| Washington                      |   | 91-1815009                        |
|---------------------------------|--------|-----------------------------------|
| (State or Other Jurisdiction of |   | (IRS Employer Identification No.) |
| Incorporation or Organization)  |   |                              |

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

----

|                       |                        |                       |                                                                                                         |   | Page   |
|----------------------------|-----------------------------|----------------------------|--------------------------------------------------------------------------------------------------------------|--------|--------|
| PART  I          |                        |                       |                                                                                                         |   |   |
|                       | Forward Looking Information |                       | 3                                                                                                            |
|                       | Item 1.                     |                       | Business                                                                                                     |   | 4      |
|                       | Item 1A.                    |                       | Risk Factors                                                                                                 |   | 17     |
|                       | Item 1B.                    |                       | Unresolved Staff Comments                                                                                    |   | 23     |
|                       | Item 2.                     |                       | Properties                                                                                                   |   | 23     |
|                       | Item 3.                     |                       | Legal Proceedings                                                                                            |   | 24     |
|                       | Item 4.                     |                       | [Reserved]                                                                                                   |   | 24     |
|                       |                        |                       |                                                                                                         |   |   |
| PART  II         |                        |                       |                                                                                                         |   |   |
|                       | Item 5.                     |                       | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |   | 25     |
|                       | Item 6.                     |                       | Selected Financial Data                                                                                      |   | 26     |
|                       | Item 7.                     |                       | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |   | 27     |
|                       | Item 8.                     |                       | Financial Statements and Supplementary Data                                                                  |   | 57     |
|                       | Item 9.                     |                       | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |   | 57     |
|                       | Item 9A.                    |                       | Controls and Procedures                                                                                      |   | 57     |
|                       | Item 9B.                    |                       | Other Information                                                                                            |   | 59     |
|                       |                        |                       |                                                                                                         |   |   |
| PART  III        |                        |                       |                                                                                                         |   |   |
|                       | Item 10.                    |                       | Directors, Executive Officers and Corporate Governance                                                       |   | 59     |
|                       | Item 11.                    |                       | Executive Compensation                                                                                       |   | 60     |
|                       | Item 12.                    |                       | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |   | 60     |
|                       | Item 13.                    |                       | Certain Relationships and Related Transactions and Director Independence                                     |   | 60     |
|                       | Item 14.                    |                       | Principal Accountant Fees and Services                                                                       |   | 60     |
|                       |                        |                       |                                                                                                         |   |   |
| PART  IV         |                        |                       |                                                                                                         |   |   |
|                       | Item 15.                    |                       | Exhibits and Financial Statement Schedules                                                                   |   | 60     |
| FINANCIAL STATEMENTS  |                        | F-1 – F-37 |
| SIGNATURES                 |                        | 61                         |

----

----

| (dollars in thousands) |   | For Year Ended December 31, |    |
|----------------------------------|--------|-------------------------------------------------|---------|
|                        |   | 2010                                            |    |   | 2009 |   |   | 2008 |   |
| Revenue:                         |   |                                            |    |   |   |   |   |   |   |
| Net Interest Income              |   | $                                               | 22,879  |   |   | $ | 21,753 |   |   | $ | 21,715 |   |
| Noninterest Income               |   |                                            | 8,451   |   |   |   | 7,025 |   |   |   | 5,057 |   |
| Total Revenue                    |   |                                            | 31,330  |   |   |   | 28,778 |   |   |   | 26,772 |   |
| Net Income (Loss)                |   | $                                               | 1,634   |   |   | $ | (6,338 | ) |   | $ | 951 |   |
| Total Assets                     |   | $                                               | 644,403 |   |   | $ | 668,626 |   |   | $ | 625,835 |   |

----

| Year Ended |   | Brokered Deposits |       |   | CDARS  |   |      | Total Outstanding |   |   | Percentage ofTotal Deposits |   |
|-----------------|--------|------------------------|------------|--------|--------|--------|-----------|------------------------|--------|--------|---------------------------------------|--------|
|            |   |                   |       |   |   |   |      |                   |   |   |                                  |   |
| 2010            |   | $                      | 27,220,000 |   |   | $      | 1,984,000 |                   |   | $      | 29,204,000                            |   |   |   | 5.4 | % |
| 2009            |   | $                      | 60,220,000 |   |   | $      | 716,000   |                   |   | $      | 60,936,000                            |   |   |   | 10.7 | % |
| 2008            |   | $                      | 35,000,000 |   |   | $      | 305,000   |                   |   | $      | 35,305,000                            |   |   |   | 6.9 | % |

----

----

----

----

----

----

----

----

----

|   | · | Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with broad rule making, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts.  Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Require the federal banking regulators to promulgate new capital regulations and seek to make their capital requirements countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Provide for new disclosures and other requirements relating to executive compensation and corporate governance. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | · | Change the assessment base for federal deposit insurance from deposits to average total assets minus tangible equity. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

|   | · | Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non interest-bearing demand transaction accounts at all insured depository institutions. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Effective July 21, 2011, repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Require all deposit institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | Total reported loans for construction, land development and other land representing 100% or more of the bank's capital; or |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | · | Total commercial real estate loans representing 300% or more of the bank's total capital. |
|--------|--------|-------------------------------------------------------------------------------------------|

----

|   | · | An increase in loan delinquencies, problem assets and foreclosures; |
|--------|--------|---------------------------------------------------------------------|

|   | · | A decrease in the demand for loans and other products and services; |
|--------|--------|---------------------------------------------------------------------|

|   | · | An increase or decrease in the usage of unfunded commitments; or |
|--------|--------|------------------------------------------------------------------|

|   | · | A decrease in the value of loan collateral, especially real estate, which in turn may reduce a customer's borrowing power and significantly increase our exposure to particular loans. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

----

----

----

|           |   | 2010               |   |   | 2009   |   |
|----------------|--------|--------------------|--------|--------|--------|--------|
|      |   | Estimated No. |   |   |   |   |   |   |   |   | Estimated No. |   |   |   |   |   |   |   |
|           |   | Shares Traded |   |   | High   |   |   | Low |   |   | Shares Traded |   |   | High |   |   | Low |   |
|           |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter  |   |               | 48,400 |   |   | $      | 4.20 |   |   | $ | 3.65 |   |   |   | 79,500 |   |   | $ | 7.50 |   |   | $ | 5.50 |   |
| Second Quarter |   |               | 24,200 |   |   | $      | 4.95 |   |   | $ | 3.65 |   |   |   | 79,500 |   |   | $ | 6.25 |   |   | $ | 4.50 |   |
| Third Quarter  |   |               | 29,400 |   |   | $      | 4.45 |   |   | $ | 3.85 |   |   |   | 30,100 |   |   | $ | 5.60 |   |   | $ | 4.10 |   |
| Fourth Quarter |   |               | 44,700 |   |   | $      | 5.00 |   |   | $ | 4.01 |   |   |   | 114,400 |   |   | $ | 4.80 |   |   | $ | 3.65 |   |

----

|                                               |   | As of and For the Year Ended December 31, |    |
|----------------------------------------------------|--------|-----------------------------------------------------------------------------------|---------|
|                                               |   | 2010                                                                              |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   |  2006 |   |
| Operations Data                                    |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                |   | $                                                                                 | 22,879  |   |   | $ | 21,753 |   |   | $ | 21,715 |   |   | $ | 24,503 |   |   | $ | 23,867 |   |
| Provision for credit losses                        |   |                                                                              | 3,600   |   |   |   | 9,944 |   |   |   | 4,791 |   |   |   | 482 |   |   |   | 625 |   |
| Non-interest income                                |   |                                                                              | 8,451   |   |   |   | 7,025 |   |   |   | 5,057 |   |   |   | 4,475 |   |   |   | 4,176 |   |
| Non-interest expense                               |   |                                                                              | 26,400  |   |   |   | 29,691 |   |   |   | 21,591 |   |   |   | 20,379 |   |   |   | 18,118 |   |
| Provision (benefit) for income taxes               |   |                                                                              | (304    | ) |   |   | (4,519 | ) |   |   | (561 | ) |   |   | 2,086 |   |   |   | 2,749 |   |
| Net income (loss)                                  |   |                                                                              | 1,634   |   |   |   | (6,338 | ) |   |   | 951 |   |   |   | 6,031 |   |   |   | 6,551 |   |
| Net income (loss) per share:                       |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic (1)                                          |   | $                                                                                 | 0.16    |   |   | $ | (0.74 | ) |   | $ | 0.13 |   |   | $ | 0.83 |   |   | $ | 0.92 |   |
| Diluted (1)                                        |   |                                                                              | 0.16    |   |   |   | (0.74 | ) |   |   | 0.13 |   |   |   | 0.82 |   |   |   | 0.90 |   |
|                                               |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared                                 |   |                                                                              | – |   |   |   | – |   |   |   | 333 |   |   |   | 4,955 |   |   |   | 4,893 |   |
| Dividends declared per share (1)                   |   |                                                                              | – |   |   |   | – |   |   |   | 0.05 |   |   |   | 0.75 |   |   |   | 0.75 |   |
| Dividend payout ratio                              |   |                                                                              | – |   |   |   | – |   |   |   | 35 | % |   |   | 82 | % |   |   | 75 | % |
|                                               |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance Ratios                                 |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                               |   |                                                                              | 4.10    | % |   |   | 3.76 | % |   |   | 4.23 | % |   |   | 4.92 | % |   |   | 5.13 | % |
| Net interest margin(2)                             |   |                                                                              | 3.96    | % |   |   | 3.62 | % |   |   | 4.12 | % |   |   | 4.82 | % |   |   | 5.04 | % |
| Efficiency ratio(3)                                |   |                                                                              | 84.26   | % |   |   | 103.17 | % |   |   | 80.65 | % |   |   | 70.33 | % |   |   | 64.61 | % |
| Return on average assets                           |   |                                                                              | 0.25    | % |   |   | (0.96 | )% |   |   | 0.16 | % |   |   | 1.08 | % |   |   | 1.26 | % |
| Return on average equity                           |   |                                                                              | 2.77    | % |   |   | (11.63 | )% |   |   | 1.83 | % |   |   | 11.46 | % |   |   | 13.16 | % |
|                                               |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data                                 |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                       |   | $                                                                                 | 644,403 |   |   | $ | 668,626 |   |   | $ | 625,835 |   |   | $ | 565,587 |   |   | $ | 562,384 |   |
| Loans, net                                         |   |                                                                              | 455,064 |   |   |   | 471,154 |   |   |   | 478,695 |   |   |   | 433,904 |   |   |   | 420,768 |   |
| Total deposits                                     |   |                                                                              | 544,954 |   |   |   | 567,695 |   |   |   | 511,307 |   |   |   | 467,336 |   |   |   | 466,841 |   |
| Total borrowings                                   |   |                                                                              | 35,328  |   |   |   | 39,880 |   |   |   | 60,757 |   |   |   | 37,446 |   |   |   | 36,809 |   |
| Shareholders’ equity                         |   |                                                                              | 59,769  |   |   |   | 57,649 |   |   |   | 50,074 |   |   |   | 50,699 |   |   |   | 48,984 |   |
| Book value per share (1)                      |   |                                                                              | 5.90    |   |   |   | 5.70 |   |   |   | 6.84 |   |   |   | 6.98 |   |   |   | 6.83 |   |
| Tangible book value per share(1)                   |   |                                                                              | 4.66    |   |   |   | 4.44 |   |   |   | 5.08 |   |   |   | 5.19 |   |   |   | 4.99 |   |
| Equity to assets ratio                             |   |                                                                              | 9.28    | % |   |   | 8.62 | % |   |   | 8.00 | % |   |   | 8.96 | % |   |   | 8.71 | % |
|                                               |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Asset Quality Ratios                               |   |                                                                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming loans to total loans                 |   |                                                                              | 2.15    | % |   |   | 3.36 | % |   |   | 3.49 | % |   |   | 1.46 | % |   |   | 1.82 | % |
| Allowance for credit losses to total loans         |   |                                                                              | 2.28    | % |   |   | 2.30 | % |   |   | 1.57 | % |   |   | 1.14 | % |   |   | 0.95 | % |
| Allowance for credit losses to nonperforming loans |   |                                                                              | 106.18  | % |   |   | 68.49 | % |   |   | 44.97 | % |   |   | 78.10 | % |   |   | 52.30 | % |
| Nonperforming assets to total assets               |   |                                                                              | 2.57    | % |   |   | 3.42 | % |   |   | 3.80 | % |   |   | 1.13 | % |   |   | 1.37 | % |

----

|   | · | Total assets at December 31, 2010, decreased by $24,223,000, or 3.6%, to $644,403,000 compared to $668,626,000 at the end of 2009.  Decreases in loans and investments available-for-sale were the primary contributors to overall asset decline, which were partially offset by higher interest-earning deposits with banks. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The Bank remains well capitalized with a total risk-based capital ratio of 14.62% at December 31, 2010, compared to 13.07% at December 31, 2009.  Tier one leverage ratio was 9.80% at December 31, 2010, compared to 9.03% at December 31, 2009. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Asset quality continues to improve with non-performing assets decreasing during 2010 by $6,280,000, or 27.5%, to $16,579,000 at December 31, 2010, the lowest level since 2007.  The decrease was primarily in the non-performing construction and land development sector which accounts for $9,572,000, or 57.7%, of nonperforming assets at December 31, 2010, compared to $14,736,000, or 64.5%, at December 31, 2009. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Construction, land acquisition and other land loans declined $18,556,000, or 28.6%, during 2010.  This segment of the portfolio, totaling $46,256,000 at December 31, 2010, accounts for 9.7% of the total loan portfolio at year-end. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Core deposits, which include demand, savings, money market and certificates of deposits less than $100,000, increased during 2010 by $22,571,000, or 5.7%, to $418,651,000 and comprises 76.8% of total deposits at year-end.  The increase in core deposits was offset by planned decreases during 2010 in retail certificates of deposits and brokered certificates of deposits of $24,144,000 and $31,732,000, respectively, resulting in a net decrease overall in total deposits of $22,741,000, or 4.0%, during 2010. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | As a result of core deposit growth, lower borrowings and increased interest bearing deposits with banks, the Company's liquidity ratio of approximately 42% at December 31, 2010, translates into over $270 million in available funding for general operations and to meet loan and deposit needs. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Net interest income increased to $22,879,000 compared to $21,753,000 in 2009 due to decreases in rates paid on deposits and a decrease in non-accrual loans.  Net interest margin for 2010 increased 34 basis points to 3.96% compared to 3.62% in 2009. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The provision for credit losses decreased significantly by $6,344,000, or 63.8%, to $3,600,000 for 2010.  The decrease is the result of overall improvement in credit quality as evidenced by decreases in net charge-offs and impaired loans.  Net charge-offs totaled $4,075,000 during 2010 compared to $6,475,000 in 2009.  Impaired loans totaled $14,673,000 at December 31, 2010 compared to $25,738,000 one year ago.  While credit quality has improved during the year, non-performing loans remain elevated compared to long-term historical levels and remain concentrated primarily in the residential construction and land development loan portfolios. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Non-interest income increased $1,426,000, or 20.3%, to $8,451,000 for 2010 due to increased gain on sales of OREO and service charges on deposit accounts, which were partially offset by a decrease in gain on sales of loans. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Non-interest expense decreased $3,291,000, or 11.1%, to $26,400,000 for 2010.  The decrease is primarily attributable to decreases in FDIC assessments, OREO write-downs, professional services and commissions paid on loans sold in the secondary market. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In 2010, return on average assets and return on average equity increased to 0.25% and 2.77%, respectively, compared to (0.96)% and (11.63)%, respectively, in 2009. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Improve asset quality by proactively managing problem assets, selectively reducing loan concentrations, selling OREO and managing credit exposures.  Non-performing assets decreased in 2010 to $16,579,000, or 2.57% of total assets, compared to $22,859,000, or 3.42% of non-performing assets in 2009.  Additionally, net charge-offs, provision for credit losses, and OREO write-downs all showed significant improvement as stated above under “EXECUTIVE OVERVIEW” during 2010. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintain capital ratios by controlling the asset growth rate, producing positive returns to shareholders and utilizing government guarantees in connection with new loan originations.  Capital ratios increased during the year due to a combination of earnings retention and a decrease in total average assets and an increase in government guaranteed loans. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Improve net interest margin by reinvesting short-term cash and cash equivalents into higher yielding assets, reducing loans on non-accrual status and growing low cost deposits.  Net interest margin increased from 3.62% in 2009 to 3.96% for the year ended December 31, 2010. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintain a strong liquidity position through increased core deposit balances and borrowing facilities available through the FHLB and the Federal Reserve Bank (“FRB”).  Interest-bearing cash balances and federal funds sold increased $14.3 million, or 35.6%, during 2010 to $54,330,000.  Credit facilities with the FHLB and FRB are fully secured and remain an important source of liquidity. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Reduce controllable operating expenses through fiscal restraint and increased emphasis on non-interest income.  Non-interest income increased $1,426,000, or 20.3%, to $8,451,000 during 2010 compared to the prior year.  In addition, total non-interest expense decreased $3,291,000, or 11.1%, to $26,400,000 during 2010 compared to the prior year. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Grow core areas of the balance sheet including commercial real estate and commercial loans and retail deposits through the quality and breadth of our branch network, superior sales practices, competitive rates, and an emphasis on customer and employee satisfaction, which would enable us to exploit local market opportunities.  The Company focused on growing demand, money market and savings deposit balances during 2010 which combined increased $33,135,000, or 10.5%, during the year.  This was offset by a planned reduction in brokered deposits and other higher costing retail certificates of deposits totaling $55,876,000.  This change in the mix of our deposits contributed to an improvement in costs of funds as the decline in certificates of deposits was replaced by lower cost deposit products.  Commercial real estate loan balances increased $10,831,000, or5.3%, during 2010; however commercial and agricultural loan balances decreased $8,550,000, or 9.2%, during the same period.  Pricing for commercial loans has been extremely competitive.  Additionally, there has been a decrease in loan demand during this current economic recession. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Continue to improve asset quality through proactive management of problem loans, monitoring existing performing loans, and selling OREO properties. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Increase net interest margin through reinvestment of short-term cash and cash equivalents into higher yielding loans and a reduction in rates paid on junior subordinated debentures. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Increase core deposits and other retail deposits.  Continue to focus on total customer banking relationships and superior customer service.  In addition to our retail branch network, we maintain an excellent suite of cash management services including business remote check deposits, positive pay, payroll services and automated clearing house services that give us a competitive advantage over smaller institutions and enables us to compete with larger banks operating in our market areas. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Expand our presence within our existing market areas with strategic emphasis on northern Clatsop County, Oregon and Skagit County, Washington.  In addition to these areas, we believe the consolidation of problem financial institutions in Western Washington will provide opportunities to increase market share for locally owned community institutions with local decision making authority, such as Bank of the Pacific. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (dollars in thousands)                      |   | 2010   |   |   | Increase(Decrease)Amount |   |   | %      |   |   | 2009   |   |   | Increase(Decrease)Amount |    |   | %      |   |    | 2008   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------------------------|---------|--------|--------|--------|---------|--------|--------|
|                                                  |   |   |   |   |                     |   |   |   |   |   |   |   |   |                     |    |   |   |   |    |   |   |   |   |   |   |   |   |   |
| Interest and dividend income                          |   | $      | 30,860 |   |                     | $      | (1,960 | )      |   |   | (6.0   | )      |   | $                        | 32,820  |   |   | $      | (893    | )      |   |   | (2.7 | ) |   | $ | 33,713 |   |
| Interest expense                                      |   |   | 7,981  |   |                     |   | (3,086 | )      |   |   | (27.9  | )      |   |                     | 11,067  |   |   |   | (931    | )      |   |   | (7.8 | ) |   |   | 11,998 |   |
| Net interest income                                   |   |   | 22,879 |   |                     |   | 1,126  |   |   |   | 5.2    |   |   |                     | 21,753  |   |   |   | 38      |   |   |   | 0.2 |   |   |   | 21,715 |   |
| Provision for credit losses                           |   |   | 3,600  |   |                     |   | (6,344 | )      |   |   | (63.8  | )      |   |                     | 9,944   |   |   |   | 5,153   |   |   |   | 107.6 |   |   |   | 4,791 |   |
| Net interest income after provision for credit losses |   |   | 19,279 |   |                     |   | 7,470  |   |   |   | 63.3   |   |   |                     | 11,809  |   |   |   | (5,115  | )      |   |   | (30.2 | ) |   |   | 16,924 |   |
| Other operating income                                |   |   | 8,451  |   |                     |   | 1,426  |   |   |   | 20.3   |   |   |                     | 7,025   |   |   |   | 1,968   |   |   |   | 38.9 |   |   |   | 5,057 |   |
| Other operating expense                               |   |   | 26,400 |   |                     |   | (3,291 | )      |   |   | (11.1  | )      |   |                     | 29,691  |   |   |   | 8,100   |   |   |   | 37.5 |   |   |   | 21,591 |   |
| Income (loss) before income taxes                     |   |   | 1,330  |   |                     |   | 12,187 |   |   |   | 112.3  |   |   |                     | (10,857 | )      |   |   | (11,247 | )      |   |   | (2,883.8 | ) |   |   | 390 |   |
| Income taxes (benefit)                                |   |   | (304   | )      |                     |   | 4,215  |   |   |   | 93.3   |   |   |                     | (4,519  | )      |   |   | (3,958  | )      |   |   | 705.5 |   |   |   | (561 | ) |
| Net income (loss)                                     |   | $      | 1,634  |   |                     | $      | 7,972  |   |   |   | 125.8  |   |   | $                        | (6,338  | )      |   | $      | (7,289  | )      |   |   | (766.5 | ) |   | $ | 951 |   |

