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| SELECTED FINANCIAL DATA                                                                                |
|--------------------------------------------------------------------------------------------------------|
| Dollars in Thousands Except Per Share Amounts                                                          |
|                                                                                                   |   |   |   |   |   |   |   |   |   |
|                                                                                                   | 2010 |   | 2009 |   | 2008 |   | 2007 |   | 2006 |
| Summary of Operations                                                                                  |   |   |   |   |   |   |   |   |   |
| Interest income                                                                                        | $ | 47,680 |   | 50,037 |   | 56,322 |   | 61,732 |   | 55,393 |
| Interest expense                                                                                       |   | 14,348 |   | 17,187 |   | 23,526 |   | 27,585 |   | 23,110 |
| Net interest earnings                                                                                  |   | 33,332 |   | 32,850 |   | 32,796 |   | 34,147 |   | 32,283 |
| Provision for loan losses                                                                              |   | 16,438 |   | 10,535 |   | 4,794 |   | 2,038 |   | 2,513 |
| Net interest earnings after provision                                                                  |   |   |   |   |   |   |   |   |   |   |
| for loan losses                                                                                        |   | 16,894 |   | 22,315 |   | 28,002 |   | 32,109 |   | 29,770 |
| Non-interest income                                                                                    |   | 13,884 |   | 11,823 |   | 10,495 |   | 8,816 |   | 7,554 |
| Non-interest expense                                                                                   |   | 28,948 |   | 29,883 |   | 28,893 |   | 25,993 |   | 22,983 |
| Earnings before taxes                                                                                  |   | 1,830 |   | 4,255 |   | 9,604 |   | 14,932 |   | 14,341 |
| Income taxes                                                                                           |   | (11 | ) | 1,339 |   | 3,213 |   | 5,340 |   | 5,170 |
| Net earnings                                                                                           |   | 1,841 |   | 2,916 |   | 6,391 |   | 9,592 |   | 9,171 |
| Dividends and accretion of preferred stock                                                             |   | 1,394 |   | 1,246 |   | -    |   | -    |   | -    |
| Net earnings available to common                                                                       |   |   |   |   |   |   |   |   |   |   |
| shareholders                                                                                           | $ | 447 |   | 1,670 |   | 6,391 |   | 9,592 |   | 9,171 |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Selected Year-End Balances                                                                             |   |   |   |   |   |   |   |   |   |   |
| Assets                                                                                                 | $ | 1,067,652 |   | 1,048,494 |   | 968,762 |   | 907,262 |   | 818,948 |
| Available for sale securities                                                                          |   | 272,449 |   | 195,115 |   | 124,916 |   | 120,968 |   | 117,581 |
| Loans, net                                                                                             |   | 710,667 |   | 762,643 |   | 770,163 |   | 713,174 |   | 643,078 |
| Mortgage loans held for sale                                                                           |   | 3,814 |   | 2,840 |   | -    |   | -    |   | -    |
| Interest-earning assets                                                                                |   | 1,010,983 |   | 988,017 |   | 921,101 |   | 853,878 |   | 780,082 |
| Deposits                                                                                               |   | 838,712 |   | 809,343 |   | 721,062 |   | 693,639 |   | 633,820 |
| Interest-bearing liabilities                                                                           |   | 850,233 |   | 826,838 |   | 758,334 |   | 718,870 |   | 650,364 |
