   |   | 55     |   |   |   | 5      |   |   |   | 22     |   |   |   | 15 |   |
| Total loans 90 days past due                                                                         |   |   | 4,702  |   |   |   | 7,425  |   |   |   | 1,381  |   |   |   | 1,606  |   |   |   | 641 |   |
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total nonperforming assets and past due loans                                                        |   | $      | 44,642 |   |   | $      | 26,299 |   |   | $      | 9,644  |   |   | $      | 5,322  |   |   | $ | 8,697 |   |
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonaccrual loans to total loans at period end                                                        |   |   | 4.05   | %      |   |   | 1.78   | %      |   |   | 0.91   | %      |   |   | 0.46   | % |   |   | 1.09 | % |
| Nonperforming assets to total loans and other real estate and other assets owned                     |   |   | 4.44   | %      |   |   | 2.05   | %      |   |   | 0.93   | %      |   |   | 0.48   | % |   |   | 1.15 | % |
| Nonperforming assets to total assets                                                                 |   |   | 3.53   | %      |   |   | 1.63   | %      |   |   | 0.79   | %      |   |   | 0.39   | % |   |   | 0.85 | % |
| Nonperforming assets and past due loans, to total loans and other real estate and other assets owned |   |   | 4.97   | %      |   |   | 2.86   | %      |   |   | 1.09   | %      |   |   | 0.69   | % |   |   | 1.24 | % |
| Nonperforming assets and past due loans to total assets                                              |   |   | 3.95   | %      |   |   | 2.27   | %      |   |   | 0.92   | %      |   |   | 0.56   | % |   |   | 0.92 | % |

----

|                                                   |   |          |    |   | 3 Months  |   |    | 1 Year  |   |   | 3 Years |   |   |         |    |   | Non-      |   |    |   |   |
|--------------------------------------------------------|--------|---------------|---------|--------|----------------|--------|---------|--------------|--------|--------|--------------|--------|--------|--------------|---------|--------|-----------|--------|---------|--------|--------|
|                                                   |   | Within        |    |   | through        |   |    | through      |   |   | through      |   |   | After        |    |   | Sensitive |   |    |   |   |
| December 31, 2010                            |   | 3 Months |    |   | 12 Months |   |    | 3 Years |   |   | 5 Years |   |   | 5 Years |    |   | Funds     |   |    | Total  |   |
| (Dollars in thousands)                                 |   |          |    |   |           |   |    |         |   |   |         |   |   |         |    |   |      |   |    |   |   |
| ASSETS                                                 |   |          |    |   |           |   |    |         |   |   |         |   |   |         |    |   |      |   |    |   |   |
| Loans, net                                             |   | $             | 426,288 |   |           | $      | 129,594 |         |   | $      | 189,507      |   |   | $            | 101,368 |   |      | $      | 48,647  |   |   | $ | (14,227 | ) |   | $ | 881,177 |   |
| Investment securities                                  |   |          | 25,808  |   |           |   | 18,889  |         |   |   | 15,181       |   |   |         | 13,446  |   |      |   | 31,884  |   |   |   | 574 |   |   |   | 105,782 |   |
| Federal funds sold                                     |   |          | 36,691  |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 36,691 |   |
| Interest-bearing deposits with other banks             |   |          | 21,593  |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 21,593 |   |
| Other assets                                           |   |          | -       |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | 85,068 |   |   |   | 85,068 |   |
| Total assets                                           |   |          | 510,380 |   |           |   | 148,483 |         |   |   | 204,688      |   |   |         | 114,814 |   |      |   | 80,531  |   |   |   | 71,415 |   |   |   | 1,130,311 |   |
|                                                   |   |          |    |   |           |   |    |         |   |   |         |   |   |         |    |   |      |   |    |   |   |   |   |   |   |   |   |   |
| LIABILITIES                                            |   |          |    |   |           |   |    |         |   |   |         |   |   |         |    |   |      |   |    |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits                    |   |          | -       |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | 124,188 |   |   |   | 124,188 |   |
| Interest-bearing demand deposits                       |   |          | 128,426 |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 128,426 |   |
| Money market and savings deposits                      |   |          | 255,515 |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 255,515 |   |
| Certificates of deposit, $100,000 or more              |   |          | 67,896  |   |           |   | 117,323 |         |   |   | 43,380       |   |   |         | 35,066  |   |      |   | -       |   |   |   | - |   |   |   | 263,665 |   |
| Other time deposits                                    |   |          | 30,457  |   |           |   | 79,685  |         |   |   | 66,252       |   |   |         | 31,317  |   |      |   | 11      |   |   |   | - |   |   |   | 207,722 |   |
| Short-term borrowings                                  |   |          | 16,041  |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 16,041 |   |
| Long-term debt                                         |   |          | -       |   |           |   | 477     |         |   |   | 455          |   |   |         | -       |   |      |   | -       |   |   |   | - |   |   |   | 932 |   |
| Other liabilities                                      |   |          | -       |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | 11,309 |   |   |   | 11,309 |   |
| STOCKHOLDERS’ EQUITY                             |   |          | -       |   |           |   | -       |         |   |   | -            |   |   |         | -       |   |      |   | -       |   |   |   | 122,513 |   |   |   | 122,513 |   |
| Total Liabilities and Stockholders’ Equity       |   |          | 498,335 |   |           |   | 197,485 |         |   |   | 110,087      |   |   |         | 66,383  |   |      |   | 11      |   |   |   | 258,010 |   |   |   | 1,130,311 |   |
| Excess (deficit)                                       |   | $             | 12,045  |   |           | $      | (49,002 | )            |   | $      | 94,601       |   |   | $            | 48,431  |   |      | $      | 80,520  |   |   | $ | (186,595 | ) |   | $ | - |   |
| Cumulative excess (deficit)                            |   | $             | 12,045  |   |           | $      | (36,957 | )            |   | $      | 57,644       |   |   | $            | 106,075 |   |      | $      | 186,595 |   |   | $ | - |   |   | $ | - |   |
| Cumulative excess (deficit) as percent of total assets |   |          | 1.1     | %      |           |   | (3.3    | )%           |   |   | 5.1          | %      |   |         | 9.4     | %      |      |   | 16.5    | %      |   |   | - | % |   |   | - | % |

----

|                            |   | Immediate Change in Rates |   |
|---------------------------------|--------|------------------------------------------|--------|
|                            |   |  -300                               |   |   |  -200 |   |   |  -100 |   |   |  +100 |   |   |  +200 |   |   |  +300 |   |
|                            |   | Basis Points                        |   |   | Basis Points |   |   | Basis Points |   |   | Basis Points |   |   | Basis Points |   |   | Basis Points |   |
| 2010                            |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| % Change in Net Interest Income |   |                                     | N/A    |   |   |   | (3.95 | )% |   |   | 0.88 | % |   |   | 1.10 | % |   |   | 3.21 | % |   |   | 7.89 | % |
| % Change in Value of Capital    |   |                                     | N/A    |   |   |   | 8.39 | % |   |   | 3.87 | % |   |   | 4.38 | % |   |   | 7.40 | % |   |   | 9.34 | % |
|                            |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2009                            |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| % Change in Net Interest Income |   |                                     | N/A    |   |   |   | (12.81 | )% |   |   | (1.35 | )% |   |   | 2.69 | % |   |   | 4.98 | % |   |   | 7.31 | % |
| % Change in Value of Capital    |   |                                     | N/A    |   |   |   | 3.34 | % |   |   | 0.19 | % |   |   | 3.25 | % |   |   | 6.26 | % |   |   | 8.33 | % |

----

|  (Dollars in thousands) |   | Withinone year |   |   | One to three years |   |   | Three tofive years |   |   | Overfive years |   |   | Total  |   |
|----------------------------------------|--------|---------------------|--------|--------|-----------------------------------|--------|--------|------------------------------|--------|--------|---------------------|--------|--------|--------|--------|
| Long-term debt                         |   | $                   | 477    |   |                              | $      | 455    |                         |   | $      | -                   |   |   | $      | -      |   |   | $ | 932 |   |
| Operating leases                       |   |                | 717    |   |                              |   | 1,019  |                         |   |   | 578                 |   |   |   | 1,634  |   |   |   | 3,948 |   |
| Purchase obligations                   |   |                | 1,732  |   |                              |   | 3,410  |                         |   |   | 3,139               |   |   |   | 7,682  |   |   |   | 15,963 |   |
| Total                                  |   | $                   | 2,926  |   |                              | $      | 4,884  |                         |   | $      | 3,717               |   |   | $      | 9,316  |   |   | $ | 20,843 |   |

| Item 7A.  | Quantitative and Qualitative Disclosures About Market Risk. |
|----------------|-------------------------------------------------------------|

| Item 8.  | Financial Statements and Supplementary Data. |
|---------------|----------------------------------------------|

| Management’s Report on Internal Control over Financial Reporting |   | 39     |
|------------------------------------------------------------------------|--------|--------|
|                                                                   |   |   |
| Report of Independent Registered Public Accounting Firm                |   | 40     |
|                                                                   |   |   |
| Consolidated Balance Sheets                                            |   | 41     |
|                                                                   |   |   |
| Consolidated Statements of (Loss) Income                               |   | 42     |
|                                                                   |   |   |
| Consolidated Statements of Changes in Stockholders’ Equity       |   | 43     |
|                                                                   |   |   |
| Consolidated Statements of Comprehensive (Loss) Income                 |   | 44     |
|                                                                   |   |   |
| Consolidated Statements of Cash Flows                                  |   | 45     |
|                                                                   |   |   |
| Notes to Consolidated Financial Statements                             |   | 47     |

----

| /s/ W. Moorhead Vermilye |   | /s/ Susan E. Leaverton       |
|--------------------------|--------|------------------------------|
| W. Moorhead Vermilye     |   | Susan E. Leaverton, CPA      |
| Chief Executive Officer  |   | Principal Accounting Officer |

----

----

| (In thousands, except share data)                                                                                 |   | 2010   |      |   | 2009   |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| ASSETS                                                                                                                                |   |   |      |   |   |   |
| Cash and due from banks                                                                                                               |   | $      | 19,680    |   |   | $      | 14,411 |   |
| Interest-bearing deposits with other banks                                                                                            |   |   | 21,593    |   |   |   | 598 |   |
| Federal funds sold                                                                                                                    |   |   | 36,691    |   |   |   | 60,637 |   |
| Investment securities:                                                                                                                |   |   |      |   |   |   |   |   |
| Available for sale, at fair value                                                                                                     |   |   | 99,055    |   |   |   | 97,595 |   |
| Held to maturity, at amortized cost –fair value of $6,851 (2010) and $9,012 (2009)                                              |   |   | 6,727     |   |   |   | 8,940 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Loans                                                                                                                                 |   |   | 895,404   |   |   |   | 916,557 |   |
| Less:  allowance for credit losses                                                                                          |   |   | (14,227   | )      |   |   | (10,876 | ) |
| Loans, net                                                                                                                            |   |   | 881,177   |   |   |   | 905,681 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Premises and equipment, net                                                                                                           |   |   | 14,483    |   |   |   | 14,307 |   |
| Goodwill                                                                                                                              |   |   | 13,678    |   |   |   | 15,954 |   |
| Other intangible assets, net                                                                                                          |   |   | 4,840     |   |   |   | 5,406 |   |
| Other real estate and other assets owned, net                                                                                         |   |   | 3,702     |   |   |   | 2,572 |   |
| Other assets                                                                                                                          |   |   | 28,685    |   |   |   | 30,415 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Total assets                                                                                                                          |   | $      | 1,130,311 |   |   | $      | 1,156,516 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| LIABILITIES                                                                                                                           |   |   |      |   |   |   |   |   |
| Deposits:                                                                                                                             |   |   |      |   |   |   |   |   |
| Noninterest-bearing demand                                                                                                            |   | $      | 124,188   |   |   | $      | 122,492 |   |
| Interest-bearing demand                                                                                                               |   |   | 128,426   |   |   |   | 133,946 |   |
| Money market and savings                                                                                                              |   |   | 255,515   |   |   |   | 249,793 |   |
| Certificates of deposit, $100,000 or more                                                                                             |   |   | 263,665   |   |   |   | 262,663 |   |
| Other time                                                                                                                            |   |   | 207,722   |   |   |   | 222,043 |   |
| Total deposits                                                                                                                        |   |   | 979,516   |   |   |   | 990,937 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Short-term borrowings                                                                                                                 |   |   | 16,041    |   |   |   | 20,404 |   |
| Accrued expenses and other liabilities                                                                                                |   |   | 11,309    |   |   |   | 15,936 |   |
| Long-term debt                                                                                                                        |   |   | 932       |   |   |   | 1,429 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Total liabilities                                                                                                                     |   |   | 1,007,798 |   |   |   | 1,028,706 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                            |   |   |      |   |   |   |   |   |
| Common stock, par value $.01, authorized 35,000,000 shares; shares issued and outstanding–8,443,436 (2010) and 8,418,963 (2009) |   |   | 84        |   |   |   | 84 |   |
| Warrant                                                                                                                               |   |   | 1,543     |   |   |   | 1,543 |   |
| Additional paid in capital                                                                                                            |   |   | 30,242    |   |   |   | 29,872 |   |
| Retained earnings                                                                                                                     |   |   | 92,458    |   |   |   | 96,151 |   |
| Accumulated other comprehensive (loss) income                                                                                         |   |   | (1,814    | )      |   |   | 160 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Total stockholders’ equity                                                                                                      |   |   | 122,513   |   |   |   | 127,810 |   |
|                                                                                                                                  |   |   |      |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                                                                      |   | $      | 1,130,311 |   |   | $      | 1,156,516 |   |