----

----

|                                                     |   | Year Ended December 31, |    |
|---------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                     |   | 2010                                   |    |   | 2009 |   |   | 2008 |   |
|                                                     |   |                                   |    |   | Interest |   |   |   |   |   |   |   |   | Interest |   |   |   |   |   |   |   |   | Interest |   |   |   |   |
| (dollars in thousands)                              |   | Average                                |    |   | Income |   |   | Avg |   |   | Average |   |   | Income |   |   | Avg |   |   | Average |   |   | Income |   |   | Avg |   |
|                                                     |   | Balance                                |    |   | (Expense) |   |   | Rate |   |   | Balance |   |   | (Expense) |   |   | Rate |   |   | Balance |   |   | (Expense) |   |   | Rate |   |
| Assets                                                        |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning assets:                                               |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1)                                                     |   | $                                      | 485,872 |   |   | $ | 28,835 |   |   |   | 5.93 | % |   | $ | 500,796 |   |   | $ | 30,065 |   |   |   | 6.00 | % |   | $ | 471,338 |   |   | $ | 31,385 |   |   |   | 6.66 | % |
| Investment securities:                                        |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                       |   |                                   | 26,451  |   |   |   | 1,235 |   |   |   | 4.67 |   |   |   | 35,085 |   |   |   | 1,868 |   |   |   | 5.32 |   |   |   | 31,090 |   |   |   | 1,648 |   |   |   | 5.30 |   |
| Tax-Exempt (1)                                                |   |                                   | 24,421  |   |   |   | 1,498 |   |   |   | 6.13 |   |   |   | 25,033 |   |   |   | 1,580 |   |   |   | 6.31 |   |   |   | 19,440 |   |   |   | 1,193 |   |   |   | 6.14 |   |
| Total investment securities                                   |   |                                   | 50,872  |   |   |   | 2,733 |   |   |   | 5.37 |   |   |   | 60,118 |   |   |   | 3,448 |   |   |   | 5.74 |   |   |   | 50,530 |   |   |   | 2,841 |   |   |   | 5.62 |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank Stock                                  |   |                                   | 3,183   |   |   |   | – |   |   |   | – |   |   |   | 3,135 |   |   |   | – |   |   |   | – |   |   |   | 2,022 |   |   |   | 19 |   |   |   | 0.94 |   |
| Federal funds sold and deposits in banks                      |   |                                   | 37,885  |   |   |   | 116 |   |   |   | 0.31 |   |   |   | 36,610 |   |   |   | 109 |   |   |   | 0.30 |   |   |   | 3,787 |   |   |   | 44 |   |   |   | 1.16 |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total earnings assets / interest income                       |   | $                                      | 577,812 |   |   | $ | 31,684 |   |   |   | 5.48 | % |   | $ | 600,659 |   |   | $ | 33,622 |   |   |   | 5.60 | % |   | $ | 527,677 |   |   | $ | 34,289 |   |   |   | 6.50 | % |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                       |   |                                   | 10,399  |   |   |   |   |   |   |   |   |   |   |   | 10,470 |   |   |   |   |   |   |   |   |   |   |   | 11,454 |   |   |   |   |   |   |   |   |   |
| Premises and equipment (net)                                  |   |                                   | 15,580  |   |   |   |   |   |   |   |   |   |   |   | 16,402 |   |   |   |   |   |   |   |   |   |   |   | 16,522 |   |   |   |   |   |   |   |   |   |
| Other real estate owned                                       |   |                                   | 8,071   |   |   |   |   |   |   |   |   |   |   |   | 9,327 |   |   |   |   |   |   |   |   |   |   |   | 1,587 |   |   |   |   |   |   |   |   |   |
| Other assets                                                  |   |                                   | 43,782  |   |   |   |   |   |   |   |   |   |   |   | 34,886 |   |   |   |   |   |   |   |   |   |   |   | 33,361 |   |   |   |   |   |   |   |   |   |
| Allowance for credit losses                                   |   |                                   | (11,413 | ) |   |   |   |   |   |   |   |   |   |   | (9,621 | ) |   |   |   |   |   |   |   |   |   |   | (5,875 | ) |   |   |   |   |   |   |   |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                  |   | $                                      | 644,231 |   |   |   |   |   |   |   |   |   |   | $ | 662,123 |   |   |   |   |   |   |   |   |   |   | $ | 584,726 |   |   |   |   |   |   |   |   |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders' Equity                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                                 |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                     |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and interest-bearing demand                           |   | $                                      | 238,123 |   |   | $ | (1,729 | ) |   |   | 0.73 | % |   | $ | 210,004 |   |   | $ | (1,803 | ) |   |   | 0.86 | % |   | $ | 204,539 |   |   | $ | (2,903 | ) |   |   | 1.42 | % |
| Time certificates                                             |   |                                   | 220,618 |   |   |   | (4,845 | ) |   |   | 2.20 |   |   |   | 266,929 |   |   |   | (7,461 | ) |   |   | 2.80 |   |   |   | 186,319 |   |   |   | (6,891 | ) |   |   | 3.70 |   |
| Total deposits                                                |   |                                   | 458,741 |   |   |   | (6,574 | ) |   |   | 1.43 |   |   |   | 476,933 |   |   |   | (9,264 | ) |   |   | 1.94 |   |   |   | 390,858 |   |   |   | (9,794 | ) |   |   | 2.51 |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                                         |   |                                   | 7,502   |   |   |   | (204 | ) |   |   | 2.72 |   |   |   | 3,107 |   |   |   | (26 | ) |   |   | 0.84 |   |   |   | 13,398 |   |   |   | (349 | ) |   |   | 2.61 |   |
| Long-term borrowings                                          |   |                                   | 15,674  |   |   |   | (645 | ) |   |   | 4.12 |   |   |   | 31,660 |   |   |   | (1,164 | ) |   |   | 3.68 |   |   |   | 26,336 |   |   |   | (991 | ) |   |   | 3.76 |   |
| Secured borrowings                                            |   |                                   | 951     |   |   |   | (61 | ) |   |   | 6.41 |   |   |   | 1,326 |   |   |   | (75 | ) |   |   | 5.66 |   |   |   | 1,387 |   |   |   | (94 | ) |   |   | 6.78 |   |
| Junior subordinated debentures                                |   |                                   | 13,403  |   |   |   | (497 | ) |   |   | 3.71 |   |   |   | 13,403 |   |   |   | (538 | ) |   |   | 4.01 |   |   |   | 13,403 |   |   |   | (770 | ) |   |   | 5.74 |   |
| Total borrowings                                              |   |                                   | 37,530  |   |   |   | (1,407 | ) |   |   | 3.75 |   |   |   | 49,496 |   |   |   | (1,803 | ) |   |   | 3.64 |   |   |   | 54,524 |   |   |   | (2,204 | )  |   |   | 4.04 |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities/ Interest expense          |   | $                                      | 496,271 |   |   | $ | (7,981 | ) |   |   | 1.61 | % |   | $ | 526,429 |   |   | $ | (11,067 | ) |   |   | 2.10 | % |   | $ | 445,382 |   |   | $ | (11,998 | ) |   |   | 2.69 | % |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                               |   |                                   | 84,556  |   |   |   |   |   |   |   |   |   |   |   | 77,282 |   |   |   |   |   |   |   |   |   |   |   | 82,620 |   |   |   |   |   |   |   |   |   |
| Other liabilities                                             |   |                                   | 4,361   |   |   |   |   |   |   |   |   |   |   |   | 3,900 |   |   |   |   |   |   |   |   |   |   |   | 4,750 |   |   |   |   |   |   |   |   |   |
| Shareholders' equity                                          |   |                                   | 59,043  |   |   |   |   |   |   |   |   |   |   |   | 54,512 |   |   |   |   |   |   |   |   |   |   |   | 51,974 |   |   |   |   |   |   |   |   |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders' equity                    |   | $                                      | 644,231 |   |   |   |   |   |   |   |   |   |   | $ | 662,123 |   |   |   |   |   |   |   |   |   |   | $ | 584,726 |   |   |   |   |   |   |   |   |   |
|                                                          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income (1)                                       |   |                                   |    |   |   | $ | 23,703 |   |   |   |   |   |   |   |   |   |   | $ | 22,555 |   |   |   |   |   |   |   |   |   |   | $ | 22,291 |   |   |   |   |   |
| Net interest income as a percentage of average earning assets |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                               |   |                                   |    |   |   |   |   |   |   |   | 5.48 | % |   |   |   |   |   |   |   |   |   |   | 5.60 | % |   |   |   |   |   |   |   |   |   |   | 6.50 | % |
| Interest expense                                              |   |                                   |    |   |   |   |   |   |   |   | 1.38 | % |   |   |   |   |   |   |   |   |   |   | 1.84 | % |   |   |   |   |   |   |   |   |   |   | 2.27 | % |
| Net interest income                                           |   |                                   |    |   |   |   |   |   |   |   | 4.10 | % |   |   |   |   |   |   |   |   |   |   | 3.76 | % |   |   |   |   |   |   |   |   |   |   | 4.23 | % |
| Net interest margin (2)                                       |   |                                   |    |   |   |   |   |   |   |   | 3.96 | % |   |   |   |   |   |   |   |   |   |   | 3.62 | % |   |   |   |   |   |   |   |   |   |   | 4.12 | % |
| Tax equivalent adjustment (1)                                 |   |                                   |    |   |   | $ | 824 |   |   |   |   |   |   |   |   |   |   | $ | 802 |   |   |   |   |   |   |   |   |   |   | $ | 576 |   |   |   |   |   |

----

----

|                                                   |   | 2010 compared to 2009      |    |   | 2009 compared to 2008      |   |
|-------------------------------------------------------------|--------|-------------------------------------------|---------|--------|-------------------------------------------|--------|
|                                                   |   | Increase (decrease) due to |    |   | Increase (decrease) due to |   |
| (dollars in thousands)                                      |   | Volume                                    |    |   | Rate                                      |   |   | Net |   |   | Volume |   |   | Rate |   |   | Net |   |
| Interest earned on:                                         |   |                                      |    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                       |   | $                                         | (889    | )      |                                      | $      | (341 | ) |   | $ | (1,230 | ) |   | $ | 2,170 |   |   | $ | (3,490 | ) |   | $ | (1,320 | ) |
| Securities:                                                 |   |                                      |    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                     |   |                                      | (422    | )      |                                      |   | (211 | ) |   |   | (633 | ) |   |   | 212 |   |   |   | 8 |   |   |   | 220 |   |
| Tax-exempt                                                  |   |                                      | (38     | )      |                                      |   | (44 | ) |   |   | (82 | ) |   |   | 352 |   |   |   | 35 |   |   |   | 387 |   |
| Total securities                                            |   |                                      | (460    | )      |                                      |   | (255 | ) |   |   | (715 | ) |   |   | 564 |   |   |   | 43 |   |   |   | 607 |   |
| Federal Home Loan Bank stock                                |   |                                      | – |   |                                      |   | – |   |   |   | – |   |   |   | 7 |   |   |   | (26 | ) |   |   | (19 | ) |
| Fed funds sold and interest bearing deposits in other banks |   |                                      | 4       |   |                                      |   | 3 |   |   |   | 7 |   |   |   | 120 |   |   |   | (55 | ) |   |   | 65 |   |
| Total interest earning assets                               |   |                                      | (1,345  | )      |                                      |   | (593 | ) |   |   | (1,938 | ) |   |   | 2,861 |   |   |   | (3,528 | ) |   |   | (667 | ) |
|                                                        |   |                                      |    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest paid on:                                           |   |                                      |    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and interest bearing demand deposits                |   |                                      | (224    | )      |                                      |   |   298 |   |   |   |   74 |   |   |   | (76 | ) |   |   |   1,176 |   |   |   |   1,100 |   |
| Time deposits                                               |   |                                      | 1,170   |   |                                      |   | 1,446 |   |   |   | 2,616 |   |   |   | (2,516 | ) |   |   | 1,946 |   |   |   | (570 | ) |
| Total borrowings                                            |   |                                      | 447     |   |                                      |   | (51 | ) |   |   | 396 |   |   |   | 194 |   |   |   | 207 |   |   |   | 401 |   |
| Total interest bearing liabilities                          |   |                                      | 1,393   |   |                                      |   | 1,693 |   |   |   | 3,086 |   |   |   | (2,398 | ) |   |   | 3,329 |   |   |   | 931 |   |
| Change in net interest income                               |   | $                                         | 48      |   |                                      | $      | 1,100 |   |   | $ | 1,148 |   |   | $ | 463 |   |   | $ | (199 | ) |   | $ | 264 |   |

----

| (dollars in thousands)                   |   | 2010   |   |   | Increase(Decrease)Amount |   |   | %      |   |   | 2009   |   |   | Increase(Decrease)Amount |   |   | %      |   |   | 2008   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------------------------|--------|--------|--------|--------|--------|--------|--------|
| Service charges on deposit accounts                |   | $      | 1,783  |   |                     | $      | 134    |   |   |   | 8.1    |   |   | $                        | 1,649  |   |   | $      | 72     |   |   |   | 4.6 |   |   | $ | 1,577 |   |
| Net gain (loss) on sale of other real estate owned |   |   | 260    |   |                     |   | 1,678  |   |   |   | 118.3  |   |   |                     | (1,418 | )      |   |   | (1,808 | )      |   |   | (463.6 | ) |   |   | 390 |   |
| Net gains on sales of loans                        |   |   | 4,168  |   |                     |   | (470   | )      |   |   | (10.1  | )      |   |                     | 4,638  |   |   |   | 3,212  |   |   |   | 225.3 |   |   |   | 1,426 |   |
| Net gains (loss) on sales of securities            |   |   | 422    |   |                     |   | (62    | )      |   |   | (12.8  | )      |   |                     | 484    |   |   |   | 649    |   |   |   | 393.3 |   |   |   | (165 | ) |
| Earnings on bank owned life insurance              |   |   | 541    |   |                     |   | 52     |   |   |   | 10.6   |   |   |                     | 489    |   |   |   | (118   | )      |   |   | (19.4 | ) |   |   | 607 |   |
| Other operating income                             |   |   | 1,277  |   |                     |   | 94     |   |   |   | 7.9    |   |   |                     | 1,183  |   |   |   | (39    | )      |   |   | (3.2 | ) |   |   | 1,222 |   |
|                                               |   |   |   |   |                     |   |   |   |   |   |   |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total non-interest income                          |   | $      | 8,451  |   |                     | $      | 1,426  |   |   |   | 20.3   |   |   | $                        | 7,025  |   |   | $      | 1,968  |   |   |   | 38.9 |   |   | $ | 5,057 |   |

----

| (dollars in thousands)         |   | 2010   |   |   | Increase(Decrease)Amount |   |   | %      |   |   | 2009  |   |   | Increase(Decrease)Amount |   |   | %      |   |   | 2008   |   |
|--------------------------------|--------|--------|--------|--------|--------------------------|--------|--------|--------|--------|--------|-------|--------|--------|--------------------------|--------|--------|--------|--------|--------|--------|--------|
| Salaries and employee benefits |   | $      | 13,530 |   |                     | $      | (28    | )      |   |   | (0.2  | )      |   | $                        | 13,558 |   |   | $      | 1,177  |   |   |   | 9.5 |   |   | $ | 12,381 |   |
| Occupancy and equipment        |   |   | 2,766  |   |                     |   | (13    | )      |   |   | (0.5  | )      |   |                     | 2,779  |   |   |   | (76    | )      |   |   | (2.7 | ) |   |   | 2,855 |   |
| State taxes                    |   |   | 480    |   |                     |   | 44     |   |   |   | 10.1  |   |   |                     | 436    |   |   |   | 70     |   |   |   | 19.1 |   |   |   | 366 |   |
| Data processing                |   |   | 1,247  |   |                     |   | 1      |   |   |   | 0.1   |   |   |                     | 1,246  |   |   |   | 482    |   |   |   | 63.1 |   |   |   | 764 |   |
| Professional services          |   |   | 767    |   |                     |   | (99    | )      |   |   | (11.4 | )      |   |                     | 866    |   |   |   | (55    | )      |   |   | (6.0 | ) |   |   | 921 |   |
| FDIC and state assessments     |   |   | 1,361  |   |                     |   | (441   | )      |   |   | (24.5 | )      |   |                     | 1,802  |   |   |   | 1,588  |   |   |   | 742.1 |   |   |   | 214 |   |
| OREO write-downs               |   |   | 1,272  |   |                     |   | (2,417 | )      |   |   | (65.5 | )      |   |                     | 3,689  |   |   |   | 3,689  |   |   |   | n/a |   |   |   | – |   |
| OREO operating expenses        |   |   | 614    |   |                     |   | 107    |   |   |   | 21.1  |   |   |                     | 507    |   |   |   | 419    |   |   |   | 476.1 |   |   |   | 88 |   |
| Marketing and advertising      |   |   | 409    |   |                     |   | 14     |   |   |   | 3.5   |   |   |                     | 395    |   |   |   | (133   | )      |   |   | (25.2 | ) |   |   | 528 |   |
| Other expense                  |   |   | 3,954  |   |                     |   | (459   | )      |   |   | (10.4 | )      |   |                     | 4,413  |   |   |   | 939    |   |   |   | 27.0 |   |   |   | 3,474 |   |
| Total non-interest expense     |   | $      | 26,400 |   |                     | $      | (3,291 | )      |   |   | (11.1 | )      |   | $                        | 29,691 |   |   | $      | 8,100  |   |   |   | 37.5 |   |   | $ | 21,591 |   |

----

----

| Held To Maturity                            |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| (dollars in thousands)                           |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Obligations of states and political subdivisions |   | $      | 6,084  |   |   | $      | 6,958  |   |   | $ | 5,750 |   |
| Mortgage-backed securities                       |   |   | 370    |   |   |   | 491    |   |   |   | 636 |   |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                            |   | $      | 6,454  |   |   | $      | 7,449  |   |   | $ | 6,386 |   |