| Shareholders' equity                                                                                   | $ | 96,858 |   | 99,223 |   | 101,128 |   | 70,102 |   | 62,835 |
| Shares outstanding*                                                                                    |   | 5,541,413 |   | 5,539,056 |   | 5,539,056 |   | 5,624,234 |   | 5,745,951 |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Selected Average Balances                                                                              |   |   |   |   |   |   |   |   |   |   |
| Assets                                                                                                 | $ | 1,078,136 |   | 1,016,257 |   | 929,799 |   | 846,836 |   | 772,585 |
| Available for sale securities                                                                          |   | 219,798 |   | 161,135 |   | 115,853 |   | 120,296 |   | 118,137 |
| Loans                                                                                                  |   | 757,532 |   | 782,464 |   | 747,203 |   | 665,379 |   | 604,427 |
| Interest-earning assets                                                                                |   | 999,054 |   | 956,680 |   | 876,425 |   | 801,094 |   | 732,244 |
| Deposits                                                                                               |   | 840,342 |   | 772,075 |   | 720,918 |   | 659,174 |   | 605,407 |
| Interest-bearing liabilities                                                                           |   | 849,870 |   | 796,260 |   | 740,478 |   | 665,727 |   | 613,686 |
| Shareholders' equity                                                                                   | $ | 101,529 |   | 101,162 |   | 76,241 |   | 70,586 |   | 62,465 |
| Shares outstanding*                                                                                    |   | 5,539,308 |   | 5,539,056 |   | 5,588,314 |   | 5,700,860 |   | 5,701,829 |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Profitability Ratios                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Return on average total assets                                                                         |   | 0.17% |   | 0.29% |   | 0.69% |   | 1.13% |   | 1.19% |
| Return on average shareholders' equity                                                                 |   | 1.81% |   | 2.88% |   | 8.38% |   | 13.59% |   | 14.68% |
| Dividend payout ratio**                                                                                |   | 100.11% |   | 86.22% |   | 41.93% |   | 24.30% |   | 20.78% |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Liquidity and Capital Ratios (averages)                                                                |   |   |   |   |   |   |   |   |   |   |
| Loan to deposit                                                                                        |   | 90.15% |   | 101.35% |   | 103.65% |   | 100.94% |   | 99.84% |
| Shareholders' equity to total assets                                                                   |   | 9.42% |   | 9.95% |   | 8.20% |   | 8.34% |   | 8.09% |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Per share of Common Stock*                                                                             |   |   |   |   |   |   |   |   |   |   |
| Basic net income                                                                                       | $ | 0.08 |   | 0.30 |   | 1.14 |   | 1.68 |   | 1.61 |
| Diluted net income                                                                                     | $ | 0.08 |   | 0.30 |   | 1.13 |   | 1.65 |   | 1.58 |
| Cash dividends                                                                                         | $ | 0.08 |   | 0.26 |   | 0.48 |   | 0.41 |   | 0.33 |
| Book value                                                                                             | $ | 12.96 |   | 13.39 |   | 13.73 |   | 12.46 |   | 10.94 |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| *Shares outstanding and per share computations have been retroactively restated to reflect a 10% stock |
| dividend during second quarter 2006 and a 3-for-2 stock split during second quarter 2007.              |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **As a percentage of net earnings available to common shareholders.                                    |   |   |   |   |