----

| (Dollars in thousands, except per share data) |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| INTEREST INCOME                                                             |   |   |   |   |   |   |   |   |   |
| Interest and fees on loans                                                  |   | $      | 51,962 |   |   | $      | 55,209 |   |   | $ | 56,866 |   |
| Interest and dividends on investment securities:                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                     |   |   | 3,209  |   |   |   | 3,184  |   |   |   | 3,788 |   |
| Tax-exempt                                                                  |   |   | 212    |   |   |   | 301    |   |   |   | 420 |   |
| Interest on federal funds sold                                              |   |   | 60     |   |   |   | 84     |   |   |   | 308 |   |
| Interest on deposits with other banks                                       |   |   | 18     |   |   |   | 11     |   |   |   | 92 |   |
| Total interest income                                                       |   |   | 55,461 |   |   |   | 58,789 |   |   |   | 61,474 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| INTEREST EXPENSE                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest on deposits                                                        |   |   | 12,681 |   |   |   | 17,018 |   |   |   | 19,877 |   |
| Interest on short-term borrowings                                           |   |   | 83     |   |   |   | 127    |   |   |   | 1,147 |   |
| Interest on long-term debt                                                  |   |   | 58     |   |   |   | 266    |   |   |   | 531 |   |
| Total interest expense                                                      |   |   | 12,822 |   |   |   | 17,411 |   |   |   | 21,555 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INTEREST INCOME                                                         |   |   | 42,639 |   |   |   | 41,378 |   |   |   | 39,919 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for credit losses                                                 |   |   | 21,119 |   |   |   | 8,986  |   |   |   | 3,337 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES                       |   |   | 21,520 |   |   |   | 32,392 |   |   |   | 36,582 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| NONINTEREST INCOME                                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                         |   |   | 3,257  |   |   |   | 3,424  |   |   |   | 3,600 |   |
| Trust and investment fee income                                             |   |   | 1,503  |   |   |   | 1,100  |   |   |   | 951 |   |
| Gains (losses) on sales of investment securities                            |   |   | -      |   |   |   | 49     |   |   |   | (15 | ) |
| Other than temporary impairment of securities                               |   |   | -      |   |   |   | -      |   |   |   | (371 | ) |
| Insurance agency commissions income                                         |   |   | 10,113 |   |   |   | 11,131 |   |   |   | 12,090 |   |
| Gains on disposals of premises and equipment                                |   |   | -      |   |   |   | -      |   |   |   | 1,247 |   |
| Loss on sale of investment in unconsolidated subsidiary                     |   |   | -      |   |   |   | -      |   |   |   | (337 | ) |
| Other noninterest income                                                    |   |   | 3,168  |   |   |   | 3,837  |   |   |   | 3,185 |   |
| Total noninterest income                                                    |   |   | 18,041 |   |   |   | 19,541 |   |   |   | 20,350 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| NONINTEREST EXPENSE                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and wages                                                          |   |   | 17,477 |   |   |   | 18,488 |   |   |   | 18,426 |   |
| Employee benefits                                                           |   |   | 3,829  |   |   |   | 4,631  |   |   |   | 4,895 |   |
| Occupancy expense                                                           |   |   | 2,328  |   |   |   | 2,324  |   |   |   | 2,179 |   |
| Furniture and equipment expense                                             |   |   | 1,200  |   |   |   | 1,183  |   |   |   | 1,185 |   |
| Data processing                                                             |   |   | 2,607  |   |   |   | 2,463  |   |   |   | 2,323 |   |
| Directors’ fees                                                       |   |   | 412    |   |   |   | 478    |   |   |   | 558 |   |
| Goodwill and other intangible assets impairment                             |   |   | 3,051  |   |   |   | -      |   |   |   | - |   |
| Amortization of intangible assets                                           |   |   | 515    |   |   |   | 515    |   |   |   | 515 |   |
| Insurance agency commissions expense                                        |   |   | 1,569  |   |   |   | 1,913  |   |   |   | 2,248 |   |
| FDIC insurance premium expense                                              |   |   | 1,834  |   |   |   | 2,078  |   |   |   | 356 |   |
| Other noninterest expenses                                                  |   |   | 6,898  |   |   |   | 6,175  |   |   |   | 5,685 |   |
| Total noninterest expense                                                   |   |   | 41,720 |   |   |   | 40,248 |   |   |   | 38,370 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| (LOSS) INCOME BEFORE INCOME TAXES                                           |   |   | (2,159 | )      |   |   | 11,685 |   |   |   | 18,562 |   |
|  Income tax (benefit) expense                                          |   |   | (492   | )      |   |   | 4,412  |   |   |   | 7,092 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                                                           |   |   | (1,667 | )      |   |   | 7,273  |   |   |   | 11,470 |   |
| Preferred stock dividends and discount accretion                            |   |   | -      |   |   |   | 1,876  |   |   |   | - |   |
| Net (loss) income available to common shareholders                          |   | $      | (1,667 | )      |   | $      | 5,397  |   |   | $ | 11,470 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic (loss) earnings per common share                                      |   | $      | (0.20  | )      |   | $      | 0.64   |   |   | $ | 1.37 |   |
| Diluted (loss) earnings per common share                                    |   | $      | (0.20  | )      |   | $      | 0.64   |   |   | $ | 1.37 |   |
| Cash dividends paid per common share                                        |   | $      | 0.24   |   |   | $      | 0.64   |   |   | $ | 0.64 |   |

----

| (Dollars in thousands, except per share data)                          |   | PreferredStock |    |   | CommonStock |   |   | Warrant |   |   | AdditionalPaid InCapital |   |   | RetainedEarnings |   |   | AccumulatedOtherComprehensiveIncome (Loss) |   |   | TotalStockholders’Equity |   |
|------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|-------------|--------|--------|---------|--------|--------|-------------------------------|--------|--------|------------------|--------|--------|-------------------------------------------------|--------|--------|--------------------------------|--------|
| Balances, December 31, 2007                                                                          |   | $              | -       |   |        | $      | 84     |    |   | $      | -                             |   |   | $                | 29,539 |   |                                            | $      | 90,365 |                           |   | $ | 247 |   |   | $ | 120,235 |   |
| Adjustment to initially apply EITF Issue 06-4                                                        |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (318   | )                              |   |   | - |   |   |   | (318 | ) |
| Comprehensive income:                                                                                |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Net income                                                                                           |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | 11,470 |                           |   |   | - |   |   |   | 11,470 |   |
| Unrealized gains on available-for-sale securities, net of reclassification adjustment, net of taxes  |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | 1,146 |   |   |   | 1,146 |   |
| Total comprehensive income                                                                           |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   | 12,616 |   |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Shares issued for employee stock-based awards                                                        |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | 138    |   |                                            |   | -      |                           |   |   | - |   |   |   | 138 |   |
| Stock-based compensation expense                                                                     |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | 91     |   |                                            |   | -      |                           |   |   | - |   |   |   | 91 |   |
| Cash dividends paid ($0.64 per share)                                                                |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (5,377 | )                              |   |   | - |   |   |   | (5,377 | ) |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Balances, December 31, 2008                                                                          |   |           | -       |   |        |   | 84     |    |   |   | -                             |   |   |             | 29,768 |   |                                            |   | 96,140 |                           |   |   | 1,393 |   |   |   | 127,385 |   |
| Comprehensive income:                                                                                |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Net income                                                                                           |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | 7,273  |                           |   |   | - |   |   |   | 7,273 |   |
| Unrealized losses on available-for-sale securities, net of reclassification adjustment, net of taxes |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | (665 | ) |   |   | (665 | ) |
| Unrealized losses on cash flow hedging activities, net of taxes                                      |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | (568 | ) |   |   | (568 | ) |
| Total comprehensive income                                                                           |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   | 6,040 |   |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Warrant issued                                                                                       |   |           | -       |   |        |   | -      |    |   |   | 1,543                         |   |   |             | -      |   |                                            |   | -      |                           |   |   | - |   |   |   | 1,543 |   |
| Preferred shares issued pursuant to TARP                                                             |   |           | 25,000  |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | - |   |   |   | 25,000 |   |
| Discount from issuance of preferred stock                                                            |   |           | (1,543  | )      |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | - |   |   |   | (1,543 | ) |
| Discount accretion                                                                                   |   |           | 68      |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (68    | )                              |   |   | - |   |   |   | - |   |
| Redemption of preferred stock                                                                        |   |           | (23,525 | )      |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | - |   |   |   | (23,525 | ) |
| Shares issued for employee stock-based awards                                                        |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | 2      |   |                                            |   | -      |                           |   |   | - |   |   |   | 2 |   |
| Stock-based compensation expense                                                                     |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | 102    |   |                                            |   | -      |                           |   |   | - |   |   |   | 102 |   |
| Preferred stock dividends                                                                            |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (1,808 | )                              |   |   | - |   |   |   | (1,808 | ) |
| Cash dividends paid ($0.64 per share)                                                                |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (5,386 | )                              |   |   | - |   |   |   | (5,386 | ) |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Balances, December 31, 2009                                                                          |   |           | -       |   |        |   | 84     |    |   |   | 1,543                         |   |   |             | 29,872 |   |                                            |   | 96,151 |                           |   |   | 160 |   |   |   | 127,810 |   |
| Comprehensive loss:                                                                                  |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Net loss                                                                                             |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (1,667 | )                              |   |   | - |   |   |   | (1,667 | ) |
| Unrealized gains on available-for-sale securities, net of reclassification adjustment, net of taxes  |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | 242 |   |   |   | 242 |   |
| Unrealized losses on cash flow hedging activities, net of taxes                                      |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | -      |                           |   |   | (2,216 | ) |   |   | (2,216 | ) |
| Total comprehensive loss                                                                             |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   | (3,641 | ) |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Stock-based compensation expense                                                                     |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | 370    |   |                                            |   | -      |                           |   |   | - |   |   |   | 370 |   |
| Cash dividends paid ($0.24 per share)                                                                |   |           | -       |   |        |   | -      |    |   |   | -                             |   |   |             | -      |   |                                            |   | (2,026 | )                              |   |   | - |   |   |   | (2,026 | ) |
|                                                                                                 |   |           |    |   |        |   |   |    |   |   |                          |   |   |             |   |   |                                            |   |   |                           |   |   |   |   |   |   |   |   |
| Balances, December 31, 2010                                                                          |   | $              | -       |   |        | $      | 84     |    |   | $      | 1,543                         |   |   | $                | 30,242 |   |                                            | $      | 92,458 |                           |   | $ | (1,814 | ) |   | $ | 122,513 |   |

----

| (Dollars in thousands)                                   |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net (loss) income                                        |   | $      | (1,667 | )      |   | $      | 7,273  |   |   | $ | 11,470 |   |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive (loss) income:                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities available for sale:                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) on available-for-sale securities |   |   | 406    |   |   |   | (1,061 | )      |   |   | 1,525 |   |
| Tax effect                                                         |   |   | (164   | )      |   |   | 425    |   |   |   | (609 | ) |
| Reclassification of (gains) losses recognized in net income        |   |   | -      |   |   |   | (49    | )      |   |   | 386 |   |
| Tax effect                                                         |   |   | -      |   |   |   | 20     |   |   |   | (156 | ) |
| Net of tax amount                                                  |   |   | 242    |   |   |   | (665   | )      |   |   | 1,146 |   |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flow hedging activities:                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses on cash flow hedging activities          |   |   | (3,717 | )      |   |   | (952   | )      |   |   | - |   |
| Tax effect                                                         |   |   | 1,501  |   |   |   | 384    |   |   |   | - |   |
| Net of tax amount                                                  |   |   | (2,216 | )      |   |   | (568   | )      |   |   | - |   |
| Total other comprehensive (loss) income                            |   |   | (1,974 | )      |   |   | (1,233 | )      |   |   | 1,146 |   |
| Comprehensive (loss) income                                        |   | $      | (3,641 | )      |   | $      | 6,040  |   |   | $ | 12,616 |   |