----

| Available For Sale                          |   |   |    |   |   |   |    |   |   |
|--------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| (dollars in thousands)                           |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|                                             |   |   |    |   |   |   |    |   |   |
| U.S. Government agency securities                |   | $      | 1,109   |   |   | $      | 973     |   |   | $ | 1,759 |   |
| Obligations of states and political subdivisions |   |   | 21,152  |   |   |   | 22,080  |   |   |   | 19,584 |   |
| Mortgage-backed securities                       |   |   | 16,614  |   |   |   | 25,624  |   |   |   | 27,205 |   |
| Corporate bonds                                  |   |   | 3,018   |   |   |   | – |   |   |   | 945 |   |
| Mutual funds                                     |   |   | – |   |   |   | 5,000   |   |   |   | – |   |
|                                             |   |   |    |   |   |   |    |   |   |   |   |   |
| Total                                            |   | $      | 41,893  |   |   | $      | 53,677  |   |   | $ | 49,493 |   |

| Held To Maturity (dollars in thousands) |   | Due in oneyear or less |           |   | Due afterone throughfive years |   |    | Due afterfive throughten years |   |   | Due afterten years |   |   |  Total |   |
|--------------------------------------------------------|--------|--------------------------------------------|----------------|--------|-----------------------------------------------|--------|---------|-----------------------------------------------|--------|--------|------------------------------|--------|--------|-------------|--------|
|                                                   |   |                                       |           |   |                                          |   |    |                                          |   |   |                         |   |   |        |   |   |   |   |   |   |
| Obligations of states and political subdivisions       |   |                                       |   – |   |                                          | $      | 705     |                                          |   | $      | 479                          |   |   | $           | 4,900  |   |   | $ | 6,084 |   |
| Weighted average yield                                 |   |                                       | –        |   |                                          |   | 5.61    | %                                             |   |   | 5.94                         | %      |   |        | 4.63   | % |   |   |   |   |
| Mortgage-backed securities                             |   |                                       | –        |   |                                          |   | – |                                          |   |   | –                      |   |   |        | 370    |   |   |   | 370 |   |
| Weighted average yield                                 |   |                                       | –        |   |                                          |   | – |                                          |   |   | –                      |   |   |        | 5.39   | % |   | ____ |   |
|                                                   |   |                                       |           |   |                                          |   |    |                                          |   |   |                         |   |   |        |   |   |   |   |   |   |
| Total                                                  |   |                                       | –        |   |                                          | $      | 705     |                                          |   | $      | 479                          |   |   | $           | 5,270  |   |   | $ | 6,454 |   |

| Available For Sale (dollars in thousands)   |   | Due in oneyear or less |    |   | Due afterone throughfive years |   |    | Due afterfive throughten years |   |   | Due afterten years |   |   |  Total |    |
|--------------------------------------------------|--------|--------------------------------------------|---------|--------|-----------------------------------------------|--------|---------|-----------------------------------------------|--------|--------|------------------------------|--------|--------|-------------|---------|
|                                             |   |                                       |    |   |                                          |   |    |                                          |   |   |                         |   |   |        |    |   |   |   |   |   |
| U.S. Agency securities                           |   | $                                          | – |   |                                          | $      | – |                                          |   | $      | 995                          |   |   | $           | 114     |   |   | $ | 1,109 |   |
| Weighted average yield                           |   |                                       | – |   |                                          |   | – |                                          |   |   | 2.00                         | %      |   |        | 7.88    | % |   |   |   |   |
| Obligations of states and political subdivisions |   |                                       | 2,920   |   |                                          |   | 6,311   |                                          |   |   | 2,309                        |   |   |        | 9,612   |   |   |   | 21,152 |   |
| Weighted average yield                           |   |                                       | 5.10    | %      |                                          |   | 4.37    | %                                             |   |   | 5.06                         | %      |   |        | 5.99    | % |   |   |   |   |
| Mortgage-backed securities                       |   |                                       | – |   |                                          |   | 34      |                                          |   |   | 3,209                        |   |   |        | 13,371  |   |   |   | 16,614 |   |
| Weighted average yield                           |   |                                       | – |   |                                          |   | 3.34    | %                                             |   |   | 2.87                         | %      |   |        | 4.31    | % |   |   |   |   |
| Corporate bonds                                  |   |                                       | – |   |                                          |   | 3,018   |                                          |   |   | –                      |   |   |        | – |   |   |   | 3,018 |   |
| Weighted average yield                           |   |                                       | – |   |                                          |   | 2.44    | %                                             |   |   | –                      |   |   |        | – |   |   | ____ |   |
|                                             |   |                                       |    |   |                                          |   |    |                                          |   |   |                         |   |   |        |    |   |   |   |   |   |
| Total                                            |   | $                                          | 2,920   |   |                                          | $      | 9,363   |                                          |   | $      | 6,513                        |   |   | $           | 23,097  |   |   | $ | 41,893 |   |

----

| (dollars in thousands)                              |   | 2010   |    |   | 2009   |   |    | 2008   |   |   | 2007    |   |   | 2006   |    |
|-----------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Commercial and agricultural                         |   | $      | 84,575  |   |   | $      | 93,125  |   |   | $      | 91,888  |   |   | $      | 128,145 |   |   | $ | 132,843 |   |
| Construction, land development and other land loans |   |   | 46,256  |   |   |   | 64,812  |   |   |   | 100,725 |   |   |   | 93,249  |   |   |   | 87,063 |   |
| Residential real estate 1-4 family                  |   |   | 89,212  |   |   |   | 91,821  |   |   |   | 82,468  |   |   |   | 60,616  |   |   |   | 64,545 |   |
| Multi-family                                        |   |   | 9,113   |   |   |   | 8,605   |   |   |   | 7,860   |   |   |   | 6,353   |   |   |   | 6,927 |   |
| Farmland                                            |   |   | 22,354  |   |   |   | 22,824  |   |   |   | 18,092  |   |   |   | 20,125  |   |   |   | 20,126 |   |
| Commercial real estate                              |   |   | 216,015 |   |   |   | 205,184 |   |   |   | 188,444 |   |   |   | 137,620 |   |   |   | 117,608 |   |
| Installment                                         |   |   | 7,029   |   |   |   | 7,216   |   |   |   | 7,293   |   |   |   | 7,283   |   |   |   | 8,668 |   |
| Credit cards and overdrafts                         |   |   | 2,099   |   |   |   | 1,929   |   |   |   | 1,959   |   |   |   | 3,363   |   |   |   | 1,990 |   |
| Less unearned income                                |   |   | (828    | )      |   |   | (881    | )      |   |   | (925    | )      |   |   | (681    | ) |   |   | (601 | ) |
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Total                                               |   | $      | 475,825 |   |   | $      | 494,635 |   |   | $      | 497,804 |   |   | $      | 456,073 |   |   | $ | 439,169 |   |

----

|                                                |   |                   |    |   | Due after   |   |    |            |   |   |    |   |
|-----------------------------------------------------|--------|------------------------|---------|--------|------------------|--------|---------|-----------------|--------|--------|---------|--------|
|                                           |   | Due in one   |    |   | one through |   |    | Due after  |   |   |    |   |
| (dollars in thousands)                    |   | year or less |    |   | five years  |   |    | five years |   |   | Total   |   |
|                                                |   |                   |    |   |             |   |    |            |   |   |    |   |
| Commercial                                          |   | $                      | 38,134  |   |             | $      | 26,968  |            |   | $      | 19,473  |   |   | $ | 84,575 |   |
| Construction, land development and other land loans |   |                   | 37,582  |   |             |   | 7,304   |            |   |   | 1,370   |   |   |   | 46,256 |   |
| Residential real estate 1-4 family                  |   |                   | 10,581  |   |             |   | 15,712  |            |   |   | 62,919  |   |   |   | 89,212 |   |
| Multi-family                                        |   |                   | 2,369   |   |             |   | 2,786   |            |   |   | 3,958   |   |   |   | 9,113 |   |
| Farmland                                            |   |                   | 8,730   |   |             |   | 5,249   |            |   |   | 8,375   |   |   |   | 22,354 |   |
| Commercial real estate                              |   |                   | 59,194  |   |             |   | 98,667  |            |   |   | 58,154  |   |   |   | 216,015 |   |
| Installment                                         |   |                   | 1,477   |   |             |   | 3,554   |            |   |   | 1,998   |   |   |   | 7,029 |   |
| Credit cards and overdrafts                         |   |                   | 2,099   |   |             |   | – |            |   |   | – |   |   |   | 2,099 |   |
| Total                                               |   | $                      | 160,166 |   |             | $      | 160,240 |            |   | $      | 156,247 |   |   | $ | 476,653 |   |
| Less unearned income                                |   |                   |    |   |             |   |    |            |   |   |    |   |   |   | (828 | ) |
| Total loans                                         |   |                   |    |   |             |   |    |            |   |   |    |   |   | $ | 475,825 |   |
|                                                |   |                   |    |   |             |   |    |            |   |   |    |   |   |   |   |   |
| Total loans maturing after one year with            |   |                   |    |   |             |   |    |            |   |   |    |   |   |   |   |   |
| Predetermined interest rates (fixed)                |   |                   |    |   |             | $      | 65,985  |            |   | $      | 155,998 |   |   | $ | 221,983 |   |
| Floating or adjustable rates (variable)             |   |                   |    |   |             |   | 94,255  |            |   |   | 249     |   |   |   | 94,504 |   |
| Total                                               |   |                   |    |   |             | $      | 160,240 |            |   | $      | 156,247 |   |   | $ | 316,487 |   |

----

| (dollars in thousands)                              |   | 2010   |    |   | 2009   |   |    | 2008   |   |   | 2007    |   |   | 2006   |    |
|-----------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Accruing loans past due 90 days or more             |   | $      | – |   |   | $      | 547     |   |   | $      | 2,274   |   |   | $      | 2,932   |   |   | $ | 376 |   |
| Restructured loans on accrual status                |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Non-accrual loans:                                  |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Construction, land development and other land loans |   |   | 5,529   |   |   |   | 9,886   |   |   |   | 11,787  |   |   |   | 2,326   |   |   |   | 991 |   |
| Residential real estate 1-4 family                  |   |   | 2,246   |   |   |   | 1,323   |   |   |   | 615     |   |   |   | 1,044   |   |   |   | 120 |   |
| Multi-family real estate                            |   |   | – |   |   |   | 353     |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commercial real estate                              |   |   | 803     |   |   |   | 2,949   |   |   |   | 1,477   |   |   |   | – |   |   |   | 905 |   |
| Farmland                                            |   |   | 170     |   |   |   | 87      |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Commercial and industrial                           |   |   | 1,251   |   |   |   | 1,049   |   |   |   | 797     |   |   |   | 109     |   |   |   | 5,319 |   |
| Installment                                         |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Total non-accrual loans (2)                         |   |   | 9,999   |   |   |   | 15,647  |   |   |   | 14,676  |   |   |   | 3,479   |   |   |   | 7,335 |   |
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Total non-performing loans                          |   |   | 9,999   |   |   |   | 16,194  |   |   |   | 16,950  |   |   |   | 6,411   |   |   |   | 7,711 |   |
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| OREO:                                               |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Construction, land development and other land loans |   |   | 4,043   |   |   |   | 4,850   |   |   |   | 5,443   |   |   |   | – |   |   |   | – |   |
| Residential real estate 1-4 family                  |   |   | 540     |   |   |   | 220     |   |   |   | 1,367   |   |   |   | – |   |   |   | – |   |
| Commercial real estate                              |   |   | 1,997   |   |   |   | 1,595   |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Total OREO                                          |   |   | 6,580   |   |   |   | 6,665   |   |   |   | 6,810   |   |   |   | – |   |   |   | – |   |
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Total non-performing assets                         |   | $      | 16,579  |   |   | $      | 22,859  |   |   | $      | 23,760  |   |   | $      | 6,411   |   |   | $ | 7,711 |   |
|                                                |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Allowance for credit losses (Allowance)             |   | $      | 10,617  |   |   | $      | 11,092  |   |   | $      | 7,623   |   |   | $      | 5,007   |   |   | $ | 4,033 |   |
| Allowance to non-performing loans                   |   |   | 106.18  | %      |   |   | 68.49   | %      |   |   | 44.97   | %      |   |   | 78.10   | % |   |   | 52.30 | % |
| Allowance to non-performing assets                  |   |   | 64.04   | %      |   |   | 48.52   | %      |   |   | 32.08   | %      |   |   | 78.10   | % |   |   | 52.30 | % |
| Non-performing loans to total loans (1)             |   |   | 2.15    | %      |   |   | 3.36    | %      |   |   | 3.49    | %      |   |   | 1.46    | % |   |   | 1.82 | % |
| Non-performing assets to total assets               |   |   | 2.57    | %      |   |   | 3.42    | %      |   |   | 3.80    | %      |   |   | 1.13    | % |   |   | 1.37 | % |

|   | (1) | excludes loans held for sale |
|--------|-----|------------------------------|

|   | (2) | Includes $932,000 in non-accrual troubled debt restructured loans (“TDRs”) as of December 31, 2010, which are also considered impaired loans.  There were no TDRS as of December 31, 2006 through 2009. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|  (dollars in thousands)                                       |   | 2010   |   |   | 2009   |   |    | 2008   |   |   | 2007    |   |   | 2006   |    |
|--------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                                               |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |
| Balance at beginning of year                                       |   | $      | 11,092 |   |   | $      | 7,623   |   |   | $      | 5,007   |   |   | $      | 4,033   |   |   | $ | 5,296 |   |
| Charge-offs:                                                       |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Construction and land development                                  |   |   | 1,891  |   |   |   | 4,687   |   |   |   | 2,039   |   |   |   | – |   |   |   | – |   |
| Residential real estate 1-4 family                                 |   |   | 1,518  |   |   |   | 940     |   |   |   | 14      |   |   |   | – |   |   |   | – |   |
| Commercial real estate                                             |   |   | 164    |   |   |   | 505     |   |   |   | – |   |   |   | 40      |   |   |   | – |   |
| Commercial                                                         |   |   | 469    |   |   |   | 238     |   |   |   | 18      |   |   |   | – |   |   |   | 1,925 |   |
| Credit card                                                        |   |   | 38     |   |   |   | 80      |   |   |   | 66      |   |   |   | 18      |   |   |   | 16 |   |
| Installment                                                        |   |   | 81     |   |   |   | 74      |   |   |   | 89      |   |   |   | 93      |   |   |   | 4 |   |
| Total charge-offs                                                  |   |   | 4,161  |   |   |   | 6,524   |   |   |   | 2,226   |   |   |   | 151     |   |   |   | 1,945 |   |
|                                                               |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Recoveries:                                                        |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Construction and land development                                  |   |   | 2      |   |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
| Residential real estate 1-4 family                                 |   |   | 48     |   |   |   | 2       |   |   |   | 3       |   |   |   | – |   |   |   | – |   |
| Commercial real estate                                             |   |   | 17     |   |   |   | 17      |   |   |   | 37      |   |   |   | 21      |   |   |   | 51 |   |
| Commercial                                                         |   |   | 13     |   |   |   | 17      |   |   |   | – |   |   |   | 619     |   |   |   | – |   |
| Credit card                                                        |   |   | 3      |   |   |   | 4       |   |   |   | 2       |   |   |   | 2       |   |   |   | 5 |   |
| Installment                                                        |   |   | 3      |   |   |   | 9       |   |   |   | 9       |   |   |   | 1       |   |   |   | 1 |   |
| Total recoveries                                                   |   |   | 86     |   |   |   | 49      |   |   |   | 51      |   |   |   | 643     |   |   |   | 57 |   |
|                                                               |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
| Net charge-offs (recoveries)                                       |   |   | 4,075  |   |   |   | 6,475   |   |   |   | 2,175   |   |   |   | (492    | ) |   |   | 1,888 |   |
| Provision for credit losses                                        |   |   | 3,600  |   |   |   | 9,944   |   |   |   | 4,791   |   |   |   | 482     |   |   |   | 625 |   |
| Balance at end of year                                             |   | $      | 10,617 |   |   | $      | 11,092  |   |   | $      | 7,623   |   |   | $      | 5,007   |   |   | $ | 4,033 |   |
| Ratio of net charge-offs (recoveries) to average loans outstanding |   |   | 0.84   | %      |   |   | 1.29    | %      |   |   | .46     | %      |   |   | (.11    | )% |   |   | .45 | % |

----

----

| (dollars in thousands)                        |   | 2010   |   |   | 2009   |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total impaired loans                          |   | $      | 14,673 |   |   | $      | 25,738 |   |   | $      | 22,117 |   |   | $      | 6,431  |   |   | $ | 7,379 |   |
| Total impaired loans with valuation allowance |   |   | 508    |   |   |   | 2,962  |   |   |   | 462    |   |   |   | 3,052  |   |   |   | 51 |   |
| Valuation allowance related to impaired loans |   |   | 142    |   |   |   | 638    |   |   |   | 118    |   |   |   | 72     |   |   |   | 17 |   |

|                                                                |   |    |   |   | % of |   |    |    |   |   | % of |   |   |    |    |   | % of |   |    |    |   |   | % of |   |   |    |    |   | % of |   |
|--------------------------------------------------------------------------|--------|---------|--------|--------|-----------|--------|---------|---------|--------|--------|-----------|--------|--------|---------|---------|--------|-----------|--------|---------|---------|--------|--------|-----------|--------|--------|---------|---------|--------|-----------|--------|
|                                                                |   | 2010    |   |   | Total     |   |    | 2009    |   |   | Total     |   |   | 2008    |    |   | Total     |   |    | 2007    |   |   | Total     |   |   | 2006    |    |   | Total     |   |
| (dollars in thousands)                                         |   | Reserve |   |   | Loans*    |   |    | Reserve |   |   | Loans*    |   |   | Reserve |    |   | Loans*    |   |    | Reserve |   |   | Loans*    |   |   | Reserve |    |   | Loans*    |   |
|                                                                     |   |    |   |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |
| Commercial loans                                                         |   | $       | 816    |   |      |   | 18      | %       |   | $      | 1,308     |   |   |    | 19      | %      |      | $      | 1,392   |    |   |   | 18        | %      |   | $       | 1,780   |   |      |   | 28 | % |   | $ | 1,705 |   |   |   | 30 | % |
| Real estate loans                                                        |   |    | 7,139  |   |      |   | 80      | %       |   |   | 8,341     |   |   |    | 79      | %      |      |   | 5,975   |    |   |   | 80        | %      |   |    | 3,016   |   |      |   | 70 | % |   |   | 2,167 |   |   |   | 67 | % |
| Consumer loans                                                           |   |    | 690    |   |      |   | 2       | %       |   |   | 260       |   |   |    | 2       | %      |      |   | 256     |    |   |   | 2         | %      |   |    | 211     |   |      |   | 2 | % |   |   | 161 |   |   |   | 3 | % |
| Unallocated                                                              |   |    | 1,972  |   |      |   | – |    |   |   | 1,183     |   |   |    | – |   |      |   | – |    |   |   | –   |   |   |    | – |   |      |   | – |   |   |   | – |   |   |   | – |   |
|                                                                     |   |    |   |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Total allowance                                                          |   | $       | 10,617 |   |      |   | 100     | %       |   | $      | 11,092    |   |   |    | 100     | %      |      | $      | 7,623   |    |   |   | 100       | %      |   | $       | 5,007   |   |      |   | 100 | % |   | $ | 4,033 |   |   |   | 100 | % |
|                                                                     |   |    |   |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |    |    |   |   |      |   |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of allowance for credit losses to loans outstanding at end of year |   |    |   |   |      |   | 2.28    | %       |   |   |      |   |   |    | 2.30    | %      |      |   |    |    |   |   | 1.57      | %      |   |    |    |   |      |   | 1.14 | % |   |   |   |   |   |   | 0.95 | % |

| * | Represents the total of all outstanding loans in each category as a percent of total loans outstanding. |
|---|---------------------------------------------------------------------------------------------------------|

----

| (dollars in thousands)      |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|-----------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                        |   |   |    |   |   |   |    |   |   |
| Non-interest bearing demand |   | $      | 95,115  |   |   | $      | 86,046  |   |   | $ | 80,066 |   |
| Interest bearing demand     |   |   | 103,358 |   |   |   | 91,968  |   |   |   | 68,113 |   |
| Money market deposits       |   |   | 93,996  |   |   |   | 86,260  |   |   |   | 93,216 |   |
| Savings deposits            |   |   | 55,993  |   |   |   | 51,053  |   |   |   | 51,948 |   |
| Time deposits               |   |   | 196,492 |   |   |   | 252,368 |   |   |   | 217,964 |   |
|                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Total                       |   | $      | 544,954 |   |   | $      | 567,695 |   |   | $ | 511,307 |   |