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| (Dollars in thousands) |                          |                                                                                                  |                          |                   |                                                                                       |   |
|------------------------|-------------------------------|-------------------------------------------------------------------------------------------------------|-------------------------------|------------------------|--------------------------------------------------------------------------------------------|--------|
|                   | Asset Derivatives             |                                                                                                  | Liability Derivatives         |
|                   |  As of December 31, 2010 |                                                                                                  |  As of December 31, 2009 |                   | As of December 31, 2010                                                                    |   | As of December 31, 2009 |
|                   | Balance Sheet Location        |   Fair Value                                                                                |                          | Balance Sheet Location |   Fair Value                                                                     |   | Balance Sheet Location |  Fair Value |   | Balance Sheet Location |  Fair Value |
| Interest rate          |                          |                                                                                                  |                          |                   |                                                                                       |   |   |   |   |   |   |
| derivative             |                          |                                                                                                  |                          |                   |                                                                                       |   |   |   |   |   |   |
| contracts              | Other assets                  |  $          648       |                          | Other assets           |  $          1,762    |   | N/A | $           -       |   | N/A |  $        -         |

| (Dollars in thousands)             |   |                 |   |                |   |                |
|------------------------------------|--------|----------------------|--------|---------------------|--------|---------------------|
|                               |   |                 |   |                |   |                |   |   |   |   |
|                               |   |                 |   |                |   |                |   |   |   |   |
|                               |   |                 |   |                |   | Location of Gain    |   | Amount of Gain |
|                               |   | Amount of Gain       |   | (Loss) Reclassified |   | (Loss) Reclassified |
|                               |   | (Loss) Recognized in |   | from Accumulated    |   | from Accumulated    |
|                               |   | OCI on Derivatives   |   | OCI into Income     |   | OCI into Income     |
|                               |   | Years ended          |   |                |   | Years ended         |
|                               |   | December 31,         |   |                |   | December 31,        |
|                               |   | 2010                 |   | 2009                |   |                |   | 2010 |   | 2009 |
| Interest rate derivative contracts |   | $                    | 404    |                | $      | 434                 |   | Interest income |   | $ | 1,518 |   | $ | 3,114 |
|                               |   |                 |   |                |   |                |   | Non-interest income |   | $ |        - |   | $ |      46 |

----

| (Dollars in thousands)                        |                                      |    |              |   |              |    |              |
|-----------------------------------------------|-------------------------------------------|---------|-------------------|--------|-------------------|---------|-------------------|
|                                          | Fair Value Measurements December 31, 2010 |    | Level 1 Valuation |   | Level 2 Valuation |    | Level 3 Valuation |
| Mortgage-backed securities                    | $                                         | 139,361 |              | -      |              | 139,361 |              | - |
| U.S. government                               |                                      |    |              |   |              |    |              |   |
| sponsored enterprises                         | $                                         | 42,640  |              | -      |              | 42,640  |              | - |
| State and political subdivisions              | $                                         | 87,829  |              | -      |              | 87,829  |              | - |
| Trust preferred securities                    | $                                         | 1,250   |              | -      |              | -       |              | 1,250 |
| Equity securities                             | $                                         | 1,369   |              | 1,369  |              | -       |              | - |
| Mortgage loans held for sale                  | $                                         | 3,814   |              | -      |              | 3,814   |              | - |
| Market value of derivatives (in other assets) | $                                         | 648     |              | -      |              | 648     |              | - |
|                                          |                                      |    |              |   |              |    |              |   |
|                                          | Fair Value Measurements December 31, 2009 |    | Level 1 Valuation |   | Level 2 Valuation |    | Level 3 Valuation |
| Mortgage-backed securities                    | $                                         | 107,526 |              | -      |              | 107,526 |              | - |
| U.S. government                               |                                      |    |              |   |              |    |              |   |
| sponsored enterprises                         | $                                         | 41,142  |              | -      |              | 41,142  |              | - |
| State and political subdivisions              | $                                         | 44,336  |              | -      |              | 44,336  |              | - |
| Trust preferred securities                    | $                                         | 1,250   |              | -      |              | -       |              | 1,250 |
| Equity securities                             | $                                         | 861     |              | 861    |              | -       |              | - |
| Mortgage loans held for sale                  | $                                         | 2,840   |              | -      |              | 2,840   |              | - |
| Market value of derivatives (in other assets) | $                                         | 1,762   |              | -      |              | 1,762   |              | - |

| (Dollars in thousands)                                            |                                     |
|-------------------------------------------------------------------|------------------------------------------|
|                                                              | Investment Securities Available for Sale |
|                                                              | Level 3 Valuation                        |
| Balance, beginning of period                                      | $                                        | 1,250 |
| Change in book value                                              |                                     | - |
| Change in gain/(loss) realized and unrealized                     |                                     | - |
| Purchases/(sales)                                                 |                                     | - |
| Transfers in and/or out of Level 3                                |                                     | - |
| Balance, end of period                                            | $                                        | 1,250 |
|                                                              |                                     |   |
| Change in unrealized gain/(loss) for assets still held in Level 3 | $                                        | - |