----

| (Dollars in thousands)                                                         |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |   |   |    |   |   |   |    |   |   |
| Net (loss) income                                                                        |   | $      | (1,667  | )      |   | $      | 7,273   |   |   | $ | 11,470 |   |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |   |   |    |   |   |   |    |   |   |   |   |   |
| Provision for credit losses                                                              |   |   | 21,119  |   |   |   | 8,986   |   |   |   | 3,337 |   |
| Goodwill and other intangibles impairment                                                |   |   | 3,051   |   |   |   | -       |   |   |   | - |   |
| Depreciation and amortization                                                            |   |   | 2,405   |   |   |   | 1,880   |   |   |   | 1,784 |   |
| Discount accretion on debt securities                                                    |   |   | (128    | )      |   |   | (226    | )      |   |   | (199 | ) |
| Stock-based compensation expense                                                         |   |   | 390     |   |   |   | 102     |   |   |   | 91 |   |
| Excess tax benefits from stock-based arrangements                                        |   |   | (20     | )      |   |   | (5      | )      |   |   | (4 | ) |
| Deferred income taxes                                                                    |   |   | (2,905  | )      |   |   | (928    | )      |   |   | (498 | ) |
| (Gains) losses on sales of securities                                                    |   |   | -       |   |   |   | (49     | )      |   |   | 15 |   |
| Other than temporary impairment of securities                                            |   |   | -       |   |   |   | -       |   |   |   | 371 |   |
| Gains on disposals of premises and equipment                                             |   |   | -       |   |   |   | -       |   |   |   | (1,247 | ) |
| Loss on sale of investment in unconsolidated subsidiary                                  |   |   | -       |   |   |   | -       |   |   |   | 337 |   |
| Losses on sales of other real estate owned                                               |   |   | 78      |   |   |   | 26      |   |   |   | 50 |   |
| Write-downs of other real estate owned                                                   |   |   | 657     |   |   |   | 159     |   |   |   | - |   |
| Gains on interest rate swaps                                                             |   |   | -       |   |   |   | (420    | )      |   |   | - |   |
| Net changes in:                                                                          |   |   |    |   |   |   |    |   |   |   |   |   |
| Insurance premiums receivable                                                            |   |   | 242     |   |   |   | 365     |   |   |   | (265 | ) |
| Accrued interest receivable                                                              |   |   | (256    | )      |   |   | (198    | )      |   |   | 402 |   |
| Prepaid FDIC premium expense                                                             |   |   | (1,376  | )      |   |   | (5,425  | )      |   |   | (10 | ) |
| Other assets                                                                             |   |   | 3,650   |   |   |   | (1,481  | )      |   |   | (1,673 | ) |
| Accrued interest payable                                                                 |   |   | (921    | )      |   |   | (569    | )      |   |   | (443 | ) |
| Other liabilities                                                                        |   |   | (972    | )      |   |   | 689     |   |   |   | 491 |   |
|                                                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Net cash provided by operating activities                                                |   |   | 23,347  |   |   |   | 10,179  |   |   |   | 14,009 |   |
|                                                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |   |   |    |   |   |   |    |   |   |   |   |   |
| Proceeds from maturities and principal payments of securities available for sale         |   |   | 47,945  |   |   |   | 53,668  |   |   |   | 82,063 |   |
| Proceeds from sales of securities available for sale                                     |   |   | -       |   |   |   | 2,048   |   |   |   | 2 |   |
| Purchases of securities available for sale                                               |   |   | (49,626 | )      |   |   | (78,376 | )      |   |   | (62,551 | ) |
| Proceeds from maturities and principal payments of securities held to maturity           |   |   | 2,195   |   |   |   | 3,934   |   |   |   | 3,666 |   |
| Purchases of securities held to maturity                                                 |   |   | -       |   |   |   | (2,623  | )      |   |   | (1,026 | ) |
| Net decrease (increase) in loans                                                         |   |   | 264     |   |   |   | (38,190 | )      |   |   | (114,033 | ) |
| Purchases of premises and equipment                                                      |   |   | (1,292  | )      |   |   | (1,553  | )      |   |   | (331 | ) |
| Proceeds from sales of premises and equipment                                            |   |   | -       |   |   |   | -       |   |   |   | 2,773 |   |
| Proceeds from sales of other real estate owned                                           |   |   | 1,255   |   |   |   | 122     |   |   |   | 264 |   |
| Purchases of interest rate caps                                                          |   |   | -       |   |   |   | (6,475  | )      |   |   | - |   |
| Investment in unconsolidated subsidiary                                                  |   |   | (25     | )      |   |   | -       |   |   |   | - |   |
| Proceeds from sale of investment in unconsolidated subsidiary                            |   |   | -       |   |   |   | -       |   |   |   | 600 |   |
|                                                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Net cash provided (used) by investing activities                                         |   |   | 716     |   |   |   | (67,445 | )      |   |   | (88,573 | ) |
|                                                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Net increase (decrease) in demand, money market and savings deposits                     |   |   | 1,898   |   |   |   | 127,319 |   |   |   | (10,688 | ) |
| Net (decrease) increase in certificates of deposit                                       |   |   | (13,320 | )      |   |   | 18,247  |   |   |   | 90,163 |   |
| Excess tax benefits from stock-based arrangements                                        |   |   | 20      |   |   |   | 5       |   |   |   | 4 |   |
| Net (decrease) increase in short-term borrowings                                         |   |   | (4,363  | )      |   |   | (32,565 | )      |   |   | 5,276 |   |
| Proceeds from issuance of long-term debt                                                 |   |   | -       |   |   |   | -       |   |   |   | 3,000 |   |
| Repayment of long-term debt                                                              |   |   | (497    | )      |   |   | (6,518  | )      |   |   | (7,538 | ) |
| Net (payment) receipt of counterparty collateral – interest rate caps              |   |   | (3,457  | )      |   |   | 4,847   |   |   |   | - |   |
| Proceeds from issuance of preferred stock and warrant                                    |   |   | -       |   |   |   | 25,000  |   |   |   | - |   |
| Redemption of preferred stock                                                            |   |   | -       |   |   |   | (23,525 | )      |   |   | - |   |
| Proceeds from issuance of common stock                                                   |   |   | -       |   |   |   | 2       |   |   |   | 138 |   |
| Preferred stock dividends paid                                                           |   |   | -       |   |   |   | (1,808  | )      |   |   | - |   |
| Common stock dividends paid                                                              |   |   | (2,026  | )      |   |   | (5,386  | )      |   |   | (5,377 | ) |
| Net cash (used) provided by financing activities                                         |   |   | (21,745 | )      |   |   | 105,618 |   |   |   | 74,978 |   |

----

| (Dollars in thousands)                |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| NET INCREASE IN CASH AND CASH EQUIVALENTS       |   |   | 2,318  |   |   |   | 48,352 |   |   |   | 414 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  |   |   | 75,646 |   |   |   | 27,294 |   |   |   | 26,880 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR        |   | $      | 77,964 |   |   | $      | 75,646 |   |   | $ | 27,294 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Supplemental cash flow information:             |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest paid                                   |   | $      | 13,743 |   |   | $      | 17,980 |   |   | $ | 21,998 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Income taxes paid                               |   | $      | 1,193  |   |   | $      | 4,975  |   |   | $ | 9,704 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Transfers from loans to other real estate owned |   | $      | 3,140  |   |   | $      | 2,731  |   |   | $ | 286 |   |

----

| NOTE 1.  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|---------------|--------------------------------------------|

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|                                                     |   |      |   |   | Gross      |   |   | Gross      |   |   | Estimated |   |
|----------------------------------------------------------|--------|-----------|--------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|
|                                                     |   | Amortized |   |   | Unrealized |   |   | Unrealized |   |   | Fair      |   |
| (Dollars in thousands)                         |   | Cost      |   |   | Gains      |   |   | Losses     |   |   | Value     |   |
| Available-for-sale securities:                           |   |      |   |   |       |   |   |       |   |   |      |   |
| December 31, 2010:                                       |   |      |   |   |       |   |   |       |   |   |      |   |
| Obligations of U.S. Government agencies and corporations |   | $         | 58,052 |   |       | $      | 921    |       |   | $      | 69        |   |   | $ | 58,904 |   |
| Mortgage-backed securities                               |   |      | 38,817 |   |       |   | 933    |       |   |   | 173       |   |   |   | 39,577 |   |
| Equity securities                                        |   |      | 566    |   |       |   | 8      |       |   |   | -         |   |   |   | 574 |   |
| Total                                                    |   | $         | 97,435 |   |       | $      | 1,862  |       |   | $      | 242       |   |   | $ | 99,055 |   |
|                                                     |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2009:                                       |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Obligations of U.S. Treasury                             |   | $         | 2,998  |   |       | $      | -      |       |   | $      | -         |   |   | $ | 2,998 |   |
| Obligations of U.S. Government agencies and corporations |   |      | 57,258 |   |       |   | 879    |       |   |   | 397       |   |   |   | 57,740 |   |
| Mortgage-backed securities                               |   |      | 35,579 |   |       |   | 818    |       |   |   | 90        |   |   |   | 36,307 |   |
| Equity securities                                        |   |      | 546    |   |       |   | 4      |       |   |   | -         |   |   |   | 550 |   |
| Total                                                    |   | $         | 96,381 |   |       | $      | 1,701  |       |   | $      | 487       |   |   | $ | 97,595 |   |
|                                                     |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Held-to-maturity securities:                             |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2010:                                       |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Obligations of states and political subdivisions         |   | $         | 6,727  |   |       | $      | 143    |       |   | $      | 19        |   |   | $ | 6,851 |   |
|                                                     |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2009:                                       |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Obligations of states and political subdivisions         |   | $         | 8,940  |   |       | $      | 163    |       |   | $      | 91        |   |   | $ | 9,012 |   |

|                                       |   | Less than12 Months |   |   | More than12 Months |   |   | Total     |   |
|--------------------------------------------|--------|------------------------------|--------|--------|------------------------------|--------|--------|-----------|--------|
| (Dollars in thousands)           |   | FairValue                    |   |   | UnrealizedLosses             |   |   | FairValue |   |   | UnrealizedLosses |   |   | FairValue |   |   | UnrealizedLosses |   |
| Available-for-sale securities:             |   |                         |   |   |                         |   |   |      |   |   |   |   |   |   |   |   |   |   |
| U.S. Gov’t agencies and corporations |   | $                            | 8,747  |   |                         | $      | 42     |      |   | $ | 3,268 |   |   | $ | 27 |   |   | $ | 12,015 |   |   | $ | 69 |   |
| Mortgage-backed securities                 |   |                         | 13,406 |   |                         |   | 173    |      |   |   | - |   |   |   | - |   |   |   | 13,406 |   |   |   | 173 |   |
| Total                                      |   | $                            | 22,153 |   |                         | $      | 215    |      |   | $ | 3,268 |   |   | $ | 27 |   |   | $ | 25,421 |   |   | $ | 242 |   |

----

|                                             |   | Less than12 Months |   |   | More than12 Months |   |   | Total     |   |
|--------------------------------------------------|--------|------------------------------|--------|--------|------------------------------|--------|--------|-----------|--------|
| (Dollars in thousands)                 |   | FairValue                    |   |   | UnrealizedLosses             |   |   | FairValue |   |   | UnrealizedLosses |   |   | FairValue |   |   | UnrealizedLosses |   |
| Held-to-maturity securities:                     |   |                         |   |   |                         |   |   |      |   |   |   |   |   |   |   |   |   |   |
| Obligations of states and political subdivisions |   | $                            | 996    |   |                         | $      | 15     |      |   | $ | 206 |   |   | $ | 4 |   |   | $ | 1,202 |   |   | $ | 19 |   |

|                                   |   | Available for sale |   |   | Held to maturity |   |
|----------------------------------------|--------|------------------------------|--------|--------|----------------------------|--------|
|                                   |   | Amortized                    |   |   | Estimated                  |   |   | Amortized |   |   | Estimated |   |
| (Dollars in thousands)       |   | Cost                         |   |   | Fair Value            |   |   | Cost |   |   | Fair Value |   |
| Due in one year or less                |   | $                            | 10,839 |   |                       | $      | 10,996 |   |   | $ | 1,163 |   |   | $ | 1,164 |   |
| Due after one year through five years  |   |                         | 38,069 |   |                       |   | 38,728 |   |   |   | 3,840 |   |   |   | 3,964 |   |
| Due after five years through ten years |   |                         | 23,569 |   |                       |   | 24,010 |   |   |   | 1,219 |   |   |   | 1,228 |   |
| Due after ten years                    |   |                         | 24,392 |   |                       |   | 24,747 |   |   |   | 505 |   |   |   | 495 |   |
|                                   |   |                         | 96,869 |   |                       |   | 98,481 |   |   |   | 6,727 |   |   |   | 6,851 |   |
| Equity securities                      |   |                         | 566    |   |                       |   | 574 |   |   |   | - |   |   |   | - |   |
| Total                                  |   | $                            | 97,435 |   |                       | $      | 99,055 |   |   | $ | 6,727 |   |   | $ | 6,851 |   |

|                                  |   | December 31, 2010 |   |   | December 31, 2009 |   |
|---------------------------------------|--------|-----------------------------|--------|--------|-----------------------------|--------|
|                                  |   | Amortized                   |   |   | Estimated                   |   |   | Amortized |   |   | Estimated |   |
| (Dollars in thousands)      |   | Cost                        |   |   | Fair Value             |   |   | Cost |   |   | Fair Value |   |
| Pledged available-for-sale securities |   | $                           | 63,097 |   |                        | $      | 64,651 |   |   | $ | 64,856 |   |   | $ | 66,024 |   |