----

|                                 |   | 2010            |    |   | 2009   |   |   | 2008            |   |
|--------------------------------------|--------|-----------------|---------|--------|--------|--------|--------|-----------------|--------|
| (dollars in thousands)     |   | AverageDeposits |    |   | Rate   |   |   | AverageDeposits |   |   | Rate |   |   | AverageDeposits |   |   | Rate |   |
|                                 |   |            |    |   |   |   |   |            |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing demand Deposits |   | $               | 84,556  |   |   |   | 0.00   | %               |   | $ | 77,282 |   |   |   | 0.00 | % |   | $ | 82,620 |   |   |   | 0.00 | % |
| Interest bearing demand deposits     |   |            | 97,820  |   |   |   | 0.93   | %               |   |   | 77,030 |   |   |   | 0.98 | % |   |   | 53,816 |   |   |   | 0.81 | % |
| Savings and money market deposits    |   |            | 140,303 |   |   |   | 0.58   | %               |   |   | 132,974 |   |   |   | 0.79 | % |   |   | 150,723 |   |   |   | 1.64 | % |
| Time deposits                        |   |            | 220,618 |   |   |   | 2.20   | %               |   |   | 266,929 |   |   |   | 2.80 | % |   |   | 186,319 |   |   |   | 3.70 | % |
|                                 |   |            |    |   |   |   |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                |   | $               | 543,297 |   |   |   | 1.21   | %               |   | $ | 554,215 |   |   |   | 1.67 | % |   | $ | 473,478 |   |   |   | 2.07 | % |

| (dollars in thousands) |   | Under$100,000 |   |   | Over$100,000 |   |    | Total  |   |
|----------------------------------|--------|---------------|--------|--------|--------------|--------|---------|--------|--------|
|                             |   |          |   |   |         |   |    |   |   |
| 3 months or less                 |   | $             | 12,552 |   |         | $      | 23,561  |   |   | $ | 36,113 |   |
| Over 3 through 6 months          |   |          | 15,916 |   |         |   | 16,655  |   |   |   | 32,571 |   |
| Over 6 through 12 months         |   |          | 23,203 |   |         |   | 54,251  |   |   |   | 77,454 |   |
| Over 12 months                   |   |          | 18,518 |   |         |   | 31,836  |   |   |   | 50,354 |   |
|                             |   |          |   |   |         |   |    |   |   |   |   |   |
| Total                            |   | $             | 70,189 |   |         | $      | 126,303 |   |   | $ | 196,492 |   |

----

| (dollars in thousands)          |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                      |   |   |   |   |   |   |   |   |   |
| Amount outstanding at end of period       |   | $      | 10,500 |   |   | $      | 4,500  |   |   | $ | 23,500 |   |
| Weighted average interest rate thereon    |   |   | 3.85   | %      |   |   | 3.77   | %      |   |   | 2.37 | % |
| Maximum month-end balance during the year |   |   | 10,500 |   |   |   | 24,000 |   |   |   | 34,290 |   |
| Average balance during the year           |   |   | 7,502  |   |   |   | 3,107  |   |   |   | 13,398 |   |
| Average interest rate during the year     |   |   | 2.72   | %      |   |   | 0.84   | %      |   |   | 2.61 | % |

|                              |   | Payments due by Period |    |
|-----------------------------------|--------|---------------------------------------|---------|
| Contractual obligations      |   | Less than1 year             |    |   | 1 – 3years |   |   | 3 – 5years |   |   | More than5 years |   |   | Total |   |
|                              |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                  |   | $                                     | 275     |   |   | $ | 449 |   |   | $ | 339 |   |   | $ | — |   |   | $ | 1,063 |   |
| Total deposits                    |   |                                  | 494,600 |   |   |   | 37,592 |   |   |   | 12,762 |   |   |   | — |   |   |   | 544,954 |   |
| Federal Home Loan Bank borrowings |   |                                  | — |   |   |   | 10,500 |   |   |   | — |   |   |   | — |   |   |   | 10,500 |   |
| Secured borrowings                |   |                                  | 135     |   |   |   | 790 |   |   |   | — |   |   |   | — |   |   |   | 925 |   |
| Junior subordinated debentures    |   |                                  | — |   |   |   | — |   |   |   | — |   |   |   | 13,403 |   |   |   | 13,403 |   |
|                              |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total long-term obligations       |   | $                                     | 495,010 |   |   | $ | 49,331 |   |   | $ | 13,101 |   |   | $ | 13,403 |   |   | $ | 570,845 |   |

|                         |   | 2010   |   |   | 2009   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
|                         |   |   |   |   |   |   |
| Commitments to extend credit |   | $      | 90,888 |   |   | $      | 71,435 |   |
| Standby letters of credit    |   |   | 1,123  |   |   |   | 1,164 |   |

----

| Year ended December 31, |   | 2010   |    |   | 2009   |   |    | 2008   |   |   | 2007   |   |   | 2006   |   |
|----------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                   |   |   |    |   |   |   |    |   |   |   |   |   |   |   |   |
| Return on average assets               |   |   | .25     | %      |   |   | (.96    | )%     |   |   | .16    | %      |   |   | 1.08   | % |   |   | 1.26 | % |
| Return on average equity               |   |   | 2.77    | %      |   |   | (11.63  | )%     |   |   | 1.83   | %      |   |   | 11.46  | % |   |   | 13.16 | % |
| Average equity to average assets ratio |   |   | 9.16    | %      |   |   | 8.23    | %      |   |   | 8.89   | %      |   |   | 9.41   | % |   |   | 9.60 | % |
| Dividend payout ratio                  |   |   | — |   |   |   | — |   |   |   | 35     | %      |   |   | 82     | % |   |   | 75 | % |

----

----

|                                     |   |   |   |   |   |   |   | Requirements for       |   |
|------------------------------------------|--------|--------|--------|--------|--------|--------|--------|-----------------------------|--------|
|                                     |   | Actual |   |   |   |   |   | Adequately Capitalized |   |
| (dollars in thousands)         |   | Amount |   |   | Ratio  |   |   | Amount                      |   |   | Ratio |   |
|                                     |   |   |   |   |   |   |   |                        |   |   |   |   |
| December 31, 2010                        |   |   |   |   |   |   |   |                        |   |   |   |   |
| Tier 1 capital (to average assets)       |   |   |   |   |   |   |   |                        |   |   |   |   |
| Consolidated                             |   | $      | 61,086 |   |   |   | 9.72   | %                           |   | $ | 25,139 |   |   |   | 4.00 | % |
| Bank                                     |   |   | 61,577 |   |   |   | 9.80   | %                           |   |   | 25,130 |   |   |   | 4.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Consolidated                             |   |   | 61,086 |   |   |   | 13.21  | %                           |   |   | 18,493 |   |   |   | 4.00 | % |
| Bank                                     |   |   | 61,577 |   |   |   | 13.35  | %                           |   |   | 18,446 |   |   |   | 4.00 | % |
| Total capital (to risk-weighted assets)  |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Consolidated                             |   |   | 66,925 |   |   |   | 14.48  | %                           |   |   | 36,985 |   |   |   | 8.00 | % |
| Bank                                     |   |   | 67,401 |   |   |   | 14.62  | %                           |   |   | 36,892 |   |   |   | 8.00 | % |
|                                     |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| December 31, 2009                        |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Tier 1 capital (to average assets)       |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Consolidated                             |   | $      | 59,263 |   |   |   | 9.06   | %                           |   | $ | 26,170 |   |   |   | 4.00 | % |
| Bank                                     |   |   | 59,055 |   |   |   | 9.03   | %                           |   |   | 26,148 |   |   |   | 4.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Consolidated                             |   |   | 59,263 |   |   |   | 11.84  | %                           |   |   | 20,022 |   |   |   | 4.00 | % |
| Bank                                     |   |   | 59,055 |   |   |   | 11.81  | %                           |   |   | 20,009 |   |   |   | 4.00 | % |
| Total capital (to risk-weighted assets)  |   |   |   |   |   |   |   |                        |   |   |   |   |   |   |   |   |
| Consolidated                             |   |   | 65,579 |   |   |   | 13.10  | %                           |   |   | 40,043 |   |   |   | 8.00 | % |
| Bank                                     |   |   | 65,368 |   |   |   | 13.07  | %                           |   |   | 40,018 |   |   |   | 8.00 | % |

----

----

----

----

| (dollars in thousands)                                  |   | Due in oneyear or less |     |   | Due afterone throughfive years |   |    | Due afterfive years |   |   | Total   |   |
|-------------------------------------------------------------------|--------|--------------------------------------------|----------|--------|-----------------------------------------------|--------|---------|-------------------------------|--------|--------|---------|--------|
| Interest earning assets                                           |   |                                       |     |   |                                          |   |    |                          |   |   |    |   |
| Loans, including loans held for sale                              |   | $                                          | 159,338  |   |                                          | $      | 160,240 |                          |   | $      | 156,247 |   |   | $ | 475,825 |   |
| Investment securities                                             |   |                                       | 4,915    |   |                                          |   | 18,546  |                          |   |   | 24,886  |   |   |   | 48,347 |   |
| Fed Funds sold and interest bearing balances with banks           |   |                                       | 54,330   |   |                                          |   | — |                          |   |   | — |   |   |   | 54,330 |   |
| Federal Home Loan Bank stock                                      |   |                                       | —  |   |                                          |   | — |                          |   |   | 3,182   |   |   |   | 3,182 |   |
| Total interest earning assets                                     |   | $                                          | 218,583  |   |                                          | $      | 178,786 |                          |   | $      | 184,315 |   |   | $ | 581,684 |   |
|                                                              |   |                                       |     |   |                                          |   |    |                          |   |   |    |   |   |   |   |   |
| Interest bearing liabilities                                      |   |                                       |     |   |                                          |   |    |                          |   |   |    |   |   |   |   |   |
| Interest bearing demand deposits                                  |   | $                                          | 103,358  |   |                                          | $      | — |                          |   | $      | — |   |   | $ | 103,358 |   |
| Savings and money market deposits                                 |   |                                       | 149,989  |   |                                          |   | — |                          |   |   | — |   |   |   | 149,989 |   |
| Time deposits                                                     |   |                                       | 146,138  |   |                                          |   | 50,354  |                          |   |   | — |   |   |   | 196,492 |   |
| Short term borrowings                                             |   |                                       | 10,500   |   |                                          |   | — |                          |   |   | — |   |   |   | 10,500 |   |
| Long term borrowings                                              |   |                                       | —  |   |                                          |   | 10,500  |                          |   |   | — |   |   |   | 10,500 |   |
| Secured borrowings                                                |   |                                       | 135      |   |                                          |   | 790     |                          |   |   | — |   |   |   | 925 |   |
| Junior subordinated debentures                                    |   |                                       | 13,403   |   |                                          |   | — |                          |   |   | — |   |   |   | 13,403 |   |
| Total interest bearing liabilities                                |   | $                                          | 423,523  |   |                                          | $      | 61,644  |                          |   | $      | — |   |   | $ | 485,167 |   |
|                                                              |   |                                       |     |   |                                          |   |    |                          |   |   |    |   |   |   |   |   |
| Net interest rate sensitivity GAP                                 |   | $                                          | (204,940 | )      |                                          | $      | 117,142 |                          |   | $      | 184,315 |   |   | $ | 96,517 |   |
| Cumulative interest rate sensitivity GAP                          |   |                                       |     |   |                                          |   | (87,798 | )                             |   |   | 96,517  |   |   |   | 96,517 |   |
| Cumulative interest rate sensitivity GAP as a % of earning assets |   |                                       |     |   |                                          |   | (15.1   | )%                            |   |   | 16.6    | %      |   |   | 16.6 | % |

----

----

----

----

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

|   | (a) | (1)  The following financial statements are filed below: |
|--------|-----|--------------------------------------------------------------------|

|   | (a) | (2)  Schedules:  None |
|--------|-----|-------------------------------------------|

|   | (a) | (3)  Exhibits:  See Exhibit Index immediately following the signature page. |
|--------|-----|-------------------------------------------------------------------------------------------------|

----

----

| Pacific Financial Corporation and Subsidiary |
|----------------------------------------------|
| December 31, 2010 and 2009                   |
| Consolidated Balance Sheets                  |

|                                                                                                                                              |   | 2010   |    |   | 2009   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                                                                                              |   |   |    |   |   |   |
| Assets                                                                                                                                            |   |   |    |   |   |   |
| Cash and due from banks (See note 2)                                                                                                              |   | $      | 7,428   |   |   | $      | 12,836 |   |
| Interest bearing deposits in banks                                                                                                                |   |   | 54,330  |   |   |   | 35,068 |   |
| Federal funds sold                                                                                                                                |   |   | — |   |   |   | 5,000 |   |
| Securities available for sale, at fair value (amortized cost of $42,402 and $54,981)                                                              |   |   | 41,893  |   |   |   | 53,677 |   |
| Securities held to maturity (fair value of $6,584 and $7,594)                                                                                     |   |   | 6,454   |   |   |   | 7,449 |   |
| Federal Home Loan Bank stock, at cost                                                                                                             |   |   | 3,182   |   |   |   | 3,182 |   |
| Loans held for sale                                                                                                                               |   |   | 10,144  |   |   |   | 12,389 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Loans                                                                                                                                             |   |   | 465,681 |   |   |   | 482,246 |   |
| Allowance for credit losses                                                                                                                       |   |   | 10,617  |   |   |   | 11,092 |   |
| Loans - net                                                                                                                                       |   |   | 455,064 |   |   |   | 471,154 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Premises and equipment                                                                                                                            |   |   | 15,181  |   |   |   | 15,914 |   |
| Other real estate owned                                                                                                                           |   |   | 6,580   |   |   |   | 6,665 |   |
| Accrued interest receivable                                                                                                                       |   |   | 2,334   |   |   |   | 2,537 |   |
| Cash surrender value of life insurance                                                                                                            |   |   | 16,748  |   |   |   | 16,207 |   |
| Goodwill                                                                                                                                          |   |   | 11,282  |   |   |   | 11,282 |   |
| Other intangible assets                                                                                                                           |   |   | 1,303   |   |   |   | 1,445 |   |
| Other assets                                                                                                                                      |   |   | 12,480  |   |   |   | 13,821 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Total assets                                                                                                                                      |   | $      | 644,403 |   |   | $      | 668,626 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                                                                                                        |   |   |    |   |   |   |   |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Liabilities                                                                                                                                       |   |   |    |   |   |   |   |   |
| Deposits:                                                                                                                                         |   |   |    |   |   |   |   |   |
| Demand, non-interest bearing                                                                                                                      |   | $      | 95,115  |   |   | $      | 86,046 |   |
| Savings and interest-bearing demand                                                                                                               |   |   | 253,347 |   |   |   | 229,281 |   |
| Time, interest-bearing                                                                                                                            |   |   | 196,492 |   |   |   | 252,368 |   |
| Total deposits                                                                                                                                    |   |   | 544,954 |   |   |   | 567,695 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Accrued interest payable                                                                                                                          |   |   | 1,380   |   |   |   | 1,125 |   |
| Secured borrowings                                                                                                                                |   |   | 925     |   |   |   | 977 |   |
| Short-term borrowings                                                                                                                             |   |   | 10,500  |   |   |   | 4,500 |   |
| Long-term borrowings                                                                                                                              |   |   | 10,500  |   |   |   | 21,000 |   |
| Junior subordinated debentures                                                                                                                    |   |   | 13,403  |   |   |   | 13,403 |   |
| Other liabilities                                                                                                                                 |   |   | 2,972   |   |   |   | 2,277 |   |
| Total liabilities                                                                                                                                 |   |   | 584,634 |   |   |   | 610,977 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Commitments and Contingencies (See note 13)                                                                                                       |   |   | — |   |   |   | — |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Shareholders’ Equity                                                                                                                        |   |   |    |   |   |   |   |   |
| Common stock (par value $1); authorized:  25,000,000 shares; issued and outstanding:  2010 and 2009 – 10,121,853 shares |   |   | 10,122  |   |   |   | 10,122 |   |
| Additional paid-in capital                                                                                                                        |   |   | 41,316  |   |   |   | 41,270 |   |
| Retained earnings                                                                                                                                 |   |   | 9,233   |   |   |   | 7,599 |   |
| Accumulated other comprehensive loss                                                                                                              |   |   | (902    | )      |   |   | (1,342 | ) |
| Total shareholders’ equity                                                                                                                  |   |   | 59,769  |   |   |   | 57,649 |   |
|                                                                                                                                              |   |   |    |   |   |   |   |   |
| Total liabilities and shareholders’ equity                                                                                                  |   | $      | 644,403 |   |   | $      | 668,626 |   |

----

| Pacific Financial Corporation and Subsidiary |
|----------------------------------------------|
| Years Ended December 31, 2010, 2009 and 2008 |
| Consolidated Statements of Income            |

|                                                      |   | 2010   |       |   | 2009   |   |      | 2008   |   |
|-----------------------------------------------------------|--------|--------|------------|--------|--------|--------|-----------|--------|--------|
|                                                      |   |   |       |   |   |   |      |   |   |
| Interest and Dividend Income                              |   |   |       |   |   |   |      |   |   |
| Loans                                                     |   | $      | 28,520     |   |   | $      | 29,800    |   |   | $ | 31,215 |   |
| Federal funds sold and deposits in banks                  |   |   | 116        |   |   |   | 109       |   |   |   | 44 |   |
| Securities available for sale:                            |   |   |       |   |   |   |      |   |   |   |   |   |
| Taxable                                                   |   |   | 1,214      |   |   |   | 1,841     |   |   |   | 1,610 |   |
| Tax-exempt                                                |   |   | 716        |   |   |   | 745       |   |   |   | 609 |   |
| Securities held to maturity:                              |   |   |       |   |   |   |      |   |   |   |   |   |
| Taxable                                                   |   |   | 21         |   |   |   | 27        |   |   |   | 38 |   |
| Tax-exempt                                                |   |   | 273        |   |   |   | 298       |   |   |   | 178 |   |
| Federal Home Loan Bank stock dividends                    |   |   | —    |   |   |   | —   |   |   |   | 19 |   |
| Total interest and dividend income                        |   |   | 30,860     |   |   |   | 32,820    |   |   |   | 33,713 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Interest Expense                                          |   |   |       |   |   |   |      |   |   |   |   |   |
| Deposits                                                  |   |   | 6,574      |   |   |   | 9,264     |   |   |   | 9,794 |   |
| Short-term borrowings                                     |   |   | —    |   |   |   | 26        |   |   |   | 349 |   |
| Long-term borrowings                                      |   |   | 849        |   |   |   | 1,164     |   |   |   | 991 |   |
| Secured borrowings                                        |   |   | 61         |   |   |   | 75        |   |   |   | 94 |   |
| Junior subordinated debentures                            |   |   | 497        |   |   |   | 538       |   |   |   | 770 |   |
| Total interest expense                                    |   |   | 7,981      |   |   |   | 11,067    |   |   |   | 11,998 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Net interest income                                       |   |   | 22,879     |   |   |   | 21,753    |   |   |   | 21,715 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Provision for Credit Losses                               |   |   | 3,600      |   |   |   | 9,944     |   |   |   | 4,791 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Net interest income after provision for credit losses     |   |   | 19,279     |   |   |   | 11,809    |   |   |   | 16,924 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Non-Interest Income                                       |   |   |       |   |   |   |      |   |   |   |   |   |
| Service charges on deposit accounts                       |   |   | 1,783      |   |   |   | 1,649     |   |   |   | 1,577 |   |
| Net gains (loss) on sale of other real estate owned       |   |   | 260        |   |   |   | (1,418    | )      |   |   | 390 |   |
| Net gains from sales of loans                             |   |   | 4,168      |   |   |   | 4,638     |   |   |   | 1,426 |   |
| Net gain (loss) on sales of securities available for sale |   |   | 422        |   |   |   | 484       |   |   |   | (165 | ) |
| Earnings on bank owned life insurance                     |   |   | 541        |   |   |   | 489       |   |   |   | 607 |   |
| Other operating income                                    |   |   | 1,277      |   |   |   | 1,183     |   |   |   | 1,222 |   |
| Total non-interest income                                 |   |   | 8,451      |   |   |   | 7,025     |   |   |   | 5,057 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Non-Interest Expense                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Salaries and employee benefits                            |   |   | 13,530     |   |   |   | 13,558    |   |   |   | 12,381 |   |
| Occupancy                                                 |   |   | 1,544      |   |   |   | 1,560     |   |   |   | 1,565 |   |
| Equipment                                                 |   |   | 1,222      |   |   |   | 1,219     |   |   |   | 1,290 |   |
| State taxes                                               |   |   | 480        |   |   |   | 436       |   |   |   | 366 |   |
| Data processing                                           |   |   | 1,247      |   |   |   | 1,246     |   |   |   | 764 |   |
| Professional services                                     |   |   | 767        |   |   |   | 866       |   |   |   | 921 |   |
| Other real estate owned write-downs                       |   |   | 1,272      |   |   |   | 3,689     |   |   |   | — |   |
| Other real estate owned operating costs                   |   |   | 614        |   |   |   | 507       |   |   |   | 88 |   |
| FDIC assessments                                          |   |   | 1,361      |   |   |   | 1,802     |   |   |   | 214 |   |
| Other                                                     |   |   | 4,363      |   |   |   | 4,808     |   |   |   | 4,002 |   |
| Total non-interest expense                                |   |   | 26,400     |   |   |   | 29,691    |   |   |   | 21,591 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Income (loss) before income taxes                         |   |   | 1,330      |   |   |   | (10,857   | )      |   |   | 390 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Income Taxes Benefit                                      |   |   | (304       | )      |   |   | (4,519    | )      |   |   | (561 | ) |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Net income (loss)                                         |   | $      | 1,634      |   |   | $      | (6,338    | )      |   | $ | 951 |   |
|                                                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Earnings (Loss) Per Share                                 |   |   |       |   |   |   |      |   |   |   |   |   |
| Basic                                                     |   | $      | 0.16       |   |   | $      | (0.74     | )      |   | $ | 0.13 |   |
| Diluted                                                   |   | $      | 0.16       |   |   | $      | (0.74     | )      |   | $ | 0.13 |   |
| Weighted Average Shares Outstanding:                      |   |   |       |   |   |   |      |   |   |   |   |   |
| Basic                                                     |   |   | 10,121,853 |   |   |   | 8,539,237 |   |   |   | 7,311,611 |   |
| Diluted                                                   |   |   | 10,121,853 |   |   |   | 8,539,237 |   |   |   | 7,328,168 |   |