----

| (Dollars in thousands)           |   | 2010   |    |   | 2009   |   |
|----------------------------------|--------|--------|---------|--------|--------|--------|
| Real estate – construction |   | $      | 143,952 |   |   | $      | 161,437 |   |
| Real estate – residential  |   |   | 333,738 |   |   |   | 327,873 |   |
| Real estate – commercial   |   |   | 318,726 |   |   |   | 315,930 |   |
| Commercial                       |   |   | 82,787  |   |   |   | 91,566 |   |
| Consumer                         |   |   | 16,201  |   |   |   | 19,751 |   |
| Total loans                      |   |   | 895,404 |   |   |   | 916,557 |   |
| Allowance for credit losses      |   |   | (14,227 | )      |   |   | (10,876 | ) |
| Total loans, net                 |   | $      | 881,177 |   |   | $      | 905,681 |   |

| (Dollars in thousands)           |   | 2010   |    |   | 2009   |   |   | 2008   |   |
|----------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
| Balance, beginning of year       |   | $      | 10,876  |   |   | $      | 9,320  |   |   | $ | 7,551 |   |
|                             |   |   |    |   |   |   |   |   |   |   |   |   |
| Loans charged off                |   |   |    |   |   |   |   |   |   |   |   |   |
| Real estate – construction |   |   | (7,910  | )      |   |   | (674   | )      |   |   | (536 | ) |
| Real estate – residential  |   |   | (5,818  | )      |   |   | (2,621 | )      |   |   | (316 | ) |
| Real estate – commercial   |   |   | (492    | )      |   |   | (1,695 | )      |   |   | (238 | ) |
| Commercial                       |   |   | (3,710  | )      |   |   | (2,304 | )      |   |   | (447 | ) |
| Consumer                         |   |   | (589    | )      |   |   | (417   | )      |   |   | (276 | ) |
| Total                            |   |   | (18,519 | )      |   |   | (7,711 | )      |   |   | (1,813 | ) |
| Recoveries                       |   |   |    |   |   |   |   |   |   |   |   |   |
| Real estate – construction |   |   | 14      |   |   |   | 2      |   |   |   | - |   |
| Real estate – residential  |   |   | 215     |   |   |   | 70     |   |   |   | 19 |   |
| Real estate – commercial   |   |   | 108     |   |   |   | 6      |   |   |   | - |   |
| Commercial                       |   |   | 214     |   |   |   | 66     |   |   |   | 136 |   |
| Consumer                         |   |   | 200     |   |   |   | 137    |   |   |   | 90 |   |
| Total                            |   |   | 751     |   |   |   | 281    |   |   |   | 245 |   |
| Net loans charged off            |   |   | (17,768 | )      |   |   | (7,430 | )      |   |   | (1,568 | ) |
| Provision for credit losses      |   |   | 21,119  |   |   |   | 8,986  |   |   |   | 3,337 |   |
|                             |   |   |    |   |   |   |   |   |   |   |   |   |
| Balance, end of year             |   | $      | 14,227  |   |   | $      | 10,876 |   |   | $ | 9,320 |   |

----

| (Dollars in thousands)                                    |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Impaired loans with a valuation allowance                           |   | $      | 837    |   |   | $      | 2,028  |   |   | $ | 2,550 |   |
| Impaired loans with no valuation allowance                          |   |   | 35,401 |   |   |   | 14,274 |   |   |   | 5,565 |   |
|                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Total impaired loans                                                |   | $      | 36,238 |   |   | $      | 16,302 |   |   | $ | 8,115 |   |
|                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for credit losses applicable to impaired loans            |   | $      | 203    |   |   | $      | 468    |   |   | $ | 341 |   |
| Allowance for credit losses applicable to other than impaired loans |   |   | 14,024 |   |   |   | 10,408 |   |   |   | 8,979 |   |
|                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Total allowance for credit losses                                   |   | $      | 14,227 |   |   | $      | 10,876 |   |   | $ | 9,320 |   |
|                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Average recorded investment in impaired loans                       |   | $      | 35,242 |   |   | $      | 12,646 |   |   | $ | 5,477 |   |

| (Dollars in thousands)    |   | Recordedinvestment |   |   | Unpaidprincipalbalance |   |   | Relatedallowance |   |   | Averagerecordedinvestment |   |
|-------------------------------------|--------|--------------------|--------|--------|------------------------|--------|--------|------------------|--------|--------|---------------------------|--------|
| 2010                                |   |               |   |   |                   |   |   |             |   |   |                      |   |
| With no related allowance recorded: |   |               |   |   |                   |   |   |             |   |   |                      |   |
| Real estate – construction    |   | $                  | 17,261 |   |                   | $      | 22,643 |             |   | $      | -                         |   |   | $ | 17,784 |   |
| Real estate – residential     |   |               | 9,132  |   |                   |   | 11,038 |             |   |   | -                         |   |   |   | 8,368 |   |
| Real estate – commercial      |   |               | 5,133  |   |                   |   | 5,558  |             |   |   | -                         |   |   |   | 3,827 |   |
| Commercial                          |   |               | 3,845  |   |                   |   | 4,305  |             |   |   | -                         |   |   |   | 2,793 |   |
| Consumer                            |   |               | 30     |   |                   |   | 30     |             |   |   | -                         |   |   |   | 56 |   |
| Total                               |   |               | 35,401 |   |                   |   | 43,574 |             |   |   | -                         |   |   |   | 32,828 |   |
|                                |   |               |   |   |                   |   |   |             |   |   |                      |   |   |   |   |   |
| With a related allowance recorded:  |   |               |   |   |                   |   |   |             |   |   |                      |   |   |   |   |   |
| Real estate – construction    |   |               | -      |   |                   |   | -      |             |   |   | -                         |   |   |   | 1,596 |   |
| Real estate – residential     |   |               | 837    |   |                   |   | 945    |             |   |   | 203                       |   |   |   | 420 |   |
| Real estate – commercial      |   |               | -      |   |                   |   | -      |             |   |   | -                         |   |   |   | - |   |
| Commercial                          |   |               | -      |   |                   |   | -      |             |   |   | -                         |   |   |   | 398 |   |
| Consumer                            |   |               | -      |   |                   |   | -      |             |   |   | -                         |   |   |   | - |   |
| Total                               |   |               | 837    |   |                   |   | 945    |             |   |   | 203                       |   |   |   | 2,414 |   |
|                                |   |               |   |   |                   |   |   |             |   |   |                      |   |   |   |   |   |
| Total:                              |   |               |   |   |                   |   |   |             |   |   |                      |   |   |   |   |   |
| Real estate – construction    |   |               | 17,261 |   |                   |   | 22,643 |             |   |   | -                         |   |   |   | 19,380 |   |
| Real estate – residential     |   |               | 9,969  |   |                   |   | 11,983 |             |   |   | 203                       |   |   |   | 8,788 |   |
| Real estate – commercial      |   |               | 5,133  |   |                   |   | 5,558  |             |   |   | -                         |   |   |   | 3,827 |   |
| Commercial                          |   |               | 3,845  |   |                   |   | 4,305  |             |   |   | -                         |   |   |   | 3,191 |   |
| Consumer                            |   |               | 30     |   |                   |   | 30     |             |   |   | -                         |   |   |   | 56 |   |
| Total                               |   | $                  | 36,238 |   |                   | $      | 44,519 |             |   | $      | 203                       |   |   | $ | 35,242 |   |

----

| (Dollars in thousands)                                 |   | Real estate -construction |    |   | Real estate -residential |   |    | Real estate -commercial |   |   | Commercial |   |   | Consumer |   |   | Unallocated |   |   | Total  |   |
|------------------------------------------------------------------|--------|-------------------------------------|---------|--------|------------------------------------|--------|---------|-----------------------------------|--------|--------|------------|--------|--------|----------|--------|--------|-------------|--------|--------|--------|--------|
| 2010                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |
| Allowance for credit losses:                                     |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |
| Beginning balance                                                |   | $                                   | 2,630   |   |                               | $      | 1,528   |                              |   | $      | 3,947      |   |   | $        | 2,132  |   |        | $      | 515    |   |   | $ | 124 |   |   | $ | 10,876 |   |
| Charge-offs                                                      |   |                                | (7,910  | )      |                               |   | (5,818  | )                                 |   |   | (492       | )      |   |     | (3,710 | )      |        |   | (589   | )      |   |   | - |   |   |   | (18,519 | ) |
| Recoveries                                                       |   |                                | 14      |   |                               |   | 215     |                              |   |   | 108        |   |   |     | 214    |   |        |   | 200    |   |   |   | - |   |   |   | 751 |   |
| Provision                                                        |   |                                | 8,593   |   |                               |   | 8,908   |                              |   |   | 102        |   |   |     | 2,786  |   |        |   | 511    |   |   |   | 219 |   |   |   | 21,119 |   |
| Ending balance                                                   |   | $                                   | 3,327   |   |                               | $      | 4,833   |                              |   | $      | 3,665      |   |   | $        | 1,422  |   |        | $      | 637    |   |   | $ | 343 |   |   | $ | 14,227 |   |
|                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance:  individually evaluated for impairment |   | $                                   | -       |   |                               | $      | 203     |                              |   | $      | -          |   |   | $        | -      |   |        | $      | -      |   |   | $ | - |   |   | $ | 203 |   |
|                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance:  collectively evaluated for impairment |   | $                                   | 3,327   |   |                               | $      | 4,630   |                              |   | $      | 3,665      |   |   | $        | 1,422  |   |        | $      | 637    |   |   | $ | 343 |   |   | $ | 14,024 |   |
|                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                                           |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance                                                   |   | $                                   | 143,952 |   |                               | $      | 333,738 |                              |   | $      | 318,726    |   |   | $        | 82,787 |   |        | $      | 16,201 |   |   | $ | - |   |   | $ | 895,404 |   |
|                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance:  individually evaluated for impairment |   | $                                   | 17,261  |   |                               | $      | 9,969   |                              |   | $      | 5,133      |   |   | $        | 3,845  |   |        | $      | 30     |   |   | $ | - |   |   | $ | 36,238 |   |
|                                                             |   |                                |    |   |                               |   |    |                              |   |   |       |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance:  collectively evaluated for impairment |   | $                                   | 126,691 |   |                               | $      | 323,769 |                              |   | $      | 313,593    |   |   | $        | 78,942 |   |        | $      | 16,171 |   |   | $ | - |   |   | $ | 859,166 |   |

----

| (Dollars in thousands) |   | Real estate -construction |    |   | Real estate -residential |   |    | Real estate -commercial |   |   | Commercial |   |   | Consumer |   |   | Total  |   |
|----------------------------------|--------|-------------------------------------|---------|--------|------------------------------------|--------|---------|-----------------------------------|--------|--------|------------|--------|--------|----------|--------|--------|--------|--------|
| Pass/Performing                  |   | $                                   | 83,344  |   |                               | $      | 283,895 |                              |   | $      | 260,040    |   |   | $        | 73,502 |   |   | $      | 16,043 |   |   | $ | 716,824 |   |
| Special mention                  |   |                                | 23,090  |   |                               |   | 23,847  |                              |   |   | 17,821     |   |   |     | 2,249  |   |   |   | - |   |   |   | 67,007 |   |
| Substandard                      |   |                                | 20,257  |   |                               |   | 13,752  |                              |   |   | 35,732     |   |   |     | 3,088  |   |   |   | 128 |   |   |   | 72,957 |   |
| Doubtful                         |   |                                | -       |   |                               |   | 2,275   |                              |   |   | -          |   |   |     | 103    |   |   |   | - |   |   |   | 2,378 |   |
| Nonaccrual                       |   |                                | 17,261  |   |                               |   | 9,969   |                              |   |   | 5,133      |   |   |     | 3,845  |   |   |   | 30 |   |   |   | 36,238 |   |
| Total                            |   | $                                   | 143,952 |   |                               | $      | 333,738 |                              |   | $      | 318,726    |   |   | $        | 82,787 |   |   | $      | 16,201 |   |   | $ | 895,404 |   |