----

| Pacific Financial Corporation and Subsidiary          |
|-------------------------------------------------------|
| Years Ended December 31, 2010, 2009 and 2008          |
| Consolidated Statements of Shareholders’ Equity |

|                                                                                                                                                                 |   |      |       |   |   |   |    |       |   |   |     |   |   | Accumulated   |    |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|--------|--------|--------|---------|------------|--------|--------|----------|--------|--------|---------------|---------|--------|--------|--------|
|                                                                                                                                                                      |   | Shares of |       |   |   |   |    | Additional |   |   |     |   |   | Other         |    |   |   |   |
|                                                                                                                                                                      |   | Common    |       |   | Common |   |    | Paid-in    |   |   | Retained |   |   | Comprehensive |    |   |   |   |
|                                                                                                                                                                      |   | Stock     |       |   | Stock  |   |    | Capital    |   |   | Earnings |   |   | Loss          |    |   | Total  |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |
| Balance at January 1, 2008                                                                                                                                                |   |      | 6,606,545  |   |   | $      | 6,607   |       |   | $      | 27,163   |   |   | $             | 17,807  |   |   | $      | (878 | ) |   | $ | 50,699 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Comprehensive loss:                                                                                                                                                       |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | 951     |   |   |   | — |   |   |   | 951 |   |
| Unrealized holding loss on securities of $2,106 (net of tax of $1,084) less reclassification adjustment for net losses included in net income of $109 (net of tax of $56) |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | (1,997 | ) |   |   | (1,997 | ) |
| Amortization of unrecognized prior service costs and net gains/losses                                                                                                     |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | 68 |   |   |   | 68 |   |
| Comprehensive loss                                                                                                                                                        |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   | (978 | ) |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Stock options exercised                                                                                                                                                   |   |      | 6,656      |   |   |   | 6       |       |   |   | 52       |   |   |          | — |   |   |   | — |   |   |   | 58 |   |
| Issuance of common stock                                                                                                                                                  |   |      | 41,672     |   |   |   | 42      |       |   |   | 524      |   |   |          | — |   |   |   | — |   |   |   | 566 |   |
| Common stock repurchased and retired                                                                                                                                      |   |      | (2,300     | )      |   |   | (2      | )          |   |   | (24      | )      |   |          |    |   |   |   |   |   |   |   | (26 | ) |
| Stock compensation expense                                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | 87       |   |   |          | — |   |   |   | — |   |   |   | 87 |   |
| Cash dividends declared ($0.05 per share)                                                                                                                                 |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | (333    | )      |   |   | — |   |   |   | (333 | ) |
| Stock dividends declared (10%)                                                                                                                                            |   |      | 664,857    |   |   |   | 665     |       |   |   | 3,823    |   |   |          | (4,488  | )      |   |   | — |   |   |   | — |   |
| Tax benefit from exercise of stock options                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | 1        |   |   |          | — |   |   |   | — |   |   |   | 1 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2008                                                                                                                                              |   |      | 7,317,430  |   |   | $      | 7,318   |       |   | $      | 31,626   |   |   | $             | 13,937  |   |   | $      | (2,807 | ) |   | $ | 50,074 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Comprehensive loss:                                                                                                                                                       |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                                                                  |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | (6,338  | )      |   |   | — |   |   |   | (6,338 | ) |
| Unrealized holding gain on securities of $1,727 (net of tax of $890) less reclassification adjustment for net gains included in net income of $319 (net of tax of $165)   |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | 1,408 |   |   |   | 1,408 |   |
| Amortization of unrecognized prior service costs and net gains/losses                                                                                                     |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | 57 |   |   |   | 57 |   |
| Comprehensive loss                                                                                                                                                        |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   | (4,873 | ) |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Issuance of common stock                                                                                                                                                  |   |      | 2,804,423  |   |   |   | 2,804   |       |   |   | 9,590    |   |   |          | — |   |   |   | — |   |   |   | 12,394 |   |
| Stock compensation expense                                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | 54       |   |   |          | — |   |   |   | — |   |   |   | 54 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2009                                                                                                                                              |   |      | 10,121,853 |   |   | $      | 10,122  |       |   | $      | 41,270   |   |   | $             | 7,599   |   |   | $      | (1,342 | ) |   | $ | 57,649 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Comprehensive income:                                                                                                                                                     |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | 1,634   |   |   |   | — |   |   |   | 1,634 |   |
| Unrealized holding gain on securities of $802 (net of tax of $273) less reclassification adjustment for net gains included in net income of $279 (net of tax of $143)     |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | 523 |   |   |   | 523 |   |
| Amortization of unrecognized prior service costs and net gains/losses                                                                                                     |   |      | —    |   |   |   | — |       |   |   | —  |   |   |          | — |   |   |   | (83 | ) |   |   | (83 | ) |
| Comprehensive income                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   | 2,074 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Stock compensation expense                                                                                                                                                |   |      | —    |   |   |   | — |       |   |   | 46       |   |   |          | — |   |   |   | — |   |   |   | 46 |   |
|                                                                                                                                                                      |   |      |       |   |   |   |    |       |   |   |     |   |   |          |    |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2010                                                                                                                                              |   |      | 10,121,853 |   |   | $      | 10,122  |       |   | $      | 41,316   |   |   | $             | 9,233   |   |   | $      | (902 | ) |   | $ | 59,769 |   |

----

| Pacific Financial Corporation and Subsidiary |
|----------------------------------------------|
| Years Ended December 31, 2010, 2009 and 2008 |
| Consolidated Statements of Cash Flows        |

|                                                                                        |   | 2010   |     |   | 2009   |   |     | 2008   |   |
|---------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|----------|--------|--------|
|                                                                                        |   |   |     |   |   |   |     |   |   |
| Cash Flows from Operating Activities                                                        |   |   |     |   |   |   |     |   |   |
| Net income (loss)                                                                           |   | $      | 1,634    |   |   | $      | (6,338   | )      |   | $ | 951 |   |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |   |   |     |   |   |   |     |   |   |   |   |   |
| Depreciation and amortization                                                               |   |   | 1,585    |   |   |   | 1,611    |   |   |   | 1,604 |   |
| Provision for credit losses                                                                 |   |   | 3,600    |   |   |   | 9,944    |   |   |   | 4,791 |   |
| Deferred income taxes                                                                       |   |   | (886     | )      |   |   | (2,696   | )      |   |   | (752 | ) |
| Originations of loans held for sale                                                         |   |   | (209,301 | )      |   |   | (274,264 | )      |   |   | (96,986 | ) |
| Proceeds from sales of loans held for sale                                                  |   |   | 215,548  |   |   |   | 276,668  |   |   |   | 99,709 |   |
| Net gains on sales of loans                                                                 |   |   | (4,168   | )      |   |   | (4,638   | )      |   |   | (1,426 | ) |
| (Gain) loss on sales of securities available for sale                                       |   |   | (422     | )      |   |   | (484     | )      |   |   | 165 |   |
| (Gain) loss on sales of other real estate owned                                             |   |   | (260     | )      |   |   | 1,418    |   |   |   | (390 | ) |
| (Gain) loss on sale of premises and equipment                                               |   |   | 14       |   |   |   | —  |   |   |   | (301 | ) |
| Earnings on bank owned life insurance                                                       |   |   | (541     | )      |   |   | (489     | )      |   |   | (607 | ) |
| Decrease in accrued interest receivable                                                     |   |   | 203      |   |   |   | 235      |   |   |   | 393 |   |
| Increase (decrease) in accrued interest payable                                             |   |   | 255      |   |   |   | 123      |   |   |   | (397 | ) |
| Write-down of other real estate owned                                                       |   |   | 1,272    |   |   |   | 3,689    |   |   |   | — |   |
| (Increase) decrease in prepaid expenses                                                     |   |   | 1,289    |   |   |   | (4,590   | )      |   |   | (140 | ) |
| Other - net                                                                                 |   |   | 1,054    |   |   |   | (2,231   | )      |   |   | (1,011 | ) |
|                                                                                        |   |   |     |   |   |   |     |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                         |   |   | 10,876   |   |   |   | (2,042   | )      |   |   | 5,603 |   |
|                                                                                        |   |   |     |   |   |   |     |   |   |   |   |   |
| Cash Flows from Investing Activities                                                        |   |   |     |   |   |   |     |   |   |   |   |   |
| Net increase in interest bearing deposits in banks                                          |   |   | (19,262  | )      |   |   | (34,486  | )      |   |   | (329 | ) |
| Net (increase) decrease in federal funds sold                                               |   |   | 5,000    |   |   |   | (4,225   | )      |   |   | (775 | ) |
| Activity in securities available for sale:                                                  |   |   |     |   |   |   |     |   |   |   |   |   |
| Sales                                                                                       |   |   | 17,179   |   |   |   | 11,072   |   |   |   | 5,208 |   |
| Maturities, prepayments and calls                                                           |   |   | 8,069    |   |   |   | 9,780    |   |   |   | 5,921 |   |
| Purchases                                                                                   |   |   | (12,325  | )      |   |   | (23,366  | )      |   |   | (21,254 | ) |
| Activity in securities held to maturity:                                                    |   |   |     |   |   |   |     |   |   |   |   |   |
| Maturities                                                                                  |   |   | 1,048    |   |   |   | 384      |   |   |   | 828 |   |
| Purchases                                                                                   |   |   | (56      | )      |   |   | (1,450   | )      |   |   | (2,888 | ) |
| Proceeds from sales of government loan pools                                                |   |   | 5,272    |   |   |   | —  |   |   |   | — |   |
| (Increase) decrease in loans made to customers, net of principal collections                |   |   | 114      |   |   |   | (11,867  | )      |   |   | (53,335 | ) |
| Purchases of premises and equipment                                                         |   |   | (470     | )      |   |   | (552     | )      |   |   | (2,933 | ) |
| Proceeds from sales of premises and equipment                                               |   |   | —  |   |   |   | —  |   |   |   | 668 |   |
| Proceeds from sales of other real estate owned                                              |   |   | 6,440    |   |   |   | 5,834    |   |   |   | 1,499 |   |
|                                                                                        |   |   |     |   |   |   |     |   |   |   |   |   |
| Net cash provided by (used in) investing activities                                         |   |   | 11,009   |   |   |   | (48,876  | )      |   |   | (67,390 | ) |

----

| Pacific Financial Corporation and Subsidiary |
|----------------------------------------------|
| Years Ended December 31, 2010, 2009 and 2008 |
| Consolidated Statements of Cash Flows        |

|                                                                        |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|-----------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                                                        |   |   |    |   |   |   |    |   |   |
| Cash Flows from Financing Activities                                        |   |   |    |   |   |   |    |   |   |
| Net increase (decrease) in deposits                                         |   | $      | (22,741 | )      |   | $      | 56,388  |   |   | $ | 43,971 |   |
| Net increase (decrease) in short-term borrowings                            |   |   | (4,500  | )      |   |   | (23,500 | )      |   |   | 6,875 |   |
| Decrease in secured borrowings                                              |   |   | (52     | )      |   |   | (377    | )      |   |   | (64 | ) |
| Proceeds from issuance of long-term borrowings                              |   |   | — |   |   |   | 3,000   |   |   |   | 23,500 |   |
| Repayments of long-term borrowings                                          |   |   | — |   |   |   | — |   |   |   | (7,000 | ) |
| Common stock issued                                                         |   |   | — |   |   |   | 12,394  |   |   |   | 624 |   |
| Repurchase and retirement of common stock                                   |   |   | — |   |   |   | — |   |   |   | (26 | ) |
| Cash dividends paid                                                         |   |   | — |   |   |   | (333    | )      |   |   | (4,955 | ) |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Net cash provided by (used in) financing activities                         |   |   | (27,293 | )      |   |   | 47,572  |   |   |   | 62,925 |   |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Net change in cash and due from banks                                       |   |   | (5,408  | )      |   |   | (3,346  | )      |   |   | 1,138 |   |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Cash and Due from Banks                                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Beginning of year                                                           |   |   | 12,836  |   |   |   | 16,182  |   |   |   | 15,044 |   |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| End of year                                                                 |   | $      | 7,428   |   |   | $      | 12,836  |   |   | $ | 16,182 |   |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Supplemental Disclosures of Cash Flow Information                           |   |   |    |   |   |   |    |   |   |   |   |   |
| Interest paid                                                               |   | $      | 7,726   |   |   | $      | 10,944  |   |   | $ | 12,395 |   |
| Income taxes paid                                                           |   |   | 725     |   |   |   | 183     |   |   |   | 1,091 |   |
|                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Supplemental Disclosures of Non-Cash Investing Activities                   |   |   |    |   |   |   |    |   |   |   |   |   |
| Fair value adjustment of securities available for sale, net of tax          |   | $      | 523     |   |   | $      | 1,408   |   |   | $ | (1,997 | ) |
| Transfer of loans held for sale to loans held for investment                |   |   | — |   |   |   | 1,408   |   |   |   | 4,259 |   |
| Other real estate owned acquired in settlement of loans                     |   |   | (8,093  | )      |   |   | (11,252 | )      |   |   | (7,919 | ) |
| Financed sale of other real estate owned                                    |   |   | 726     |   |   |   | 456     |   |   |   | — |   |
| Reclass of current portion of long-term borrowings to short-term borrowings |   |   | 10,500  |   |   |   | 4,500   |   |   |   | 6,500 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                             |   |      |   |   | Gross      |   |    | Gross      |   |   |    |   |
|--------------------------------------------------|--------|-----------|--------|--------|------------|--------|---------|------------|--------|--------|---------|--------|
|                                             |   | Amortized |   |   | Unrealized |   |    | Unrealized |   |   | Fair    |   |
| Securities Available for Sale                    |   | Cost      |   |   | Gains      |   |    | Losses     |   |   | Value   |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |
| December 31, 2010                                |   |      |   |   |       |   |    |       |   |   |    |   |
| U.S. Government agency securities                |   | $         | 1,103  |   |       | $      | 11      |       |   | $      | 5       |   |   | $ | 1,109 |   |
| Obligations of states and political subdivisions |   |      | 20,588 |   |       |   | 623     |       |   |   | 59      |   |   |   | 21,152 |   |
| Agency MBS                                       |   |      | 7,555  |   |       |   | 187     |       |   |   | 12      |   |   |   | 7,730 |   |
| Non-agency MBS                                   |   |      | 10,145 |   |       |   | 4       |       |   |   | 1,265   |   |   |   | 8,884 |   |
| Corporate bonds                                  |   |      | 3,011  |   |       |   | 37      |       |   |   | 30      |   |   |   | 3,018 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| Total                                            |   | $         | 42,402 |   |       | $      | 862     |       |   | $      | 1,371   |   |   | $ | 41,893 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| December 31, 2009                                |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| U.S. Government agency securities                |   | $         | 933    |   |       | $      | 40      |       |   | $      | — |   |   | $ | 973 |   |
| Obligations of states and political subdivisions |   |      | 21,294 |   |       |   | 821     |       |   |   | 35      |   |   |   | 22,080 |   |
| Agency MBS                                       |   |      | 11,023 |   |       |   | 156     |       |   |   | 15      |   |   |   | 11,164 |   |
| Non-agency MBS                                   |   |      | 16,731 |   |       |   | 121     |       |   |   | 2,392   |   |   |   | 14,460 |   |
| Mutual funds                                     |   |      | 5,000  |   |       |   | — |       |   |   | — |   |   |   | 5,000 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| Total                                            |   | $         | 54,981 |   |       | $      | 1,138   |       |   | $      | 2,442   |   |   | $ | 53,677 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| Securities Held to Maturity                      |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| December 31, 2010                                |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| State and municipal securities                   |   | $         | 6,084  |   |       | $      | 104     |       |   | $      | — |   |   | $ | 6,188 |   |
| Agency MBS                                       |   |      | 370    |   |       |   | 26      |       |   |   | — |   |   |   | 396 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| Total                                            |   | $         | 6,454  |   |       | $      | 130     |       |   | $      | — |   |   | $ | 6,584 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| December 31, 2009                                |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| State and municipal securities                   |   | $         | 6,958  |   |       | $      | 124     |       |   | $      | — |   |   | $ | 7,082 |   |
| Agency MBS                                       |   |      | 491    |   |       |   | 21      |       |   |   | — |   |   |   | 512 |   |
|                                             |   |      |   |   |       |   |    |       |   |   |    |   |   |   |   |   |
| Total                                            |   | $         | 7,449  |   |       | $      | 145     |       |   | $      | — |   |   | $ | 7,594 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                             |   | Less than 12 Months |   |   | More than 12 Months |   |   | Total  |   |
|--------------------------------------------------|--------|---------------------|--------|--------|---------------------|--------|--------|--------|--------|
|                                             |   | Fair                |   |   | Unrealized          |   |   | Fair   |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |
| December 31, 2010                                |   | Value               |   |   | Loss                |   |   | Value  |   |   | Loss |   |   | Value |   |   | Loss |   |
|                                             |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for Sale                               |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency securities                |   | $                   | 995    |   |                | $      | 5      |   |   | $ | — |   |   | $ | — |   |   | $ | 995 |   |   | $ | 5 |   |
| Obligations of states and political subdivisions |   |                | 4,825  |   |                |   | 59     |   |   |   | — |   |   |   | — |   |   |   | 4,825 |   |   |   | 59 |   |
| Agency MBS                                       |   |                | 903    |   |                |   | 12     |   |   |   | — |   |   |   | — |   |   |   | 903 |   |   |   | 12 |   |
| Non-agency MBS                                   |   |                | 2,071  |   |                |   | 154    |   |   |   | 6,503 |   |   |   | 1,111 |   |   |   | 8,574 |   |   |   | 1,265 |   |
| Corporate bonds                                  |   |                | 1,949  |   |                |   | 30     |   |   |   | — |   |   |   | — |   |   |   | 1,949 |   |   |   | 30 |   |
|                                             |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                            |   | $                   | 10,743 |   |                | $      | 260    |   |   | $ | 6,503 |   |   | $ | 1,111 |   |   | $ | 17,246 |   |   | $ | 1,371 |   |
|                                             |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   | Less than 12 Months |   |   | More than 12 Months |   |   | Total  |   |
|                                             |   | Fair                |   |   | Unrealized          |   |   | Fair   |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |
| December 31, 2009                                |   | Value               |   |   | Loss                |   |   | Value  |   |   | Loss |   |   | Value |   |   | Loss |   |
|                                             |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for Sale                               |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Obligations of states and political subdivisions |   | $                   | 1,835  |   |                | $      | 2      |   |   | $ | 2,638 |   |   | $ | 33 |   |   | $ | 4,473 |   |   | $ | 35 |   |
| Agency MBS                                       |   |                | 1,408  |   |                |   | 15     |   |   |   | — |   |   |   | — |   |   |   | 1,408 |   |   |   | 15 |   |
| Non-agency MBS                                   |   |                | 4,530  |   |                |   | 347    |   |   |   | 7,778 |   |   |   | 2,045 |   |   |   | 12,308 |   |   |   | 2,392 |   |
|                                             |   |                |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                            |   | $                   | 7,773  |   |                | $      | 364    |   |   | $ | 10,416 |   |   | $ | 2,078 |   |   | $ | 18,189 |   |   | $ | 2,442 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                            |   | Held to Maturity |   |   | Available for Sale |   |
|---------------------------------|--------|------------------|--------|--------|--------------------|--------|
|                            |   |             |   |   |               |   |   |   |   |   |   |   |
|                            |   | Amortized        |   |   | Fair               |   |   | Amortized |   |   | Fair |   |
|                            |   | Cost             |   |   | Value              |   |   | Cost |   |   | Value |   |
|                            |   |             |   |   |               |   |   |   |   |   |   |   |
| Due in one year or less         |   | $                | 225    |   |               | $      | 241 |   |   | $ | 2,866 |   |   | $ | 2,920 |   |
| Due from one year to five years |   |             | 480    |   |               |   | 511 |   |   |   | 9,051 |   |   |   | 9,329 |   |
| Due from five to ten years      |   |             | 479    |   |               |   | 509 |   |   |   | 3,228 |   |   |   | 3,304 |   |
| Due after ten years             |   |             | 4,900  |   |               |   | 4,927 |   |   |   | 9,557 |   |   |   | 9,726 |   |
| Mortgage-backed securities      |   |             | 370    |   |               |   | 396 |   |   |   | 17,700 |   |   |   | 16,614 |   |
|                            |   |             |   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Total                           |   | $                | 6,454  |   |               | $      | 6,584 |   |   | $ | 42,402 |   |   | $ | 41,893 |   |

|                                                |   | 2010   |    |   | 2009   |   |
|-----------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                |   |   |    |   |   |   |
| Commercial and agricultural                         |   | $      | 84,575  |   |   | $      | 93,125 |   |
| Real estate:                                        |   |   |    |   |   |   |   |   |
| Construction, land development and other land loans |   |   | 46,256  |   |   |   | 64,812 |   |
| Residential 1-4 family                              |   |   | 89,212  |   |   |   | 91,821 |   |
| Multi-family                                        |   |   | 9,113   |   |   |   | 8,605 |   |
| Commercial real estate – owner occupied       |   |   | 109,936 |   |   |   | 105,663 |   |
| Commercial real estate – non owner occupied   |   |   | 106,079 |   |   |   | 99,521 |   |
| Farmland                                            |   |   | 22,354  |   |   |   | 22,824 |   |
| Consumer                                            |   |   | 9,128   |   |   |   | 9,145 |   |
|                                                |   |   | 476,653 |   |   |   | 495,516 |   |
| Less unearned income                                |   |   | (828    | )      |   |   | (881 | ) |
|                                                |   |   |    |   |   |   |   |   |
| Total                                               |   | $      | 475,825 |   |   | $      | 494,635 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                                        |   | Commercial |          |   | CommercialReal Estate(“CRE”) |   |          | ResidentialReal Estate |   |   | Consumer      |   |   | Unallocated |          |   | 2010Total |   |          | 2009Total |   |
|-------------------------------------------------------------|--------|------------|---------------|--------|-----------------------------------------------|--------|---------------|-----------------------------|--------|--------|---------------|--------|--------|-------------|---------------|--------|-----------|--------|---------------|-----------|--------|
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |
| Allowance for Credit Losses:                                |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |
| Beginning balance                                           |   | $          | 1,307         |   |                                          | $      | 5,864         |                        |   | $      | 2,477         |   |   | $           | 261           |   |      | $      | 1,183         |      |   | $ | 11,092 |   |   | $ | 7,623 |   |
| Charge-offs                                                 |   |       | (469          | )      |                                          |   | (2,055        | )                           |   |   | (1,518        | )      |   |        | (119          | )      |      |   | —       |      |   |   | (4,161 | ) |   |   | (6,524 | ) |
| Recoveries                                                  |   |       | 13            |   |                                          |   | 19            |                        |   |   | 48            |   |   |        | 6             |   |      |   | —       |      |   |   | 86 |   |   |   | 49 |   |
| Provision for credit losses                                 |   |       | (35           | )      |                                          |   | 1,557         |                        |   |   | 747           |   |   |        | 542           |   |      |   | 789           |      |   |   | 3,600 |   |   |   | 9,944 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance                                              |   | $          | 816           |   |                                          | $      | 5,385         |                        |   | $      | 1,754         |   |   | $           | 690           |   |      | $      | 1,972         |      |   | $ | 10,617 |   |   | $ | 11,092 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance:  individually evaluated for impairment |   |       | 142           |   |                                          |   | —       |                        |   |   | —       |   |   |        | —       |   |      |   | —       |      |   |   | 142 |   |   |   | 638 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance:  collectively evaluated for impairment |   |       | 674           |   |                                          |   | 5,385         |                        |   |   | 1,754         |   |   |        | 690           |   |      |   | 1,972         |      |   |   | 10,475 |   |   |   | 10,454 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Loans:                                                      |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance:  individually evaluated for impairment |   |       | 1,267         |   |                                          |   | 10,201        |                        |   |   | 3,205         |   |   |        | —       |   |      |   | —       |      |   |   | 14,673 |   |   |   | 25,738 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance:  collectively evaluated for impairment |   |       | 83,308        |   |                                          |   | 274,424       |                        |   |   | 95,120        |   |   |        | 9,128         |   |      |   | —       |      |   |   | 461,980 |   |   |   | 469,778 |   |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Less unearned income                                        |   |       |     |   |                                          |   |     |                        |   |   |     |   |   |        |     |   |      |   |     |      |   |   | (828 | ) |   |   | (881 | ) |
|                                                        |   |       |          |   |                                          |   |          |                        |   |   |          |   |   |        |          |   |      |   |          |      |   |   |   |   |   |   |   |   |
| Ending balance total loans                                  |   | $          | 84,575        |   |                                          | $      | 284,625       |                        |   | $      | 98,325        |   |   | $           | 9,128         |   |      | $      | —       |      |   | $ | 475,825 |   |   | $ | 494,635 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                           |   | Pass   |    |   | Other LoansEspeciallyMentioned |   |    | Substandard |   |   | Doubtful |   |   | Total  |    |
|--------------------------------|--------|--------|---------|--------|-------------------------------------|--------|---------|-------------|--------|--------|----------|--------|--------|--------|---------|
|                           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |
| Commercial                     |   | $      | 80,400  |   |                                | $      | 1,967   |        |   | $      | 1,716    |   |   | $      | 492     |   |   | $ | 84,575 |   |
|                           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   |   |   |
| Real estate:                   |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   |   |   |
| Construction and development   |   |   | 29,293  |   |                                |   | 5,199   |        |   |   | 11,764   |   |   |   | — |   |   |   | 46,256 |   |
| Residential 1-4 family         |   |   | 81,932  |   |                                |   | 1,669   |        |   |   | 5,611    |   |   |   | — |   |   |   | 89,212 |   |
| Multi-family                   |   |   | 9,113   |   |                                |   | — |        |   |   | —  |   |   |   | — |   |   |   | 9,113 |   |
| CRE – owner occupied     |   |   | 105,021 |   |                                |   | 705     |        |   |   | 4,210    |   |   |   | — |   |   |   | 109,936 |   |
| CRE – non owner occupied |   |   | 75,002  |   |                                |   | 14,983  |        |   |   | 16,094   |   |   |   | — |   |   |   | 106,079 |   |
| Farmland                       |   |   | 21,846  |   |                                |   | 115     |        |   |   | 393      |   |   |   | — |   |   |   | 22,354 |   |
| Total real estate              |   |   | 322,207 |   |                                |   | 22,671  |        |   |   | 38,072   |   |   |   | — |   |   |   | 382,950 |   |
|                           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   |   |   |
| Consumer                       |   |   | 8,987   |   |                                |   | 50      |        |   |   | 67       |   |   |   | 24      |   |   |   | 9,128 |   |
|                           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   |   |   |
| Subtotal                       |   | $      | 411,594 |   |                                | $      | 24,688  |        |   | $      | 39,855   |   |   | $      | 516     |   |   | $ | 476,653 |   |
| Less unearned income           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   | (828 | ) |
|                           |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   |   |   |   |
| Total loans                    |   |   |    |   |                                |   |    |        |   |   |     |   |   |   |    |   |   | $ | 475,825 |   |

|                                |   | RecordedInvestment |    |   | UnpaidPrincipalBalance |   |    | RelatedAllowance |   |   | AverageRecordedInvestment |   |   | InterestIncomeRecognized |    |
|-------------------------------------|--------|--------------------|---------|--------|------------------------|--------|---------|------------------|--------|--------|---------------------------|--------|--------|--------------------------|---------|
| With no related allowance recorded: |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |
| Commercial                          |   | $                  | 759     |   |                   | $      | 822     |             |   | $      | —                   |   |   | $                        | 794     |   |   | $ | 5 |   |
| Residential real estate             |   |               | 3,205   |   |                   |   | 3,766   |             |   |   | —                   |   |   |                     | 3,674   |   |   |   | 12 |   |
| Commercial real estate:             |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| CRE – owner occupied          |   |               | 726     |   |                   |   | 768     |             |   |   | —                   |   |   |                     | 752     |   |   |   | 7 |   |
| CRE – non-owner occupied      |   |               | 2,741   |   |                   |   | 2,739   |             |   |   | —                   |   |   |                     | 2,734   |   |   |   | 65 |   |
| Construction and development        |   |               | 6,734   |   |                   |   | 10,055  |             |   |   | —                   |   |   |                     | 11,695  |   |   |   | 467 |   |
|                                |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| With an allowance recorded:         |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| Commercial                          |   |               | 508     |   |                   |   | 492     |             |   |   | 142                       |   |   |                     | 506     |   |   |   | 37 |   |
| Residential real estate             |   |               | — |   |                   |   | — |             |   |   | —                   |   |   |                     | — |   |   |   | — |   |
| Commercial real estate:             |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| CRE – owner occupied          |   |               | — |   |                   |   | — |             |   |   | —                   |   |   |                     | — |   |   |   | — |   |
| CRE – non-owner occupied      |   |               | — |   |                   |   | — |             |   |   | —                   |   |   |                     | — |   |   |   | — |   |
| Construction and development        |   |               | — |   |                   |   | — |             |   |   | —                   |   |   |                     | — |   |   |   | — |   |
|                                |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| Total:                              |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| Commercial                          |   |               | 1,267   |   |                   |   | 1,314   |             |   |   | 142                       |   |   |                     | 1,300   |   |   |   | 42 |   |
| Residential real estate             |   |               | 3,205   |   |                   |   | 3,766   |             |   |   | —                   |   |   |                     | 3,674   |   |   |   | 12 |   |
| Commercial real estate:             |   |               |    |   |                   |   |    |             |   |   |                      |   |   |                     |    |   |   |   |   |   |
| CRE – owner occupied          |   |               | 726     |   |                   |   | 768     |             |   |   | —                   |   |   |                     | 752     |   |   |   | 7 |   |
| CRE – non-owner occupied      |   |               | 2,741   |   |                   |   | 2,739   |             |   |   | —                   |   |   |                     | 2,734   |   |   |   | 65 |   |
| Construction and development        |   |               | 6,734   |   |                   |   | 10,055  |             |   |   | —                   |   |   |                     | 11,695  |   |   |   | 467 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                           |   | 30-59DaysPast Due |    |   | 60-89DaysPast Due |   |    | GreaterThan 90DaysPast Due |   |   | TotalPast Due |   |   | Current |    |   | TotalLoans |   |    | RecordedInvestment > 90 Daysand StillAccruing |   |
|--------------------------------|--------|------------------------|---------|--------|------------------------|--------|---------|--------------------------------------|--------|--------|--------------------|--------|--------|---------|---------|--------|------------|--------|---------|----------------------------------------------------------------------|--------|
|                           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |
| Commercial                     |   | $                      | 280     |   |                   | $      | — |                                 |   | $      | 146                |   |   | $       | 426     |   |       | $      | 84,149  |                                                                 |   | $ | 84,575 |   |   | $ | — |   |
|                           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |   |   |   |   |   |   |   |
| Real estate:                   |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |   |   |   |   |   |   |   |
| Construction & development |   |                   | 91      |   |                   |   | 2,239   |                                 |   |   | 1,300              |   |   |    | 3,630   |   |       |   | 42,626  |                                                                 |   |   | 46,256 |   |   |   | — |   |
| Residential 1-4 family         |   |                   | 637     |   |                   |   | 292     |                                 |   |   | 1,629              |   |   |    | 2,558   |   |       |   | 86,654  |                                                                 |   |   | 89,212 |   |   |   | — |   |
| Multi-family                   |   |                   | — |   |                   |   | — |                                 |   |   | —            |   |   |    | — |   |       |   | 9,113   |                                                                 |   |   | 9,113 |   |   |   | — |   |
| CRE owner occupied             |   |                   | 256     |   |                   |   | 1,056   |                                 |   |   | 447                |   |   |    | 1,759   |   |       |   | 108,177 |                                                                 |   |   | 109,936 |   |   |   | — |   |
| CRE non-owner occupied         |   |                   | — |   |                   |   | — |                                 |   |   | 333                |   |   |    | 333     |   |       |   | 105,746 |                                                                 |   |   | 106,079 |   |   |   | — |   |
| Farmland                       |   |                   | — |   |                   |   | — |                                 |   |   | 170                |   |   |    | 170     |   |       |   | 22,184  |                                                                 |   |   | 22,354 |   |   |   | — |   |
| Total real estate              |   |                   | 984     |   |                   |   | 3,587   |                                 |   |   | 3,879              |   |   |    | 8,450   |   |       |   | 374,500 |                                                                 |   |   | 382,950 |   |   |   | — |   |
|                           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |   |   |   |   |   |   |   |
| Consumer                       |   |                   | 28      |   |                   |   | — |                                 |   |   | —            |   |   |    | 28      |   |       |   | 9,100   |                                                                 |   |   | 9,128 |   |   |   | — |   |
|                           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |   |   |   |   |   |   |   |
| Less unearned income           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   | (828    | )                                                                    |   |   | (828 | ) |   |   |   |   |
|                           |   |                   |    |   |                   |   |    |                                 |   |   |               |   |   |    |    |   |       |   |    |                                                                 |   |   |   |   |   |   |   |   |
| Total                          |   | $                      | 1,292   |   |                   | $      | 3,587   |                                 |   | $      | 4,025              |   |   | $       | 8,904   |   |       | $      | 466,921 |                                                                 |   | $ | 475,825 |   |   | $ | — |   |

|                           |   | Current TDRs |   |   | Subsequently Defaulted TDRs |   |
|--------------------------------|--------|-------------------|--------|--------|---------------------------------------|--------|
|                           |   |              |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |   | NumberofContracts |   |   | Pre-TDROutstandingRecordedInvestment  |   |   | Post-TDROutstandingRecordedInvestment |   |   | NumberofContracts |   |   | Pre-TDROutstandingRecordedInvestment |   |   | Post-TDROutstandingRecordedInvestment |   |
|                           |   |              |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential real estate        |   |              | 1      |   |                                  | $      | 417 |   |   | $ | 324 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Construction & development |   |              | 1      |   |                                  |   | 561 |   |   |   | 608 |   |   |   | — |   |   |   | — |   |   |   | — |   |
|                           |   |              |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance                 |   |              | 2      |   |                                  | $      | 978 |   |   | $ | 932 |   |   |   | — |   |   |   | — |   |   |   | — |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                              |   | 2010   |    |   | 2009   |   |
|---------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                              |   |   |    |   |   |   |
| Commercial                                        |   | $      | 1,251   |   |   | $      | 1,049 |   |
| Real estate                                       |   |   |    |   |   |   |   |   |
| Construction and development                      |   |   | 5,529   |   |   |   | 9,886 |   |
| Residential 1-4 family                            |   |   | 2,246   |   |   |   | 1,323 |   |
| Multi-family                                      |   |   | — |   |   |   | 353 |   |
| Commercial real estate – owner occupied     |   |   | 470     |   |   |   | 1,568 |   |
| Commercial real estate – non-owner occupied |   |   | 333     |   |   |   | 1,381 |   |
| Farmland                                          |   |   | 170     |   |   |   | 87 |   |
| Total real estate                                 |   |   | 8,748   |   |   |   | 14,598 |   |
|                                              |   |   |    |   |   |   |   |   |
| Total                                             |   | $      | 9,999   |   |   | $      | 15,647 |   |

|                                           |   | 2010   |   |   | 2009   |   |
|------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                           |   |   |   |   |   |   |
| Land and premises                              |   | $      | 17,609 |   |   | $      | 17,518 |   |
| Equipment, furniture and fixtures              |   |   | 7,275  |   |   |   | 7,192 |   |
| Construction in progress                       |   |   | 113    |   |   |   | 57 |   |
|                                           |   |   | 24,997 |   |   |   | 24,767 |   |
| Less accumulated depreciation and amortization |   |   | 9,816  |   |   |   | 8,853 |   |
|                                           |   |   |   |   |   |   |   |   |
| Total premises and equipment                   |   | $      | 15,181 |   |   | $      | 15,914 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

| 2011                            |   | $      | 275    |   |
|---------------------------------|--------|--------|--------|--------|
| 2011                            |   |   | 245    |   |
| 2012                            |   |   | 204    |   |
| 2013                            |   |   | 168    |   |
| 2014                            |   |   | 171    |   |
|                            |   |   |   |   |
| Total minimum payments required |   | $      | 1,063  |   |

|                         |   | 2010   |   |   | 2009   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
|                         |   |   |   |   |   |   |
| Balance at beginning of year |   | $      | 6,665  |   |   | $      | 6,810 |   |
| Additions                    |   |   | 8,093  |   |   |   | 11,252 |   |
| Dispositions                 |   |   | (6,906 | )      |   |   | (7,708 | ) |
| Fair value write-downs       |   |   | (1,272 | )      |   |   | (3,689 | ) |
|                         |   |   |   |   |   |   |   |   |
| Balance at end of year       |   | $      | 6,580  |   |   | $      | 6,665 |   |

|                                  |   | 2010   |    |   | 2009   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|
|                                  |   |   |    |   |   |   |
| Demand deposits, non-interest bearing |   | $      | 95,115  |   |   | $      | 86,046 |   |
| NOW and money market accounts         |   |   | 197,354 |   |   |   | 178,228 |   |
| Savings deposits                      |   |   | 55,993  |   |   |   | 51,053 |   |
| Time certificates, $100,000 or more   |   |   | 126,303 |   |   |   | 171,615 |   |
| Other time certificates               |   |   | 70,189  |   |   |   | 80,753 |   |
|                                  |   |   |    |   |   |   |   |   |
| Total                                 |   | $      | 544,954 |   |   | $      | 567,695 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