| (Dollars in thousands) |   | 30-59 dayspast due |   |   | 60-89dayspast due |   |   | 90 days ormore pastdue |   |   | Total pastdue |   |   | Current |   |   | Total  |   |    | 90 days ormore pastdue andaccruing |   |
|----------------------------------|--------|------------------------------|--------|--------|------------------------|--------|--------|---------------------------------------|--------|--------|--------------------|--------|--------|---------|--------|--------|--------|--------|---------|--------------------------------------------------------|--------|
| Real estate – construction |   | $                            | 1,691  |   |                   | $      | 108    |                                  |   | $      | 17,261             |   |   | $       | 19,060 |   |   | $      | 124,892 |                                                   |   | $ | 143,952 |   |   | $ | - |   |
| Real estate – residential  |   |                         | 4,046  |   |                   |   | 1,355  |                                  |   |   | 13,423             |   |   |    | 18,824 |   |   |   | 314,914 |                                                   |   |   | 333,738 |   |   |   | 3,454 |   |
| Real estate – commercial   |   |                         | 3,393  |   |                   |   | 2,717  |                                  |   |   | 6,119              |   |   |    | 12,229 |   |   |   | 306,497 |                                                   |   |   | 318,726 |   |   |   | 986 |   |
| Commercial                       |   |                         | 470    |   |                   |   | 465    |                                  |   |   | 4,019              |   |   |    | 4,954  |   |   |   | 77,833  |                                                   |   |   | 82,787 |   |   |   | 174 |   |
| Consumer                         |   |                         | 486    |   |                   |   | 25     |                                  |   |   | 118                |   |   |    | 629    |   |   |   | 15,572  |                                                   |   |   | 16,201 |   |   |   | 88 |   |
| Total                            |   | $                            | 10,086 |   |                   | $      | 4,670  |                                  |   | $      | 40,940             |   |   | $       | 55,696 |   |   | $      | 839,708 |                                                   |   | $ | 895,404 |   |   | $ | 4,702 |   |

| (Dollars in thousands) |   | 2010   |    |   | 2009   |   |
|----------------------------------|--------|--------|---------|--------|--------|--------|
| Land                             |   | $      | 4,902   |   |   | $      | 4,337 |   |
| Buildings and land improvements  |   |   | 12,290  |   |   |   | 12,081 |   |
| Furniture and equipment          |   |   | 8,322   |   |   |   | 7,823 |   |
|                             |   |   | 25,514  |   |   |   | 24,241 |   |
| Accumulated depreciation         |   |   | (11,031 | )      |   |   | (9,934 | ) |
| Total                            |   | $      | 14,483  |   |   | $      | 14,307 |   |

----

| (Dollars in thousands) |   |   |   |
|----------------------------------|--------|--------|--------|
| 2011                             |   | $      | 717    |   |
| 2012                             |   |   | 601    |   |
| 2013                             |   |   | 418    |   |
| 2014                             |   |   | 333    |   |
| 2015                             |   |   | 245    |   |
| Thereafter                       |   |   | 1,634  |   |
| Total minimum lease payments     |   | $      | 3,948  |   |

----

|                                   |   | December 31, 2010 |   |   | December 31, 2009 |   |
|----------------------------------------|--------|-----------------------------|--------|--------|-----------------------------|--------|
|  (Dollars in thousands) |   | GrossCarryingAmount         |   |   | ImpairmentCharges           |   |   | AccumulatedAmortization |   |   | NetCarryingAmount |   |   | WeightedAverageRemainingLife |   |   | GrossCarryingAmount |   |   | AccumulatedAmortization |   |   | NetCarryingAmount |   |   | WeightedAverageRemainingLife |   |
|                                   |   |                        |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                               |   | $                           | 17,345 |   |                        | $      | (3,000 | ) |   | $ | (667 | ) |   | $ | 13,678 |   |   |   | - |   |   | $ | 16,621 |   |   | $ | (667 | ) |   | $ | 15,954 |   |   |   | - |   |
|                                   |   |                        |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other intangible assets                |   |                        |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortizable other intangible assets    |   |                        |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Employment agreements                  |   | $                           | 1,730  |   |                        | $      | - |   |   | $ | (810 | ) |   | $ | 920 |   |   |   | 3.7 |   |   | $ | 1,730 |   |   | $ | (561 | ) |   | $ | 1,169 |   |   |   | 4.7 |   |
| Insurance expirations                  |   |                        | 1,270  |   |                        |   | - |   |   |   | (725 | ) |   |   | 545 |   |   |   | 6.4 |   |   |   | 1,270 |   |   |   | (640 | ) |   |   | 630 |   |   |   | 7.5 |   |
| Core deposits                          |   |                        | 968    |   |                        |   | - |   |   |   | (817 | ) |   |   | 151 |   |   |   | 1.3 |   |   |   | 968 |   |   |   | (696 | ) |   |   | 272 |   |   |   | 2.3 |   |
| Customer relationships                 |   |                        | 960    |   |                        |   | (6 | ) |   |   | (195 | ) |   |   | 759 |   |   |   | 12.6 |   |   |   | 960 |   |   |   | (135 | ) |   |   | 825 |   |   |   | 13.7 |   |
|                                   |   |                        | 4,928  |   |                        |   | (6 | ) |   |   | (2,547 | ) |   |   | 2,375 |   |   |   |   |   |   |   | 4,928 |   |   |   | (2,032 | ) |   |   | 2,896 |   |   |   |   |   |
| Unamortizable other intangible assets  |   |                        |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Carrier relationships                  |   |                        | 1,300  |   |                        |   | (45 | ) |   |   | - |   |   |   | 1,255 |   |   |   | - |   |   |   | 1,300 |   |   |   | - |   |   |   | 1,300 |   |   |   | - |   |
| Trade name                             |   |                        | 1,210  |   |                        |   | - |   |   |   | - |   |   |   | 1,210 |   |   |   | - |   |   |   | 1,210 |   |   |   | - |   |   |   | 1,210 |   |   |   | - |   |
|                                   |   |                        | 2,510  |   |                        |   | (45 | ) |   |   | - |   |   |   | 2,465 |   |   |   |   |   |   |   | 2,510 |   |   |   | - |   |   |   | 2,510 |   |   |   |   |   |
| Total other intangible assets          |   | $                           | 7,438  |   |                        | $      | (51 | ) |   | $ | (2,547 | ) |   | $ | 4,840 |   |   |   |   |   |   | $ | 7,438 |   |   | $ | (2,032 | ) |   | $ | 5,406 |   |   |   |   |   |

|                                  |   |    | Amortization |   |
|---------------------------------------|--------|---------|--------------|--------|
| (Dollars in thousands)      |   | Expense |         |
| Year ended December 31, 2010          |   | $       | 515          |   |
|                                  |   |    |         |   |   |
| Estimate for years ended December 31, | 2011   |    |         | 515    |   |
|                                  | 2012   |    |         | 402    |   |
|                                  | 2013   |    |         | 306    |   |
|                                  | 2014   |    |         | 306    |   |
|                                  | 2015   |    |         | 265    |   |

| (Dollars in thousands)    |   | 2010   |   |   | 2009   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|
| Nonmarketable investment securities |   | $      | 2,949  |   |   | $      | 3,149 |   |
| Insurance premiums receivable       |   |   | 741    |   |   |   | 983 |   |
| Accrued interest receivable         |   |   | 5,060  |   |   |   | 4,804 |   |
| Deferred income taxes (1)           |   |   | 7,578  |   |   |   | 3,337 |   |
| Interest rate caps (2)              |   |   | 2,022  |   |   |   | 6,168 |   |
| Prepaid FDIC premium expense        |   |   | 4,073  |   |   |   | 5,449 |   |
| Other assets                        |   |   | 6,262  |   |   |   | 6,525 |   |
| Total                               |   | $      | 28,685 |   |   | $      | 30,415 |   |

| (Dollars in thousands)                 |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Accrued interest payable                         |   | $      | 860    |   |   | $      | 1,781 |   |
| Counterparty collateral - interest rate caps (2) |   |   | 1,390  |   |   |   | 4,847 |   |
| Other liabilities                                |   |   | 9,059  |   |   |   | 9,308 |   |
| Total                                            |   | $      | 11,309 |   |   | $      | 15,936 |   |

----

| (Dollars in thousands) |   | 2010   |    |   | 2009   |   |
|----------------------------------|--------|--------|---------|--------|--------|--------|
| Due in one year or less          |   | $      | 295,361 |   |   | $      | 384,169 |   |
| Due in one to three years        |   |   | 109,632 |   |   |   | 77,373 |   |
| Due in three to five years       |   |   | 66,394  |   |   |   | 23,164 |   |
| Total                            |   | $      | 471,387 |   |   | $      | 484,706 |   |

|                             |   | 2010   |   |   | 2009   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| (Dollars in thousands) |   | Amount |   |   | Rate   |   |   | Amount |   |   | Rate |   |
| Average for the Year             |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail repurchase agreements     |   | $      | 15,824 |   |   |   | 0.44 | % |   | $ | 18,200 |   |   |   | 0.41 | % |
| Federal Home Loan Bank advances  |   |   | -      |   |   |   | - |   |   |   | 6,000 |   |   |   | 0.60 |   |
| Other short-term borrowings      |   |   | 524    |   |   |   | 2.53 |   |   |   | 1,319 |   |   |   | 1.23 |   |
| Total                            |   | $      | 16,348 |   |   |   | 0.51 |   |   | $ | 25,519 |   |   |   | 0.50 |   |
|                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At Year End                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail repurchase agreements     |   | $      | 16,041 |   |   |   | 0.35 | % |   | $ | 17,026 |   |   |   | 0.47 | % |
| Federal Home Loan Bank advances  |   |   | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other short-term borrowings      |   |   | -      |   |   |   | - |   |   |   | 3,378 |   |   |   | 2.51 |   |
| Total                            |   | $      | 16,041 |   |   |   | 0.35 |   |   | $ | 20,404 |   |   |   | 0.82 |   |
|                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Maximum Month-End Balance        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail repurchase agreements     |   | $      | 17,864 |   |   |   |   |   |   | $ | 29,220 |   |   |   |   |   |
| Federal Home Loan Bank advances  |   |   | -      |   |   |   |   |   |   |   | 17,050 |   |   |   |   |   |
| Other short-term borrowings      |   |   | 3,378  |   |   |   |   |   |   |   | 3,378 |   |   |   |   |   |

----

| (Dollars in thousands)                                          |   | 2010 |   |   | 2009   |   |
|---------------------------------------------------------------------------|--------|------|--------|--------|--------|--------|
| Acquisition-related debt, 4.08% interest, annual payments over five years |   | $    | 932    |   |   | $      | 1,429 |   |

|                                               |   | Year Ended December 31, 2010 |   |   | Year Ended December 31, 2009 |   |
|----------------------------------------------------|--------|--------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|                                               |   | Number                                           |   |   | Weighted Average Grant                 |   |   | Number |   |   | Weighted Average Grant |   |
|                                               |   | of Shares                                   |   |   | Date Fair Value                        |   |   | of Shares |   |   | Date Fair Value |   |
| Nonvested at beginning of year |   |                                             | 27,405 |   |                                             | $      | 20.23 |   |   |   | 16,859 |   |   | $ | 22.55 |   |
| Granted                                            |   |                                             | 24,473 |   |                                             |   | 13.41 |   |   |   | 14,254 |   |   |   | 18.12 |   |
| Vested                                             |   |                                             | (7,751 | )      |                                             |   | 18.47 |   |   |   | (3,708 | ) |   |   | 22.63 |   |
| Cancelled                                          |   |                                             | -      |   |                                             |   | - |   |   |   | - |   |   |   | - |   |
|                                               |   |                                             |   |   |                                             |   |   |   |   |   |   |   |   |   |   |   |
| Nonvested at end of year                           |   |                                             | 44,127 |   |                                             |   | 16.76 |   |   |   | 27,405 |   |   |   | 20.23 |   |

----

|                             |   | Year Ended December 31, 2010 |   |   | Year Ended December 31, 2009 |   |
|----------------------------------|--------|--------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|                             |   | Number                                           |   |   | Weighted Average                            |   |   | Number |   |   | Weighted Average |   |
|                             |   | of Shares                                   |   |   | Exercise Price                              |   |   | of Shares |   |   | Exercise Price |   |
| Outstanding at beginning of year |   |                                             | 10,850 |   |                                             | $      | 13.36 |   |   |   | 18,550 |   |   | $ | 15.52 |   |
| Granted                          |   |                                             | -      |   |                                             |   | - |   |   |   | - |   |   |   | - |   |
| Exercised                        |   |                                             | -      |   |                                             |   | - |   |   |   | (25 | ) |   |   | 21.33 |   |
| Expired/Cancelled                |   |                                             | (2,430 | )      |                                             |   | 14.00 |   |   |   | (7,675 | ) |   |   | 18.55 |   |
| Outstanding at end of year       |   |                                             | 8,420  |   |                                             |   | 13.17 |   |   |   | 10,850 |   |   |   | 13.36 |   |