| 2011   |   | $      | 146,138 |   |
|--------|--------|--------|---------|--------|
| 2012   |   |   | 24,006  |   |
| 2013   |   |   | 13,586  |   |
| 2014   |   |   | 6,295   |   |
| 2015   |   |   | 6,467   |   |
|   |   |   |    |   |
| Total  |   | $      | 196,492 |   |

|                                          |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                          |   |   |   |   |   |   |
| Amount outstanding at end of year             |   | $      | 10,500 |   |   | $      | 4,500 |   |
| Weighted average interest rate at December 31 |   |   | 3.85   | %      |   |   | 3.77 | % |
| Maximum month-end balance during the year     |   |   | 10,500 |   |   |   | 24,000 |   |
| Average balance during the year               |   |   | 7,502  |   |   |   | 3,107 |   |
| Average interest rate during the year         |   |   | 2.72   | %      |   |   | .84 | % |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                   |   | Issuance |    |   | Preferred |   | Rate   |   | Initial           |   |   | Rate at  |   |   | Maturity |   |
|------------------------|--------|----------|---------|--------|-----------|--------|--------|--------|-------------------|--------|--------|----------|--------|--------|----------|--------|
| Issuance Trust         |   | Date     |    |   | Security  |   | Type   |   | Rate              |   |   | 12/31/10 |   |   | Date     |   |
|                   |   |     |    |   |      |   |   |   |              |   |   |     |   |   |     |   |
| PFC Statutory Trust I  |   |     | 12/2005 |   |      | $      | 5,000  |   | Fixed (1)         |   |   | 6.39%    |   |   |     | 6.39%  |   |   | 3/2036 |   |
| PFC Statutory Trust II |   |     | 6/2006  |   |      | $      | 8,000  |   | Variable (2) |   |   | 7.02%    |   |   |     | 1.89%  |   |   | 7/2036 |   |

|   | (1) | Fixed rate until March 15, 2011, at which time becomes a variable rate, adjusted quarterly, equal to 145 basis points over the three month London Interbank Offered Rate (“LIBOR”) rate. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The variable rate preferred securities reprice quarterly based on the three month LIBOR rate. |
|--------|-----|-----------------------------------------------------------------------------------------------|

|                     |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                     |   |   |   |   |   |   |   |   |   |
| Current                  |   | $      | 582    |   |   | $      | (1,823 | )      |   | $ | 191 |   |
| Deferred                 |   |   | (886   | )      |   |   | (2,696 | )      |   |   | (752 | ) |
|                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Total income tax benefit |   | $      | (304   | )      |   | $      | (4,519 | )      |   | $ | (561 | ) |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                             |   | 2010   |   |   | 2009   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Deferred Tax Assets                              |   |   |   |   |   |   |
| Allowance for credit losses                      |   | $      | 3,673  |   |   | $      | 3,815 |   |
| Deferred compensation                            |   |   | 124    |   |   |   | 124 |   |
| Supplemental executive retirement plan           |   |   | 621    |   |   |   | 478 |   |
| Unrealized loss on securities available for sale |   |   | 171    |   |   |   | 444 |   |
| Loan fees/costs                                  |   |   | 245    |   |   |   | 262 |   |
| OREO write-downs                                 |   |   | 703    |   |   |   | 794 |   |
| Low income housing credit carry-forward          |   |   | 326    |   |   |   | 217 |   |
| AMT credit carry-forward                         |   |   | 339    |   |   |   | 127 |   |
| Other                                            |   |   | 194    |   |   |   | 123 |   |
|                                             |   |   |   |   |   |   |   |   |
| Total deferred tax assets                        |   |   | 6,396  |   |   |   | 6,384 |   |
|                                             |   |   |   |   |   |   |   |   |
| Deferred Tax Liabilities                         |   |   |   |   |   |   |   |   |
| Depreciation                                     |   | $      | 132    |   |   | $      | 181 |   |
| Loan fees/costs                                  |   |   | 1,823  |   |   |   | 2,283 |   |
| Core deposit intangible                          |   |   | 12     |   |   |   | 61 |   |
| Prepaid expenses                                 |   |   | 124    |   |   |   | 134 |   |
| FHLB dividends                                   |   |   | 143    |   |   |   | 143 |   |
| Other                                            |   |   | 237    |   |   |   | 271 |   |
|                                             |   |   |   |   |   |   |   |   |
| Total deferred tax liabilities                   |   |   | 2,471  |   |   |   | 3,073 |   |
|                                             |   |   |   |   |   |   |   |   |
| Net deferred tax assets                          |   | $      | 3,925  |   |   | $      | 3,311 |   |

|                                    |   | 2010   |   |   | Percent    |   |   | 2009   |   |   | Percent    |   |   | 2008   |   |   | Percent |   |
|-----------------------------------------|--------|--------|--------|--------|------------|--------|--------|--------|--------|--------|------------|--------|--------|--------|--------|--------|---------|--------|
|                                    |   |   |   |   | of Pre-tax |   |   |   |   |   | of Pre-tax |   |   |   |   |   | Pre-tax |   |
|                                    |   | Amount |   |   | Income     |   |   | Amount |   |   | Income     |   |   | Amount |   |   | Income  |   |
|                                    |   |   |   |   |       |   |   |   |   |   |       |   |   |   |   |   |    |   |
| Income (loss) tax at statutory rate     |   | $      | 466    |   |       |   | 35.0   | %      |   | $      | (3,800     | )      |   |   | (35.0  | )%     |    | $      | 137 |   |   |   | 35.0 | % |
| Adjustments resulting from:             |   |   |   |   |       |   |   |   |   |   |       |   |   |   |   |   |    |   |   |   |   |   |   |   |
| Tax-exempt income                       |   |   | (530   | )      |       |   | (39.8  | )      |   |   | (505       | )      |   |   | (4.7   | )      |    |   | (371 | ) |   |   | (95.1 | ) |
| Net earnings on life insurance policies |   |   | (176   | )      |       |   | (13.3  | )      |   |   | (184       | )      |   |   | (1.7   | )      |    |   | (199 | ) |   |   | (51.0 | ) |
| Other                                   |   |   | (64    | )      |       |   | (4.8   | )      |   |   | (30        | )      |   |   | (0.2   | )      |    |   | (128 | ) |   |   | (32.8 | ) |
|                                    |   |   |   |   |       |   |   |   |   |   |       |   |   |   |   |   |    |   |   |   |   |   |   |   |
| Total income tax benefit                |   | $      | (304   | )      |       |   | (22.9  | )%     |   | $      | (4,519     | )      |   |   | (41.6  | )%     |    | $      | (561 | ) |   |   | (143.8 | )% |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                               |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net periodic pension cost:         |   |   |   |   |   |   |   |   |   |
| Service Cost                       |   | $      | 122    |   |   | $      | 173    |   |   | $ | 93 |   |
| Interest Cost                      |   |   | 86     |   |   |   | 98     |   |   |   | 48 |   |
| Amortization of prior service cost |   |   | 90     |   |   |   | 130    |   |   |   | 70 |   |
| Amortization of net (gain)/loss    |   |   | (15    | )      |   |   | (10    | )      |   |   | (2 | ) |
|                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Net periodic pension cost          |   | $      | 283    |   |   | $      | 391    |   |   | $ | 209 |   |
|                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average assumptions:      |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                      |   |   | 5.90   | %      |   |   | 6.67   | %      |   |   | 6.38 | % |
| Rate of compensation increases     |   |   | 0.00   |   |   |   | 0.00   |   |   |   | 3.00 |   |

|                                    |   | 2010   |   |   | 2009   |   |
|-----------------------------------------|--------|--------|--------|--------|--------|--------|
| Change in Benefit Obligation:           |   |   |   |   |   |   |
| Benefit obligation at beginning of year |   | $      | 1,282  |   |   | $      | 949 |   |
| Service cost                            |   |   | 122    |   |   |   | 173 |   |
| Interest cost                           |   |   | 86     |   |   |   | 98 |   |
| Actuarial gain                          |   |   | 158    |   |   |   | 62 |   |
|                                    |   |   |   |   |   |   |   |   |
| Benefit obligation at end of year       |   | $      | 1,648  |   |   | $      | 1,282 |   |

|                                                      |   | 2010   |   |   | 2009   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                      |   |   |   |   |   |   |
| Gain (loss)                                               |   | $      | 22     |   |   | $      | (152 | ) |
| Prior service cost                                        |   |   | 542    |   |   |   | 633 |   |
|                                                      |   |   |   |   |   |   |   |   |
| Total recognized in accumulative other comprehensive loss |   | $      | 564    |   |   | $      | 481 |   |

|                           |   | 2010   |   |   | 2009   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|
|                           |   |   |   |   |   |   |
| Projected benefit obligation   |   | $      | 1,648  |   |   | $      | 1,282 |   |
| Accumulated benefit obligation |   |   | 1,648  |   |   |   | 1,282 |   |

| 2011 – 2015 |   |   |   |   |   | $      | 0     |   |
|-------------------|--------|--------|--------|--------|--------|--------|-------|--------|
| 2016 – 2020 |   |   |   |   |   |   | 1,112 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                         |   | 2010   |   |   | 2009   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|
|                         |   |   |   |   |   |   |
| Commitments to extend credit |   | $      | 90,888 |   |   | $      | 71,435 |   |
| Standby letters of credit    |   |   | 1,123  |   |   |   | 1,164 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

| Grant period ended |   | ExpectedLife |   | Risk FreeInterest Rate |   |   | ExpectedVolatility |   |   | DividendYield |   |   | AverageFair Value |   |
|------------------------------|--------|--------------|--------|----------------------------------|--------|--------|--------------------|--------|--------|---------------|--------|--------|------------------------|--------|
|                         |   |         |   |                             |   |   |               |   |   |          |   |   |                   |   |
| December 31, 2010            |   | 6.5 years    |   |                             | 3.20   | %      |               |   | 18.95  | %             |   |   | —                | %      |   | $ | 0.34 |   |
| December 31, 2009            |   | 6.5 years    |   |                             | 2.90   | %      |               |   | 18.69  | %             |   |   | 1.20                   | %      |   | $ | 0.24 |   |
| December 31, 2008            |   | 6.5 years    |   |                             | 3.75   | %      |               |   | 16.19  | %             |   |   | 6.05                   | %      |   | $ | 0.83 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                             |   | 2010   |    |   | 2009     |   |    | 2008   |   |
|----------------------------------|--------|--------|---------|--------|----------|--------|---------|--------|--------|
|                             |   |   |    |   | Weighted |   |    |   |   |   | Weighted |   |   |   |   |   | Weighted |   |
|                             |   |   |    |   | Average  |   |    |   |   |   | Average |   |   |   |   |   | Average |   |
|                             |   |   |    |   | Exercise |   |    |   |   |   | Exercise |   |   |   |   |   | Exercise |   |
|                             |   | Shares |    |   | Price    |   |    | Shares |   |   | Price |   |   | Shares |   |   | Price |   |
|                             |   |   |    |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year |   |   | 820,837 |   |     | $      | 11.08   |   |   |   | 684,527 |   |   | $ | 12.58 |   |   |   | 689,868 |   |   | $ | 12.55 |   |
|                             |   |   |    |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                          |   |   | 1,000   |   |     |   | 7.00    |   |   |   | 213,750 |   |   |   | 7.00 |   |   |   | 8,250 |   |   |   | 11.27 |   |
| Exercised                        |   |   | — |   |     |   | — |   |   |   | — |   |   |   | — |   |   |   | (7,321 | ) |   |   | 7.93 |   |
| Expired                          |   |   | — |   |     |   | — |   |   |   | (35,310 | ) |   |   | 12.27 |   |   |   | — |   |   |   | — |   |
| Forfeited                        |   |   | (3,225  | )      |     |   | 11.27   |   |   |   | (42,130 | ) |   |   | 13.76 |   |   |   | (6,270 | ) |   |   | 12.42 |   |
|                             |   |   |    |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year       |   |   | 818,612 |   |     | $      | 11.07   |   |   |   | 820,837 |   |   | $ | 11.08 |   |   |   | 684,527 |   |   | $ | 12.58 |   |
|                             |   |   |    |   |     |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of year       |   |   | 599,727 |   |     | $      | 12.06   |   |   |   | 529,922 |   |   | $ | 12.35 |   |   |   | 557,587 |   |   | $ | 12.32 |   |

|                           |   | 2010   |    |   | 2009                           |   |
|--------------------------------|--------|--------|---------|--------|--------------------------------|--------|
|                           |   | Shares |    |   | WeightedAverage FairValue |   |   | Shares |   |   | WeightedAverage FairValue |   |
| Non-vested beginning of period |   |   | 290,915 |   |                           | $      | 0.60 |   |   |   | 126,940 |   |   | $ | 1.62 |   |
| Granted                        |   |   | 1,000   |   |                           |   | 0.34 |   |   |   | 213,750 |   |   |   | 0.24 |   |
| Vested                         |   |   | (70,850 | )      |                           |   | 0.89 |   |   |   | (30,635 | ) |   |   | 1.74 |   |
| Forfeited                      |   |   | (2,180  | )      |                           |   | 0.67 |   |   |   | (19,140 | ) |   |   | 1.50 |   |
|                           |   |   |    |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Non-vested end of period       |   |   | 218,885 |   |                           | $      | 0.51 |   |   |   | 290,915 |   |   | $ | 0.60 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                              |   | Options Outstanding |    |   | Options Exercisable                             |   |
|-----------------------------------|--------|--------------------------|---------|--------|------------------------------------------------------|--------|
| Range ofexercise prices |   | Number                   |    |   | Weightedaverageremainingcontractuallife (years) |   |   | Weightedaverageexerciseprice |   |   | Number |   |   | Weightedaverageremainingcontractuallife (years) |   |   | Weightedaverageexerciseprice |   |
|                              |   |                     |    |   |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   0.00 – 11.10    |   |                     | 477,117 |   |                                                 |   | 4.1 |   |   | $ | 8.79 |   |   |   | 303,717 |   |   |   | 1.5 |   |   | $ | 9.81 |   |
| 11.11 – 12.49               |   |                     | 45,650  |   |                                                 |   | 5.1 |   |   |   | 11.79 |   |   |   | 33,550 |   |   |   | 4.3 |   |   |   | 11.72 |   |
| 12.50 – 14.74               |   |                     | 162,800 |   |                                                 |   | 4.6 |   |   |   | 14.22 |   |   |   | 131,175 |   |   |   | 4.4 |   |   |   | 14.23 |   |
| 14.75 – 16.00               |   |                     | 133,045 |   |                                                 |   | 4.0 |   |   |   | 15.17 |   |   |   | 131,285 |   |   |   | 3.9 |   |   |   | 15.17 |   |
|                              |   |                     |    |   |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |                     | 818,612 |   |                                                 |   | 4.2 |   |   | $ | 11.07 |   |   |   | 599,727 |   |   |   | 2.8 |   |   | $ | 12.06 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                 |   |   |   |   |   |   |   |             |   |   |   |   |   | To be Well             |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------|--------|--------|--------|--------|--------|------------------------|--------|--------|--------|--------|
|                                      |   |   |   |   |   |   |   |             |   |   |   |   |   | Capitalized            |   |   |   |   |
|                                      |   |   |   |   |   |   |   |             |   |   |   |   |   | Under Prompt           |   |   |   |   |
|                                      |   |   |   |   |   |   |   | Capital Adequacy |   |   |   |   |   | Corrective Action |   |   |   |   |
|                                      |   | Actual |   |   |   |   |   | Purposes         |   |   |   |   |   | Provisions             |   |   |   |   |
|                                      |   | Amount |   |   | Ratio  |   |   | Amount           |   |   | Ratio  |   |   | Amount                 |   |   | Ratio  |   |
| December 31, 2010                         |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |
| Tier 1 capital (to average assets):       |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |
| Company                                   |   | $      | 61,086 |   |   |   | 9.72   | %                |   | $      | 25,139 |   |   |                   | 4.00   | %      |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 61,577 |   |   |   | 9.80   |             |   |   | 25,130 |   |   |                   | 4.00   |   |   | $      | 31,412 |   |   |   | 5.00 | % |
| Tier 1 capital (to risk-weighted assets): |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Company                                   |   |   | 61,086 |   |   |   | 13.21  |             |   |   | 18,493 |   |   |                   | 4.00   |   |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 61,577 |   |   |   | 13.35  |             |   |   | 18,446 |   |   |                   | 4.00   |   |   |   | 27,669 |   |   |   | 6.00 |   |
| Total capital (to risk-weighted assets):  |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Company                                   |   |   | 66,925 |   |   |   | 14.48  |             |   |   | 36,985 |   |   |                   | 8.00   |   |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 67,401 |   |   |   | 14.62  |             |   |   | 36,892 |   |   |                   | 8.00   |   |   |   | 46,114 |   |   |   | 10.00 |   |
|                                      |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                         |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital (to average assets):       |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Company                                   |   | $      | 59,263 |   |   |   | 9.06   | %                |   | $      | 26,170 |   |   |                   | 4.00   | %      |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 59,055 |   |   |   | 9.03   |             |   |   | 26,148 |   |   |                   | 4.00   |   |   | $      | 32,685 |   |   |   | 5.00 | % |
| Tier 1 capital (to risk-weighted assets): |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Company                                   |   |   | 59,263 |   |   |   | 11.84  |             |   |   | 20,022 |   |   |                   | 4.00   |   |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 59,055 |   |   |   | 11.81  |             |   |   | 20,009 |   |   |                   | 4.00   |   |   |   | 30,014 |   |   |   | 6.00 |   |
| Total capital (to risk-weighted assets):  |   |   |   |   |   |   |   |             |   |   |   |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Company                                   |   |   | 65,579 |   |   |   | 13.10  |             |   |   | 40,043 |   |   |                   | 8.00   |   |   | NA     |   |   | NA |   |
| Bank                                      |   |   | 65,368 |   |   |   | 13.07  |             |   |   | 40,018 |   |   |                   | 8.00   |   |   |   | 50,023 |   |   |   | 10.00 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                                                                |   | 2010     |    |   |   |   |    | 2009     |   |   |    |   |
|-------------------------------------------------------------------------------------|--------|----------|---------|--------|--------|--------|---------|----------|--------|--------|---------|--------|
|                                                                                |   | Carrying |    |   | Fair   |   |    | Carrying |   |   | Fair    |   |
|                                                                                |   | Amount   |    |   | Value  |   |    | Amount   |   |   | Value   |   |
| Financial Assets                                                                    |   |     |    |   |   |   |    |     |   |   |    |   |
| Cash and due from banks, interest-bearing deposits in banks, and federal funds sold |   | $        | 61,758  |   |   | $      | 61,758  |     |   | $      | 52,904  |   |   | $ | 52,904 |   |
| Securities available for sale                                                       |   |     | 41,893  |   |   |   | 41,893  |     |   |   | 53,677  |   |   |   | 53,677 |   |
| Securities held to maturity                                                         |   |     | 6,454   |   |   |   | 6,584   |     |   |   | 7,449   |   |   |   | 7,594 |   |
| Loans held for sale                                                                 |   |     | 10,144  |   |   |   | 10,144  |     |   |   | 12,389  |   |   |   | 12,389 |   |
| Loans, net                                                                          |   |     | 455,064 |   |   |   | 408,261 |     |   |   | 471,154 |   |   |   | 397,151 |   |
|                                                                                |   |     |    |   |   |   |    |     |   |   |    |   |   |   |   |   |
| Financial Liabilities                                                               |   |     |    |   |   |   |    |     |   |   |    |   |   |   |   |   |
| Deposits                                                                            |   | $        | 544,954 |   |   | $      | 546,753 |     |   | $      | 567,695 |   |   | $ | 569,391 |   |
| Secured borrowings                                                                  |   |     | 925     |   |   |   | 925     |     |   |   | 977     |   |   |   | 977 |   |
| Short-term borrowings                                                               |   |     | 10,500  |   |   |   | 10,775  |     |   |   | 4,500   |   |   |   | 4,601 |   |
| Long-term borrowings                                                                |   |     | 10,500  |   |   |   | 10,858  |     |   |   | 21,000  |   |   |   | 21,554 |   |
| Junior subordinated debentures                                                      |   |     | 13,403  |   |   |   | 6,916   |     |   |   | 13,403  |   |   |   | 6,412 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                              |   | ReadilyAvailableMarket PricesLevel 1 |    |   | ObservableMarket PricesLevel 2 |   |    | SignificantUnobservableInputsLevel 3 |   |   | Total   |   |
|-----------------------------------|--------|------------------------------------------------|---------|--------|------------------------------------------|--------|---------|-------------------------------------------|--------|--------|---------|--------|
| December 31, 2010       |   |                                           |    |   |                                     |   |    |                                      |   |   |    |   |
| Securities available-for-sale     |   |                                           |    |   |                                     |   |    |                                      |   |   |    |   |
| U.S. Government agency securities |   | $                                              | — |   |                                     | $      | 1,109   |                                      |   | $      | — |   |   | $ | 1,109 |   |
| State and municipal securities    |   |                                           | — |   |                                     |   | 19,995  |                                      |   |   | 1,157   |   |   |   | 21,152 |   |
| Agency MBS                        |   |                                           | — |   |                                     |   | 7,730   |                                      |   |   | — |   |   |   | 7,730 |   |
| Non-agency MBS                    |   |                                           | — |   |                                     |   | 8,884   |                                      |   |   | — |   |   |   | 8,884 |   |
| Corporate bonds                   |   |                                           | 1,069   |   |                                     |   | 1,949   |                                      |   |   | — |   |   |   | 3,018 |   |
| Total                             |   | $                                              | 1,069   |   |                                     | $      | 39,667  |                                      |   | $      | 1,157   |   |   | $ | 41,893 |   |
|                              |   |                                           |    |   |                                     |   |    |                                      |   |   |    |   |   |   |   |   |
| December 31, 2009                 |   |                                           |    |   |                                     |   |    |                                      |   |   |    |   |   |   |   |   |
| Securities available-for-sale     |   |                                           |    |   |                                     |   |    |                                      |   |   |    |   |   |   |   |   |
| U.S. Government agency securities |   | $                                              | — |   |                                     | $      | 973     |                                      |   | $      | — |   |   | $ | 973 |   |
| State and municipal securities    |   |                                           | — |   |                                     |   | 20,487  |                                      |   |   | 1,593   |   |   |   | 22,080 |   |
| Agency MBS                        |   |                                           | — |   |                                     |   | 11,164  |                                      |   |   | — |   |   |   | 11,164 |   |
| Non-agency MBS                    |   |                                           | — |   |                                     |   | 14,460  |                                      |   |   | — |   |   |   | 14,460 |   |
| Mutual funds                      |   |                                           | 5,000   |   |                                     |   | — |                                      |   |   | — |   |   |   | 5,000 |   |
| Total                             |   | $                                              | 5,000   |   |                                     | $      | 47,084  |                                      |   | $      | 1,593   |   |   | $ | 53,677 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                   |   | 2010   |    |   | 2009   |   |
|----------------------------------------|--------|--------|---------|--------|--------|--------|
|                                   |   |   |    |   |   |   |
| Balance beginning of year              |   | $      | 1,593   |   |   | $      | — |   |
| Transfers in to Level 3                |   |   | — |   |   |   | 1,593 |   |
| Included in other comprehensive income |   |   | (40     | )      |   |   | — |   |
| Matured                                |   |   | (396    | )      |   |   | — |   |
|                                   |   |   |    |   |   |   |   |   |
| Balance end of year                    |   | $      | 1,157   |   |   | $      | 1,593 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                |   | Readily AvailableMarket PricesLevel 1 |    |   | ObservableMarket PricesLevel 2 |   |    | SignificantUnobservableInputsLevel 3 |   |   |  Total |   |
|---------------------|--------|---------------------------------------|---------|--------|--------------------------------|--------|---------|--------------------------------------|--------|--------|-------------|--------|
| December 31, 2010   |   |                                  |    |   |                           |   |    |                                 |   |   |        |   |
| Loans held for sale |   | $                                     | — |   |                           | $      | 10,144  |                                 |   | $      | —     |   |   | $ | 10,144 |   |
| Impaired loans      |   | $                                     | — |   |                           | $      | — |                                 |   | $      | 2,755       |   |   | $ | 2,755 |   |
| OREO                |   | $                                     | — |   |                           | $      | — |                                 |   | $      | 5,245       |   |   | $ | 5,245 |   |
|                |   |                                  |    |   |                           |   |    |                                 |   |   |        |   |   |   |   |   |
| December 31, 2009   |   |                                  |    |   |                           |   |    |                                 |   |   |        |   |   |   |   |   |
| Loans held for sale |   | $                                     | — |   |                           | $      | 12,389  |                                 |   | $      | —     |   |   | $ | 12,389 |   |
| Impaired loans      |   | $                                     | — |   |                           | $      | — |                                 |   | $      | 7,987       |   |   | $ | 7,987 |   |
| OREO                |   | $                                     | — |   |                           | $      | — |                                 |   | $      | 7,285       |   |   | $ | 7,285 |   |