----

| (Dollars in thousands) |   | 2010   |   |   | 2009   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| Cash surrender value             |   | $      | 3,191  |   |   | $      | 2,347 |   |
| Accrued benefit obligation       |   |   | 1,037  |   |   |   | 1,269 |   |

| (Dollars in thousands)                    |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Federal income taxes currently (payable) receivable |   | $      | (512   | )      |   | $      | 918 |   |
| State income taxes currently receivable (payable)   |   |   | 111    |   |   |   | (25 | ) |
| Deferred income tax benefit                         |   |   | 7,578  |   |   |   | 3,337 |   |

| (Dollars in thousands)   |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Current tax expense:               |   |   |   |   |   |   |   |   |   |
| Federal                            |   | $      | 1,940  |   |   | $      | 4,078  |   |   | $ | 6,120 |   |
| State                              |   |   | 473    |   |   |   | 1,262  |   |   |   | 1,470 |   |
|                               |   |   | 2,413  |   |   |   | 5,340  |   |   |   | 7,590 |   |
| Deferred income tax benefit:       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                            |   |   | (2,350 | )      |   |   | (708   | )      |   |   | (334 | ) |
| State                              |   |   | (555   | )      |   |   | (220   | )      |   |   | (164 | ) |
|                               |   |   | (2,905 | )      |   |   | (928   | )      |   |   | (498 | ) |
|                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Total income tax (benefit) expense |   | $      | (492   | )      |   | $      | 4,412  |   |   | $ | 7,092 |   |

| (Dollars in thousands)           |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Tax at federal statutory rate              |   |   | 34.0   | %      |   |   | 34.2   | %      |   |   | 35.0 | % |
| Tax effect of:                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Tax-exempt income                          |   |   | 7.6    |   |   |   | (1.6   | )      |   |   | (1.2 | ) |
| Non-deductible goodwill impairment charges |   |   | (24.3  | )      |   |   | -      |   |   |   | - |   |
| Other non-deductible expenses              |   |   | (1.3   | )      |   |   | 0.2    |   |   |   | 0.1 |   |
| State income taxes, net of federal benefit |   |   | 2.4    |   |   |   | 5.9    |   |   |   | 4.6 |   |
| Other                                      |   |   | 4.4    |   |   |   | (0.9   | )      |   |   | (0.3 | ) |
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Actual income tax expense rate             |   |   | 22.8   | %      |   |   | 37.8   | %      |   |   | 38.2 | % |

----

| (Dollars in thousands)                  |   | 2010   |   |   | 2009   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Deferred tax assets:                              |   |   |   |   |   |   |
| Allowance for credit losses                       |   | $      | 5,652  |   |   | $      | 4,311 |   |
| Reserve for off-balance sheet commitments         |   |   | 198    |   |   |   | 171 |   |
| Write-downs of other real estate owned            |   |   | 163    |   |   |   | 56 |   |
| Net operating loss carry forward                  |   |   | 258    |   |   |   | 156 |   |
| Deferred gain on sale leaseback                   |   |   | 45     |   |   |   | 49 |   |
| Deferred income                                   |   |   | 1,244  |   |   |   | 665 |   |
| Accrued employee benefits                         |   |   | 1,049  |   |   |   | 849 |   |
| Accrued data processing expenses                  |   |   | 298    |   |   |   | 195 |   |
| Unrealized losses on interest rate caps           |   |   | 1,884  |   |   |   | 384 |   |
| Other                                             |   |   | 15     |   |   |   | 7 |   |
| Total deferred tax assets                         |   |   | 10,806 |   |   |   | 6,843 |   |
| Deferred tax liabilities:                         |   |   |   |   |   |   |   |   |
| Depreciation                                      |   |   | 550    |   |   |   | 529 |   |
| Purchase accounting adjustments                   |   |   | 1,047  |   |   |   | 1,374 |   |
| Federal Home Loan Bank stock dividend             |   |   | 29     |   |   |   | 29 |   |
| Deferred capital gain on branch sale              |   |   | 486    |   |   |   | 493 |   |
| Deferred gains on interest rate swaps             |   |   | 169    |   |   |   | 169 |   |
| Deferred loan costs                               |   |   | 256    |   |   |   | 373 |   |
| Unrealized gains on available-for-sale securities |   |   | 650    |   |   |   | 486 |   |
| Other                                             |   |   | 41     |   |   |   | 53 |   |
| Total deferred tax liabilities                    |   |   | 3,228  |   |   |   | 3,506 |   |
| Net deferred tax assets                           |   | $      | 7,578  |   |   | $      | 3,337 |   |

| (In thousands, except per share data) |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                           |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                              |   | $      | (1,667 | )      |   | $      | 5,397  |   |   | $ | 11,470 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding – basic              |   |   | 8,442  |   |   |   | 8,414  |   |   |   | 8,400 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive effect of stock-based awards                          |   |   | -      |   |   |   | 3      |   |   |   | 7 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding – diluted            |   |   | 8,442  |   |   |   | 8,417  |   |   |   | 8,407 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) earnings per common share – basic                 |   | $      | (0.20  | )      |   | $      | 0.64   |   |   | $ | 1.37 |   |
|                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) earnings per common share – diluted               |   | $      | (0.20  | )      |   | $      | 0.64   |   |   | $ | 1.36 |   |

----

|   December 31, 2010(Dollars in thousands) |   |  Tier 1Capital |    |   | TotalRisk-BasedCapital |   |    | NetRisk-WeightedAssets |   |   | AdjustedAverageTotal Assets |   |   | Tier 1Risk-BasedCapitalRatio |      |   | TotalRisk-BasedCapitalRatio |   |   | Tier 1LeverageRatio |   |
|-------------------------------------------------------------------------|--------|--------------------------|---------|--------|------------------------|--------|---------|------------------------|--------|--------|----------------------------------|--------|--------|-----------------------------------|-----------|--------|-----------------------------|--------|--------|--------------------------|--------|
| Company                                                                 |   | $                        | 105,808 |   |                   | $      | 117,057 |                   |   | $      | 895,581                          |   |   | $                                 | 1,109,999 |   |                        |   | 11.81  | %                        |   |   | 13.07 | % |   |   | 9.53 | % |
| Talbot Bank                                                             |   |                     | 65,736  |   |                   |   | 73,133  |                   |   |   | 589,533                          |   |   |                              | 682,493   |   |                        |   | 11.15  |                     |   |   | 12.41 |   |   |   | 9.63 |   |
| CNB                                                                     |   |                     | 32,813  |   |                   |   | 35,893  |                   |   |   | 246,056                          |   |   |                              | 342,771   |   |                        |   | 13.34  |                     |   |   | 14.59 |   |   |   | 9.57 |   |
| Felton Bank                                                             |   |                     | 7,683   |   |                   |   | 8,459   |                   |   |   | 61,086                           |   |   |                              | 81,621    |   |                        |   | 12.58  |                     |   |   | 13.85 |   |   |   | 9.41 |   |

|   December 31, 2009(Dollars in thousands) |   |  Tier 1Capital |    |   | TotalRisk-BasedCapital |   |    | NetRisk-WeightedAssets |   |   | AdjustedAverageTotal Assets |   |   | Tier 1Risk-BasedCapitalRatio |      |   | TotalRisk-BasedCapitalRatio |   |   | Tier 1LeverageRatio |   |
|-------------------------------------------------------------------------|--------|--------------------------|---------|--------|------------------------|--------|---------|------------------------|--------|--------|----------------------------------|--------|--------|-----------------------------------|-----------|--------|-----------------------------|--------|--------|--------------------------|--------|
| Company                                                                 |   | $                        | 106,391 |   |                   | $      | 116,928 |                   |   | $      | 928,933                          |   |   | $                                 | 1,148,077 |   |                        |   | 11.45  | %                        |   |   | 12.59 | % |   |   | 9.27 | % |
| Talbot Bank                                                             |   |                     | 67,539  |   |                   |   | 73,953  |                   |   |   | 602,944                          |   |   |                              | 728,612   |   |                        |   | 11.20  |                     |   |   | 12.27 |   |   |   | 9.27 |   |
| CNB                                                                     |   |                     | 31,461  |   |                   |   | 34,539  |                   |   |   | 245,852                          |   |   |                              | 324,464   |   |                        |   | 12.80  |                     |   |   | 14.05 |   |   |   | 9.70 |   |
| Felton Bank                                                             |   |                     | 8,684   |   |                   |   | 9,642   |                   |   |   | 76,060                           |   |   |                              | 90,268    |   |                        |   | 11.42  |                     |   |   | 12.68 |   |   |   | 9.62 |   |

----

----

| (Dollars in thousands) |   | Fair Value |   |   | Quoted Prices(Level 1) |   |   | Significant OtherObservable Inputs(Level 2) |   |   | SignificantUnobservable Inputs(Level 3) |   |
|----------------------------------|--------|-----------------|--------|--------|----------------------------------|--------|--------|------------------------------------------------------------|--------|--------|---------------------------------------------------|--------|
| Securities available for sale:   |   |            |   |   |                             |   |   |                                                       |   |   |                                              |   |
| U.S. Government agencies         |   | $               | 58,904 |   |                             | $      | -      |                                                       |   | $      | 58,904                                            |   |   | $ | - |   |
| Mortgage-backed securities       |   |            | 39,577 |   |                             |   | -      |                                                       |   |   | 39,577                                            |   |   |   | - |   |
| Other equity securities          |   |            | 574    |   |                             |   | -      |                                                       |   |   | 574                                               |   |   |   | - |   |
| Total                            |   | $               | 99,055 |   |                             | $      | -      |                                                       |   | $      | 99,055                                            |   |   | $ | - |   |
|                             |   |            |   |   |                             |   |   |                                                       |   |   |                                              |   |   |   |   |   |
| Interest rate caps               |   | $               | 2,022  |   |                             | $      | -      |                                                       |   | $      | 2,022                                             |   |   | $ | - |   |

| (Dollars in thousands) |   | Fair Value |   |   | Quoted Prices(Level 1) |   |   | Significant OtherObservable Inputs(Level 2) |   |   | SignificantUnobservable Inputs(Level 3) |   |
|----------------------------------|--------|-----------------|--------|--------|----------------------------------|--------|--------|------------------------------------------------------------|--------|--------|---------------------------------------------------|--------|
| Impaired loans                   |   |            |   |   |                             |   |   |                                                       |   |   |                                              |   |
| Real estate – construction |   | $               | 17,261 |   |                             | $      | -      |                                                       |   | $      | -                                                 |   |   | $ | 17,261 |   |
| Real estate – residential  |   |            | 9,766  |   |                             |   | -      |                                                       |   |   | -                                                 |   |   |   | 9,766 |   |
| Real estate – commercial   |   |            | 5,133  |   |                             |   | -      |                                                       |   |   | -                                                 |   |   |   | 5,133 |   |
| Commercial                       |   |            | 3,845  |   |                             |   | -      |                                                       |   |   | -                                                 |   |   |   | 3,845 |   |
| Consumer                         |   |            | 30     |   |                             |   | -      |                                                       |   |   | -                                                 |   |   |   | 30 |   |
| Total                            |   | $               | 36,035 |   |                             | $      | -      |                                                       |   | $      | -                                                 |   |   | $ | 36,035 |   |
|                             |   |            |   |   |                             |   |   |                                                       |   |   |                                              |   |   |   |   |   |
| Other real estate owned          |   | $               | 3,702  |   |                             | $      | -      |                                                       |   | $      | -                                                 |   |   | $ | 3,702 |   |

----

|                                       |   | 2010     |      |   | 2009      |   |
|--------------------------------------------|--------|----------|-----------|--------|-----------|--------|
|                                       |   |     |      |   | Estimated |   |   |   |   |   | Estimated |   |
|                                       |   | Carrying |      |   | Fair      |   |   | Carrying |   |   | Fair |   |
| (Dollars in thousands)           |   | Amount   |      |   | Value     |   |   | Amount |   |   | Value |   |
| Financial assets                           |   |     |      |   |      |   |   |   |   |   |   |   |
| Cash and cash equivalents                  |   | $        | 77,964    |   |      | $      | 77,964 |   |   | $ | 75,646 |   |   | $ | 75,646 |   |
| Investment securities                      |   |     | 105,782   |   |      |   | 105,906 |   |   |   | 106,535 |   |   |   | 106,607 |   |
| Loans                                      |   |     | 895,404   |   |      |   | 908,745 |   |   |   | 916,557 |   |   |   | 934,362 |   |
| Less:  allowance for loan losses |   |     | (14,227   | )      |      |   | - |   |   |   | (10,876 | ) |   | - |   |
| Total                                      |   | $        | 1,064,923 |   |      | $      | 1,092,615 |   |   | $ | 1,087,862 |   |   | $ | 1,116,615 |   |
|                                       |   |     |      |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Financial liabilities                      |   |     |      |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                   |   | $        | 979,516   |   |      | $      | 983,257 |   |   | $ | 990,937 |   |   | $ | 999,016 |   |
| Short-term borrowings                      |   |     | 16,041    |   |      |   | 16,041 |   |   |   | 20,404 |   |   |   | 20,404 |   |
| Long-term debt                             |   |     | 932       |   |      |   | 982 |   |   |   | 1,429 |   |   |   | 1,530 |   |
| Total                                      |   | $        | 996,489   |   |      | $      | 1,000,280 |   |   | $ | 1,012,770 |   |   | $ | 1,020,950 |   |

----

| (Dollars in thousands)       |   | 2010   |    |   | 2009   |   |
|------------------------------|--------|--------|---------|--------|--------|--------|
| Commitments to extend credit |   | $      | 137,078 |   |   | $      | 147,339 |   |
| Letters of credit            |   |   | 15,586  |   |   |   | 18,957 |   |
|                         |   |   |    |   |   |   |   |   |
| Total                        |   | $      | 152,664 |   |   | $      | 166,296 |   |

----

| Condensed Balance Sheets               |   |
|--------------------------------------------------|--------|
| December 31,                                |   |
| (Dollars in thousands)                 |   | 2010 |   |   | 2009 |   |
| Assets                                           |   |   |   |   |   |   |
| Cash                                             |   | $ | 1,344 |   |   | $ | 324 |   |
| Investment in subsidiaries                       |   |   | 123,570 |   |   |   | 129,727 |   |
| Premises and equipment, net                      |   |   | 2,877 |   |   |   | 3,003 |   |
| Other assets                                     |   |   | 1,422 |   |   |   | 1,705 |   |
| Total assets                                     |   | $ | 129,213 |   |   | $ | 134,759 |   |
|                                             |   |   |   |   |   |   |   |   |
| Liabilities                                      |   |   |   |   |   |   |   |   |
| Accrued interest payable                         |   | $ | 139 |   |   | $ | 149 |   |
| Short-term borrowings                            |   |   | - |   |   |   | 3,378 |   |
| Deferred tax liability                           |   |   | 1,458 |   |   |   | 1,275 |   |
| Other liabilities                                |   |   | 971 |   |   |   | 718 |   |
| Long-term debt                                   |   |   | 4,132 |   |   |   | 1,429 |   |
| Total liabilities                                |   |   | 6,700 |   |   |   | 6,949 |   |
|                                             |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   |   |   |   |   |   |   |   |
| Common stock                                     |   |   | 84 |   |   |   | 84 |   |
| Warrant                                          |   |   | 1,543 |   |   |   | 1,543 |   |
| Additional paid in capital                       |   |   | 30,242 |   |   |   | 29,872 |   |
| Retained earnings                                |   |   | 92,458 |   |   |   | 96,151 |   |
| Accumulated other comprehensive (loss) income    |   |   | (1,814 | ) |   |   | 160 |   |
| Total stockholders’ equity                 |   |   | 122,513 |   |   |   | 127,810 |   |
|                                             |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $ | 129,213 |   |   | $ | 134,759 |   |

----

| Condensed Statements of (Loss) Income                               |   |
|-----------------------------------------------------------------------------------------|--------|
| For the Years Ended December 31,                               |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                                                        |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Income                                                                                  |   |   |   |   |   |   |   |   |   |
| Dividends from subsidiaries                                                             |   | $ | 2,786 |   |   | $ | 5,725 |   |   | $ | 6,131 |   |
| Management and other fees from subsidiaries                                             |   |   | 6,095 |   |   |   | 5,952 |   |   |   | 5,285 |   |
| Other income                                                                            |   |   | 70 |   |   |   | 76 |   |   |   | 76 |   |
| Interest income                                                                         |   |   | 1 |   |   |   | 68 |   |   |   | 20 |   |
| Total income                                                                            |   |   | 8,952 |   |   |   | 11,821 |   |   |   | 11,512 |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Expenses                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense                                                                        |   |   | 172 |   |   |   | 87 |   |   |   | 121 |   |
| Salaries and employee benefits                                                          |   |   | 4,120 |   |   |   | 4,351 |   |   |   | 4,111 |   |
| Occupancy and equipment expense                                                         |   |   | 494 |   |   |   | 427 |   |   |   | 367 |   |
| Other operating expenses                                                                |   |   | 1,499 |   |   |   | 1,476 |   |   |   | 1,268 |   |
| Total expenses                                                                          |   |   | 6,285 |   |   |   | 6,341 |   |   |   | 5,867 |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before income tax expense and equity in undistributed net income of subsidiaries |   |   | 2,667 |   |   |   | 5,480 |   |   |   | 5,645 |   |
| Income tax expense (benefit)                                                            |   |   | 151 |   |   |   | 125 |   |   |   | (86 | ) |
| Income before equity in undistributed net income of subsidiaries                        |   |   | 2,516 |   |   |   | 5,355 |   |   |   | 5,731 |   |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in undistributed net (loss) income of subsidiaries                               |   |   | (4,183 | ) |   |   | 1,918 |   |   |   | 5,739 |   |
| Net (loss) income                                                                       |   |   | (1,667 | ) |   |   | 7,273 |   |   |   | 11,470 |   |
| Preferred stock dividends and discount accretion                                        |   |   | - |   |   |   | 1,876 |   |   |   | - |   |
| Net (loss) income available to common stockholders                                      |   | $ | (1,667 | ) |   | $ | 5,397 |   |   | $ | 11,470 |   |

----

| Condensed Statements of Cash Flows                               |   |
|--------------------------------------------------------------------------------------|--------|
| For the Years Ended December 31,                            |   |
|                                                                                 |   |
| (Dollars in thousands)                                                     |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Cash flows from operating activities:                                                |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                    |   | $ | (1,667 | ) |   | $ | 7,273 |   |   | $ | 11,470 |   |
| Adjustments to reconcile net (loss) income to cash provided by operating activities: |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in undistributed net loss (income) of subsidiaries                            |   |   | 4,183 |   |   |   | (1,918 | ) |   |   | (5,739 | ) |
| Depreciation                                                                         |   |   | 235 |   |   |   | 215 |   |   |   | 233 |   |
| Loss on disposals of premises and equipment                                          |   |   | - |   |   |   | - |   |   |   | 1 |   |
| Stock-based compensation expense                                                     |   |   | 390 |   |   |   | 102 |   |   |   | 91 |   |
| Excess tax benefits from stock-based arrangements                                    |   |   | (20 | ) |   |   | (5 | ) |   |   | (4 | ) |
| Net decrease (increase) in other assets                                              |   |   | 308 |   |   |   | (808 | ) |   |   | (169 | ) |
| Net increase in other liabilities                                                    |   |   | 406 |   |   |   | 114 |   |   |   | 592 |   |
| Net cash provided by operating activities                                            |   |   | 3,835 |   |   |   | 4,973 |   |   |   | 6,475 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchases of premises and equipment                                                  |   |   | (109 | ) |   |   | (333 | ) |   |   | (122 | ) |
| Investment in unconsolidated subsidiary                                              |   |   | (25 | ) |   |   | - |   |   |   | - |   |
| Investment in subsidiaries                                                           |   |   | - |   |   |   | (3,400 | ) |   |   | (85 | ) |
| Net cash used by investing activities                                                |   |   | (134 | ) |   |   | (3,733 | ) |   |   | (207 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (decrease) increase in short-term borrowings                                     |   |   | (3,378 | ) |   |   | 3,378 |   |   |   | - |   |
| Proceeds from long-term debt                                                         |   |   | 3,200 |   |   |   | - |   |   |   | - |   |
| Repayment of long-term debt                                                          |   |   | (497 | ) |   |   | (518 | ) |   |   | (538 | ) |
| Excess tax benefits from stock-based arrangements                                    |   |   | 20 |   |   |   | 5 |   |   |   | 4 |   |
| Proceeds from issuance of preferred stock and warrant                                |   |   | - |   |   |   | 25,000 |   |   |   | - |   |
| Redemption of preferred stock                                                        |   |   | - |   |   |   | (23,525 | ) |   |   | - |   |
| Proceeds from issuance of common stock                                               |   |   | - |   |   |   | 2 |   |   |   | 138 |   |
| Preferred stock dividends paid                                                       |   |   | - |   |   |   | (1,808 | ) |   |   | - |   |
| Common stock dividends paid                                                          |   |   | (2,026 | ) |   |   | (5,386 | ) |   |   | (5,377 | ) |
| Net cash used by financing activities                                                |   |   | (2,681 | ) |   |   | (2,852 | ) |   |   | (5,773 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                 |   |   | 1,020 |   |   |   | (1,612 | ) |   |   | 495 |   |
| Cash and cash equivalents at beginning of year                                       |   |   | 324 |   |   |   | 1,936 |   |   |   | 1,441 |   |
| Cash and cash equivalents at end of year                                             |   | $ | 1,344 |   |   | $ | 324 |   |   | $ | 1,936 |   |

----

| (In thousands, except per share data) |   | FirstQuarter |   |   | SecondQuarter |   |   | ThirdQuarter |   |   | FourthQuarter |   |
|----------------------------------------------------------------|--------|--------------|--------|--------|---------------|--------|--------|--------------|--------|--------|---------------|--------|
| 2010                                                           |   |         |   |   |          |   |   |         |   |   |          |   |
| Interest income                                                |   | $            | 13,828 |   |          | $      | 13,967 |         |   | $      | 13,837        |   |   | $ | 13,829 |   |
| Net interest income                                            |   |         | 10,395 |   |          |   | 10,691 |         |   |   | 10,687        |   |   |   | 10,866 |   |
| Provision for credit losses                                    |   |         | 7,617  |   |          |   | 4,917  |         |   |   | 4,193         |   |   |   | 4,392 |   |
| (Loss) income before income taxes                              |   |         | (2,661 | )      |          |   | 654    |         |   |   | (1,492        | )      |   |   | 1,340 |   |
| Net (loss) income                                              |   |         | (1,562 | )      |          |   | 445    |         |   |   | (1,400        | )      |   |   | 850 |   |
|                                                           |   |         |   |   |          |   |   |         |   |   |          |   |   |   |   |   |
| Basic (loss) earnings per common share                         |   | $            | (0.19  | )      |          | $      | 0.05   |         |   | $      | (0.17         | )      |   | $ | 0.10 |   |
| Diluted (loss) earnings per common share                       |   | $            | (0.19  | )      |          | $      | 0.05   |         |   | $      | (0.17         | )      |   | $ | 0.10 |   |
|                                                           |   |         |   |   |          |   |   |         |   |   |          |   |   |   |   |   |
| 2009                                                           |   |         |   |   |          |   |   |         |   |   |          |   |   |   |   |   |
| Interest income                                                |   | $            | 14,466 |   |          | $      | 14,630 |         |   | $      | 14,913        |   |   | $ | 14,780 |   |
| Net interest income                                            |   |         | 10,058 |   |          |   | 10,086 |         |   |   | 10,428        |   |   |   | 10,806 |   |
| Provision for credit losses                                    |   |         | 1,935  |   |          |   | 1,681  |         |   |   | 1,702         |   |   |   | 3,668 |   |
| Income before income taxes                                     |   |         | 3,590  |   |          |   | 3,059  |         |   |   | 3,148         |   |   |   | 1,888 |   |
| Net income                                                     |   |         | 2,213  |   |          |   | 1,893  |         |   |   | 1,951         |   |   |   | 1,216 |   |
| Preferred stock dividends and discount accretion               |   |         | 337    |   |          |   | 1,539  |         |   |   | -             |   |   |   | - |   |
| Net income available to common stockholders                    |   |         | 1,876  |   |          |   | 354    |         |   |   | 1,951         |   |   |   | 1,216 |   |
|                                                           |   |         |   |   |          |   |   |         |   |   |          |   |   |   |   |   |
| Basic earnings per common share                                |   | $            | 0.22   |   |          | $      | 0.04   |         |   | $      | 0.23          |   |   | $ | 0.14 |   |
| Diluted earnings per common share                              |   | $            | 0.22   |   |          | $      | 0.04   |         |   | $      | 0.23          |   |   | $ | 0.14 |   |