|                               |   | Net Income (Loss) |    |   | Shares        |   |       | Per Share |   |
|------------------------------------|--------|-------------------|---------|--------|---------------|--------|------------|-----------|--------|
|                               |   | (Numerator)       |    |   | (Denominator) |   |       | Amount    |   |
| Year Ended December 31, 2010       |   |              |    |   |          |   |       |      |   |
| Basic earnings per share:          |   | $                 | 1,634   |   |          |   | 10,121,853 |      |   | $ | 0.16 |   |
| Effect of dilutive securities:     |   |              | — |   |          |   | —    |      |   |   | — |   |
| Diluted earnings per share:        |   | $                 | 1,634   |   |          |   | 10,121,853 |      |   | $ | 0.16 |   |
|                               |   |              |    |   |          |   |       |      |   |   |   |   |
| Year Ended December 31, 2009       |   |              |    |   |          |   |       |      |   |   |   |   |
| Basic earnings (loss) per share:   |   | $                 | (6,338  | )      |          |   | 8,539,237  |      |   | $ | (0.74 | ) |
| Effect of dilutive securities:     |   |              | — |   |          |   | —    |      |   |   | — |   |
| Diluted earnings (loss) per share: |   | $                 | (6,338  | )      |          |   | 8,539,237  |      |   | $ | (0.74 | ) |
|                               |   |              |    |   |          |   |       |      |   |   |   |   |
| Year Ended December 31, 2008       |   |              |    |   |          |   |       |      |   |   |   |   |
| Basic earnings per share:          |   | $                 | 951     |   |          |   | 7,311,611  |      |   | $ | 0.13 |   |
| Effect of dilutive securities:     |   |              | — |   |          |   | 16,557     |      |   |   | — |   |
| Diluted earnings per share:        |   | $                 | 951     |   |          |   | 7,328,168  |      |   | $ | 0.13 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                             |   | 2010   |    |   | 2009   |   |
|--------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Assets                                           |   |   |    |   |   |   |
| Cash                                             |   | $      | 578     |   |   | $      | 705 |   |
| Investment in the Bank                           |   |   | 73,260  |   |   |   | 70,441 |   |
| Due from the Bank                                |   |   | — |   |   |   | — |   |
| Other assets                                     |   |   | 430     |   |   |   | 415 |   |
|                                             |   |   |    |   |   |   |   |   |
| Total assets                                     |   | $      | 74,268  |   |   | $      | 71,561 |   |
|                                             |   |   |    |   |   |   |   |   |
| Liabilities and Shareholders’ Equity       |   |   |    |   |   |   |   |   |
| Dividends payable                                |   | $      | — |   |   | $      | — |   |
| Junior subordinated debentures                   |   |   | 13,403  |   |   |   | 13,403 |   |
| Due to the Bank                                  |   |   | 196     |   |   |   | 106 |   |
| Other liabilities                                |   |   | 900     |   |   |   | 403 |   |
| Shareholders’ equity                       |   |   | 59,769  |   |   |   | 57,649 |   |
|                                             |   |   |    |   |   |   |   |   |
| Total liabilities and shareholders’ equity |   | $      | 74,268  |   |   | $      | 71,561 |   |

|                                                            |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|-----------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                                            |   |   |    |   |   |   |    |   |   |
| Dividend Income from the Bank                                   |   | $      | — |   |   | $      | — |   |   | $ | 900 |   |
| Other Income                                                    |   |   | 15      |   |   |   | 17      |   |   |   | 27 |   |
| Total Income                                                    |   |   | 15      |   |   |   | 17      |   |   |   | 927 |   |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Expenses                                                        |   |   | (759    | )      |   |   | (835    | )      |   |   | (1,066 | ) |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Income (loss) before income tax benefit                         |   |   | (744    | )      |   |   | (818    | )      |   |   | (139 | ) |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Income Tax Benefit                                              |   |   | — |   |   |   | — |   |   |   | — |   |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Income (loss) before equity in undistributed income of the Bank |   |   | (744    | )      |   |   | (818    | )      |   |   | (139 | ) |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Equity in Undistributed Income of the Bank                      |   |   | 2,378   |   |   |   | (5,520  | )      |   |   | 1,090 |   |
|                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Net income (loss)                                               |   | $      | 1,634   |   |   | $      | (6,338  | )      |   | $ | 951 |   |

----

| Pacific Financial Corporation and Subsidiary                                              |
|-------------------------------------------------------------------------------------------|
| December 31, 2010 and 2009 and for the three years ended December 31, 2010                |
| Notes to Consolidated Financial Statements, Dollars in Thousands Except Per Share Amounts |

|                                                                                        |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|---------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Operating Activities                                                                        |   |   |    |   |   |   |    |   |   |
| Net income (loss)                                                                           |   | $      | 1,634   |   |   | $      | (6,338  | )      |   | $ | 951 |   |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |   |   |    |   |   |   |    |   |   |   |   |   |
| Equity in undistributed income of subsidiary                                                |   |   | (2,378  | )      |   |   | 5,520   |   |   |   | (1,090 | ) |
| Net change in other assets                                                                  |   |   | (15     | )      |   |   | 777     |   |   |   | (4 | ) |
| Net change in other liabilities                                                             |   |   | 586     |   |   |   | 370     |   |   |   | (3 | ) |
| Other - net                                                                                 |   |   | 46      |   |   |   | 54      |   |   |   | 87 |   |
| Net cash provided by (used in) operating activities                                         |   |   | (127    | )      |   |   | 383     |   |   |   | (59 | ) |
|                                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Financing Activities                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Proceeds from junior subordinated debentures                                                |   |   | — |   |   |   | — |   |   |   | — |   |
| Common stock issued                                                                         |   |   | — |   |   |   | 12,394  |   |   |   | 624 |   |
| Repurchase and retirement of common stock                                                   |   |   | — |   |   |   | — |   |   |   | (26 | ) |
| Dividends paid                                                                              |   |   | — |   |   |   | (12,585 | )      |   |   | (4,955 | ) |
| Net cash used in financing activities                                                       |   |   | — |   |   |   | (191    | )      |   |   | (4,357 | ) |
|                                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Net increase (decrease) in cash                                                             |   |   | (127    | )      |   |   | 192     |   |   |   | (4,416 | ) |
|                                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Cash                                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| Beginning of year                                                                           |   |   | 705     |   |   |   | 513     |   |   |   | 4,929 |   |
|                                                                                        |   |   |    |   |   |   |    |   |   |   |   |   |
| End of year                                                                                 |   | $      | 578     |   |   | $      | 705     |   |   | $ | 513 |   |

----

|                              |   | First   |   |   | Second  |   |   | Third   |   |   | Fourth  |   |
|-----------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
| Year Ended December 31, 2010      |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |
| Interest income                   |   | $       | 7,930  |   |    | $      | 7,756  |    |   | $      | 7,631   |   |   | $ | 7,543 |   |
| Interest expense                  |   |    | 2,228  |   |    |   | 2,076  |    |   |   | 1,888   |   |   |   | 1,789 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Net interest income               |   |    | 5,702  |   |    |   | 5,680  |    |   |   | 5,743   |   |   |   | 5,754 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Provision for credit losses       |   |    | 800    |   |    |   | 1,200  |    |   |   | 850     |   |   |   | 750 |   |
| Non-interest income               |   |    | 1,730  |   |    |   | 2,456  |    |   |   | 2,015   |   |   |   | 2,250 |   |
| Non-interest expenses             |   |    | 6,082  |   |    |   | 6,507  |    |   |   | 6,331   |   |   |   | 7,480 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Income before income taxes        |   |    | 550    |   |    |   | 429    |    |   |   | 577     |   |   |   | (226 | ) |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Income taxes (benefit)            |   |    | (84    | )      |    |   | (74    | )       |   |   | 98      |   |   |   | (244 | ) |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Net income                        |   | $       | 634    |   |    | $      | 503    |    |   | $      | 479     |   |   | $ | 18 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Earnings per common share:        |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Basic                             |   | $       | .06    |   |    | $      | .05    |    |   | $      | .05     |   |   | $ | .00 |   |
| Diluted                           |   |    | .06    |   |    |   | .05    |    |   |   | .05     |   |   |   | .00 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Year Ended December 31, 2009      |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Interest income                   |   | $       | 8,284  |   |    | $      | 8,194  |    |   | $      | 8,302   |   |   | $ | 8,040 |   |
| Interest expense                  |   |    | 2,816  |   |    |   | 3,044  |    |   |   | 2,762   |   |   |   | 2,445 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Net interest income               |   |    | 5,468  |   |    |   | 5,150  |    |   |   | 5,540   |   |   |   | 5,595 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Provision for credit losses       |   |    | 1,787  |   |    |   | 3,587  |    |   |   | 3,170   |   |   |   | 1,400 |   |
| Non-interest income               |   |    | 2,275  |   |    |   | 2,254  |    |   |   | 1,988   |   |   |   | 508 |   |
| Non-interest expenses             |   |    | 6,622  |   |    |   | 8,130  |    |   |   | 7,069   |   |   |   | 7,870 |   |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Loss before income taxes          |   |    | (666   | )      |    |   | (4,313 | )       |   |   | (2,711  | )      |   |   | (3,167 | ) |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Income taxes (benefit)            |   |    | (352   | )      |    |   | (2,048 | )       |   |   | (952    | )      |   |   | (1,167 | ) |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Net loss                          |   | $       | (314   | )      |    | $      | (2,265 | )       |   | $      | (1,759  | )      |   | $ | (2,000 | ) |
|                              |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Earnings (loss) per common share: |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Basic                             |   | $       | (.04   | )      |    | $      | (.31   | )       |   | $      | (.19    | )      |   | $ | (.20 | ) |
| Diluted                           |   |    | (.04   | )      |    |   | (.31   | )       |   |   | (.19    | )      |   |   | (.20 | ) |

----

|   | PACIFIC FINANCIAL CORPORATION |
|--------|-------------------------------|
|   | (Registrant)                  |

| /s/ Dennis A. Long           |   | /s/ Denise Portmann  |
|-----------------------------------|--------|---------------------------|
| Dennis A. Long, President and CEO |   | Denise Portmann, CFO      |

| Principal Executive Officer and Director       |                 | Principal Financial and Accounting Officer |
|------------------------------------------------|----------------------|--------------------------------------------|
|                                           |                 |                                       |
| /s/ Dennis A. Long                        |                 | /s/ Denise Portmann                   |
| Dennis A. Long, President and CEO and Director | Denise Portmann, CFO |
|                                           |                 |                                       |
| Remaining Directors                            |                 |                                       |
|                                           |                 |                                       |
| /s/ Gary C. Forcum                   |                 | /s/ G. Dennis Archer                       |
| Gary C. Forcum (Chairman of the Board)         | G. Dennis Archer     |
|                                           |                 |                                       |
| /s/ Randy W. Rognlin                           |                 | /s/ Edwin Ketel                            |
| Randy W. Rognlin                               |                 | Edwin Ketel                                |
|                                           |                 |                                       |
| /s/ Randy Rust                                 |                 | /s/ John Ferlin                            |
| Randy Rust                                     |                 | John Ferlin                                |
|                                           |                 |                                       |
| /s/ Douglas M. Schermer                        |                 | /s/ Susan C. Freese                        |
| Douglas M. Schermer                            |                 | Susan C. Freese                            |

----

| EXHIBIT NO. | EXHIBIT |
|-------------|---------|

| 3.1 | Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.2 | Bylaws. Incorporated by reference to Exhibit 2b to Form 8-A filed by the Company and declared effective on March 7, 2000 (Registration No. 000-29329). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | Form of Warrant to purchase shares of Common Stock issued to Ithan Creek Master Investors (Cayman) L.P. (the Purchaser).  Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 25, 2009 (the 2009 8-K). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | Form of Warrant to purchase shares of Common Stock issued to investors in 2009 private placement other than the Purchaser referred to in Exhibit 4.1. Incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Amended and Restated Employment Agreement with Dennis A. Long dated December 29, 2008.  Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (the 2008 10-K).* |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Amended and Restated Employment Agreement with John Van Dijk dated December 29, 2008.  Incorporated by reference to Exhibit 10.2 to the 2008 10-K.* |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Amended and Restated Employment Agreement with Bruce D. MacNaughton dated December 29, 2008.  Incorporated by reference to Exhibit 10.3 to the 2008 10-K.* |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.4 | Amended and Restated Employment Agreement with Denise Portmann dated December 29, 2008.  Incorporated by reference to Exhibit 10.4 to the 2008 10-K.* |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.5 | Bank of the Pacific Incentive Stock Option Plan.  Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, (the 1999 10-K).* |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.6 | The Bank of Grays Harbor Incentive Stock Option Plan.  Incorporated by reference to Exhibit 10.8 of the 1999 10-K.* |
|------|-------------------------------------------------------------------------------------------------------------------------------|

| 10.7 | 2000 Stock Incentive Compensation Plan, as amended (the 2000 Plan).  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the March 2007 10-Q).* |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.8 | Forms of stock option agreements under the 2000 Plan.  Incorporated by reference to Exhibits 10.2 and 10.3 to the March 2007 10-Q.* |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| 10.9 | The Bank of Grays Harbor Employee Deferred Compensation Plan.  Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000.* |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.10 | Supplemental Executive Retirement Plan effective January 1, 2007.  Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 13, 2008 (the March 2008 8-K).* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.11 | Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Dennis A. Long.  Incorporated by reference to Exhibit 10.2 to the March 2008 8-K.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.12 | Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and John Van Dijk.  Incorporated by reference to Exhibit 10.3 to the March 2008 8-K.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.13 | Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Bruce MacNaughton.  Incorporated by reference to Exhibit 10.4 to the March 2008 |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8-K.* |
|--------|-------|

| 10.14 | Individual Participation Agreement (SERP) dated March 13, 2008, between the Company and Denise Portmann.  Incorporated by reference to Exhibit 10.5 to the March 2008 8-K.* |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.15 | Pacific Financial Corporation Annual Incentive Compensation Plan, approved March 9, 2011. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 9, 2011.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.16 | Securities Purchase Agreement, dated August 25, 2009, between the Company and the Purchaser.  Incorporated by reference to Exhibit 10.1 to the 2009 8-K. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.17 | Registration Rights Agreement, dated August 25, 2009, between the Company and the Purchaser.  Incorporated by reference to Exhibit 10.2 to the 2009 8-K. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21 | Subsidiaries of Registrant |
|----|----------------------------|

----

| 23.1 | Consent of Deloitte & Touche, LLP, Independent Registered Public Accounting Firm |
|------|--------------------------------------------------------------------------------------|

| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) |
|------|---------------------------------------------------------------------|

| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) |
|------|---------------------------------------------------------------------|

| 32 | Certification Pursuant to 18 U.S.C. 1350 |
|----|------------------------------------------|

----