----

|                              |   | Community |      |   | Insurance Products |   |    | Parent  |   |   |   |   |
|-----------------------------------|--------|-----------|-----------|--------|-------------------------|--------|---------|---------|--------|--------|--------|--------|
| (Dollars in thousands)  |   | Banking   |      |   | and Services       |   |    | Company |   |   | Total  |   |
| 2010                              |   |      |      |   |                    |   |    |    |   |   |   |   |
| Interest income                   |   | $         | 55,293    |   |                    | $      | 168     |    |   | $      | -      |   |   | $ | 55,461 |   |
| Interest expense                  |   |      | (12,752   | )      |                    |   | -       |    |   |   | (70    | )      |   |   | (12,822 | ) |
| Provision for credit losses       |   |      | (21,119   | )      |                    |   | -       |    |   |   | -      |   |   |   | (21,119 | ) |
| Noninterest income                |   |      | 7,308     |   |                    |   | 10,739  |    |   |   | (6     | )      |   |   | 18,041 |   |
| Noninterest expense               |   |      | (24,328   | )      |                    |   | (11,410 | )       |   |   | (5,982 | )      |   |   | (41,720 | ) |
| Net intersegment (expense) income |   |      | (5,418    | )      |                    |   | (521    | )       |   |   | 5,939  |   |   |   | - |   |
| (Loss) income before taxes        |   |      | (1,016    | )      |                    |   | (1,024  | )       |   |   | (119   | )      |   |   | (2,159 | ) |
| Income tax benefit (expense)      |   |      | 232       |   |                    |   | 233     |    |   |   | 27     |   |   |   | 492 |   |
| Net (loss) income                 |   | $         | (784      | )      |                    | $      | (791    | )       |   | $      | (92    | )      |   | $ | (1,667 | ) |
|                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| Total assets                      |   | $         | 1,108,712 |   |                    | $      | 18,759  |    |   | $      | 2,840  |   |   | $ | 1,130,311 |   |
|                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| 2009                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| Interest income                   |   | $         | 58,722    |   |                    | $      | 67      |    |   | $      | -      |   |   | $ | 58,789 |   |
| Interest expense                  |   |      | (17,324   | )      |                    |   | -       |    |   |   | (87    | )      |   |   | (17,411 | ) |
| Provision for credit losses       |   |      | (8,986    | )      |                    |   | -       |    |   |   | -      |   |   |   | (8,986 | ) |
| Noninterest income                |   |      | 7,774     |   |                    |   | 11,767  |    |   |   | -      |   |   |   | 19,541 |   |
| Noninterest expense               |   |      | (23,256   | )      |                    |   | (10,882 | )       |   |   | (6,110 | )      |   |   | (40,248 | ) |
| Net intersegment (expense) income |   |      | (5,481    | )      |                    |   | (470    | )       |   |   | 5,951  |   |   |   | - |   |
| Income (loss) before taxes        |   |      | 11,449    |   |                    |   | 482     |    |   |   | (246   | )      |   |   | 11,685 |   |
| Income tax (expense) benefit      |   |      | (4,323    | )      |                    |   | (182    | )       |   |   | 93     |   |   |   | (4,412 | ) |
| Net income (loss)                 |   | $         | 7,126     |   |                    | $      | 300     |    |   | $      | (153   | )      |   | $ | 7,273 |   |
|                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| Total assets                      |   | $         | 1,133,673 |   |                    | $      | 19,390  |    |   | $      | 3,453  |   |   | $ | 1,156,516 |   |
|                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| 2008                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| Interest income                   |   | $         | 61,400    |   |                    | $      | 74      |    |   | $      | -      |   |   | $ | 61,474 |   |
| Interest expense                  |   |      | (21,434   | )      |                    |   | -       |    |   |   | (121   | )      |   |   | (21,555 | ) |
| Provision for credit losses       |   |      | (3,337    | )      |                    |   | -       |    |   |   | -      |   |   |   | (3,337 | ) |
| Noninterest income                |   |      | 7,644     |   |                    |   | 12,707  |    |   |   | (1     | )      |   |   | 20,350 |   |
| Noninterest expense               |   |      | (20,864   | )      |                    |   | (11,967 | )       |   |   | (5,539 | )      |   |   | (38,370 | ) |
| Net intersegment (expense) income |   |      | (4,763    | )      |                    |   | (412    | )       |   |   | 5,175  |   |   |   | - |   |
| Income (loss) before taxes        |   |      | 18,646    |   |                    |   | 402     |    |   |   | (486   | )      |   |   | 18,562 |   |
| Income tax (expense) benefit      |   |      | (7,124    | )      |                    |   | (154    | )       |   |   | 186    |   |   |   | (7,092 | ) |
| Net income (loss)                 |   | $         | 11,522    |   |                    | $      | 248     |    |   | $      | (300   | )      |   | $ | 11,470 |   |
|                              |   |      |      |   |                    |   |    |    |   |   |   |   |   |   |   |   |
| Total assets                      |   | $         | 1,021,715 |   |                    | $      | 20,146  |    |   | $      | 2,780  |   |   | $ | 1,044,641 |   |

----

| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
|---------|---------------------------------------------------------------------------------------|

| Item 9A. | Controls and Procedures. |
|----------|--------------------------|

| Item 10. | Directors, Executive Officers and Corporate Governance. |
|----------|---------------------------------------------------------|

| Item 11. | Executive Compensation. |
|----------|-------------------------|

----

| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
|----------|-------------------------------------------------------------------------------------------------|

|      Plan Category           |   |  Number of securities to beissued upon exercise ofoutstanding options,warrants and rights |         |   |  Weighted-average exerciseprice of outstandingoptions, warrants, andrights |   |        | Number of securitiesremaining available forfuture issuance underequity compensation plans[excluding securitiesreflected in column (a)] |   |
|------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------|----------------------------------------------------------------------------------------------------------|--------|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                       |   | (a)                                                                                                                                              |         |   | (b)                                                                                                      |   |        | (c)                                                                                                                                                                                                |   |
| Equity compensation plans approved by security holders (1) |   |                                                                                                                                             |   8,420 |   |                                                                                                     | $      |  13.17 |                                                                                                                                                                                               |   |   |   575,217 |   |
|                                                       |   |                                                                                                                                             |         |   |                                                                                                     |   |        |                                                                                                                                                                                               |   |   |   |   |
| Equity compensation plans not approved by security holders |   |                                                                                                                                             | -            |   |                                                                                                     |   | -           |                                                                                                                                                                                               |   |   | - |   |
|                                                       |   |                                                                                                                                             |         |   |                                                                                                     |   |        |                                                                                                                                                                                               |   |   |   |   |
| Total                                                      |   |                                                                                                                                             | 8,420        |   |                                                                                                     | $      | 13.17       |                                                                                                                                                                                               |   |   | 575,217 |   |

----

| (1) | In addition to stock options and stock appreciation rights, the 2006 Plan permits the grant of stock awards, stock units, and performance units, and the shares available for issuance shown in column (c) may be granted pursuant to such awards.  Subject to the anti-dilution provisions of the Omnibus Plan, the maximum number of shares of restricted stock that may be granted to any participant in any calendar year is 45,000; the maximum number of restricted stock units that may be granted to any one participant in any calendar year is 45,000; and the maximum dollar value of performance units that may be granted to any one participant in any calendar year is $1,500,000.  As of December 31, 2010, the Company has granted 56,755 shares of restricted stock that are not reflected in column (a) of this table. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
|----------|----------------------------------------------------------------------------|

| Item 14. | Principal Accountant Fees and Services. |
|----------|-----------------------------------------|

----

| Item 15. | Exhibits and Financial Statement Schedules. |
|----------|---------------------------------------------|

|                 | Shore Bancshares, Inc. |
|----------------------|------------------------|
|                 |                   |
| Date: March 15, 2011 | By:                    | /s/ W. Moorhead Vermilye |
|                 |                   | W. Moorhead Vermilye |
|                 |                   | Chief Executive Officer |
|                 |                   |   |

| /s/ Herbert L. Andrew, III |         | Director                     |         | March 15, 2011 |
|----------------------------|--------------|------------------------------|--------------|----------------|
| Herbert L. Andrew, III     |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ Blenda W. Armistead    |         | Director                     |         | March 15, 2011 |
| Blenda W. Armistead        |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ Lloyd L. Beatty, Jr.   |         | Director                     |         | March 15, 2011 |
| Lloyd L. Beatty, Jr.       |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ William W. Duncan      |         | Director                     |         | March 15, 2011 |
| William W. Duncan          |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ James A. Judge         |         | Director                     |         | March 15, 2011 |
| James A. Judge             |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ Neil R. LeCompte       |         | Director                     |         | March 15, 2011 |
| Neil R. LeCompte           |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ Jerry F. Pierson       |         | Director                     |         | March 15, 2011 |
| Jerry F. Pierson           |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ Christopher F. Spurry  |         | Director                     |         | March 15, 2011 |
| Christopher F. Spurry      |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ F. Winfield Trice, Jr. |         | Director                     |         | March 15, 2011 |
| F. Winfield Trice, Jr.     |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ John H. Wilson         |         | Director                     |         | March 15, 2011 |
| John H. Wilson             |         |                         |         |           |
|                       |         |                         |         |           |
| /s/ W. Moorhead Vermilye   |         | Director                     |         | March 15, 2011 |
| W. Moorhead Vermilye       |         | Chief Executive Officer      |         |           |
|                       |         |                         |         |           |
| /s/ Susan E. Leaverton     |         | Treasurer/                   |         | March 15, 2011 |
| Susan E. Leaverton         |    | Principal Accounting Officer |    |           |

----

| Exhibit No. |   | Description                                                                                                                                                                                                                                                                              |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.1(i)           |   | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on December 14, 2000)                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.1(ii)          |   | Articles Supplementary relating to the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference Exhibit 4.1 of the Company’s Form 8-K filed on January 13, 2009)                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.1(iii)         |   | Articles Supplementary relating to the reclassification of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as common stock (incorporated by reference Exhibit 3.1(i) of the Company’s Form 8-K filed on June 17, 2009)                                                  |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.2(i)           |   | Amended and Restated By-Laws (filed herewith)                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.2(ii)          |   | First Amendment to Amended and Restated By-Laws (filed herewith)                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.2(iii)         |   | Second Amendment to Amended and Restated By-Laws (filed herewith)                                                                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                     |
| 3.2(iv)          |   | Third Amendment to Amended and Restated By-Laws (filed herewith)                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                     |
| 4.1              |   | Letter Agreement, including the related Securities Purchase Agreement – Standard Terms, dated January 9, 2009 by and between the Company and the U.S. Department of Treasury (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on January 13, 2009) |
|             |   |                                                                                                                                                                                                                                                                                     |
| 4.2              |   | Letter Agreement dated as of April 15, 2009 between the Company and the U.S. Department of the Treasury (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 16, 2009)                                                                              |
|             |   |                                                                                                                                                                                                                                                                                     |
| 4.3              |   | Substitute Common Stock Purchase Warrant dated January 9, 2009 issued to the U.S. Department of Treasury (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on June 4, 2009)                                                                                |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.1             |   | Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July 31, 2000).                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.2             |   | Summary of Compensation Arrangement for Lloyd L. Beatty, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 1, 2006).                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.3             |   | Amended Summary of Compensation Arrangement for William W. Duncan, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on February 14, 2007, as amended by Form 8-K/A filed on May 3, 2007).                                                            |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.4             |   | Summary of Compensation Arrangement between Centreville National Bank and F. Winfield Trice, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 13, 2007).                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.5             |   | Employment Agreement between The Avon-Dixon Agency, LLC and Mark M. Freestate (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).                                                                        |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.6             |   | Shore Bancshares, Inc. Management Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 21, 2010).                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.7             |   | Shore Bancshares, Inc. Amended and Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February 14, 2007)                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                     |
| 10.8             |   | Deferral Election, Investment Designation, and Beneficiary Designation Forms under the Shore Bancshares, Inc. Amended and Restated Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 2, 2006).     |

----

| 10.9   |         | Form of Centreville National Bank of Maryland Director Indexed Fee Continuation Plan Agreement with Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 12, 2006).                                 |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                                                      |
| 10.10  |         | Form of Amended and Restated Director Indexed Fee Continuation Plan Agreement between Centreville National Bank and Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 7, 2009). |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.11  |         | Form of Centreville National Bank Life Insurance Endorsement Split Dollar Plan Agreement with Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 12, 2006).                                       |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.12  |         | Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005).                                                         |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.13  |         | First Amendment to The Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan for the benefit of W. Moorhead Vermilye (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 7, 2009).            |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.14  |         | Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan Trust Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005).                                         |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.15  |         | 1998 Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed with the SEC on September 25, 1998 (Registration No. 333-64319)).                                                                         |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.16  |         | Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed May 4, 2001 (Registration No. 333-60214)).                                                                    |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.17  |         | Shore Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (incorporated by reference to Appendix A of the Company’s 2006 definitive proxy statement filed on March 24, 2006).                                                                               |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.18  |         | Form of Restricted Stock Award Agreement under the 2006 Stock and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 11, 2007).                                                                        |
|   |         |                                                                                                                                                                                                                                                                      |
| 10.19  |         | Changes to Director Compensation Arrangements (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on February 6, 2006).                                                                                                                      |
|   |         |                                                                                                                                                                                                                                                                      |
| 21     |         | Subsidiaries of the Company (included in the “BUSINESS—General” section of Item 1 of Part I of this Annual Report on Form 10-K).                                                                                                                        |
|   |         |                                                                                                                                                                                                                                                                      |
| 23     |         | Consent of Stegman & Company (filed herewith).                                                                                                                                                                                                                        |
|   |         |                                                                                                                                                                                                                                                                      |
| 31.1   |         | Certifications of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).                                                                                                                                                                             |
|   |         |                                                                                                                                                                                                                                                                      |
| 31.2   |         | Certifications of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).                                                                                                                                                                             |
|   |         |                                                                                                                                                                                                                                                                      |
| 32     |    | Certification pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith).                                                                                                                                                                                     |

----