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| (Dollars in thousands) |                                      |               |              |              |                                                      |   |   |   |
|------------------------|-------------------------------------------|--------------------|-------------------|-------------------|-----------------------------------------------------------|--------|--------|--------|
|                   | Fair Value Measurements December 31, 2010 | Level 1 Valuation  | Level 2 Valuation | Level 3 Valuation | Total Gains/(Losses) for the Year Ended December 31, 2010 |
| Impaired loans         | $                                         | 40,062   |              | -                 |                                                      | 26,798 |   | 13,264 |   | (10,591)    |
| Other real estate      | $                                         | 6,673    |              | -                 |                                                      | 6,673  |   | -      |   | (340)    |
|                   |                                      |               |              |              |                                                      |   |   |   |   |   |
|                   |                                      |               |              |              |                                                      |   |   |   |   |   |
|                   | Fair Value Measurements December 31, 2009 | Level 1 Valuation  | Level 2 Valuation | Level 3 Valuation | Total Gains/(Losses) for the Year Ended December 31, 2009 |
| Impaired loans         | $                                         | 22,789   |              | -                 |                                                      | 14,174 |   | 8,615  |   | (1,924)    |
| Other real estate      | $                                         | 3,997    |              | -                 |                                                      | 3,997  |   | -      |   | (100)    |

| (Dollars in thousands)                                                                       |                                 |                |                                  |                |                               |                |
|----------------------------------------------------------------------------------------------|--------------------------------------|---------------------|---------------------------------------|---------------------|------------------------------------|---------------------|
|                                                                                         | Unpaid Contractual Principal Balance |                | Recorded Investment With No Allowance |                | Recorded Investment With Allowance |                | Total Recorded Impairment |   | Related Allowance |   | Average Recorded Impairment |
| Real Estate Loans                                                                            |                                 |                |                                  |                |                               |                | $ | -    |   |   |   |   |
|      Construction and land development                              |                                 | 31,346              |                                  | 20,787              |                               | 2,130               |   |   | 22,916 |   | 1,055 |   | 18,767 |
|      Single-family residential                                      |                                 | 12,376              |                                  | 9,847               |                               | 990                 |   |   | 10,837 |   | 168 |   | 12,573 |
|      Commercial                                                     |                                 | 6,018               |                                  | 4,991               |                               | 359                 |   |   | 5,351 |   | 148 |   | 4,769 |
|      Multifamily and Farmland                                       |                                 | -    |                                  | -    |                               | -    |   |   | -    |   | -    |   | 27 |
|           Total impaired real estate loans |                                 | 49,740              |                                  | 35,625              |                               | 3,479               |   |   | 39,104 |   | 1,371 |   | 36,136 |
|                                                                                         |                                 |                |                                  |                |                               |                |   |   |   |   |   |   |   |
| Commercial loans (not secured by real estate)                                                |                                 | 1,243               |                                  | 811                 |                               | 5                   |   |   | 816 |   | 5 |   | 1,479 |
| Consumer loans (not secured by real estate)                                                  |                                 | 152                 |                                  | 142                 |                               | -    |   |   | 142 |   | -    |   | 79 |
| All other loans (not secured by real estate)                                                 |                                 | -    |                                  | -    |                               | -    |   |   | -    |   |   |   | -    |
|      Total impaired loans                                           | $                                    | 51,135              |                                  | 36,578              |                               | 3,484               |   |   | 40,062 |   | 1,376 |   | 37,694 |

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| Table 1- Average Balance Table                                                                                                                                                                                                                                                    |              |      |              |   |              |   |            |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|-----------|-------------------|--------|-------------------|--------|-----------------|-----------|
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                              | December 31, 2010 |      | December 31, 2009 |   | December 31, 2008 |
| (Dollars in thousands)                                                                                                                                                                                                                                                            | Average Balance   |      | Interest          |   | Yield / Rate      |   | Average Balance |      | Interest |   | Yield / Rate |   | Average Balance |   | Interest |   | Yield / Rate |
| Interest-earning assets:                                                                                                                                                                                                                                                          |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |
| Loans                                                                                                                                                                                                                                                                             | $                 | 757,532   |              | 38,674 |              | 5.11%  |            | 782,464   |   | 40,058 |   | 5.12% |   | 747,203 |   | 46,808 |   | 6.26% |
| Interest rate derivative contracts                                                                                                                                                                                                                                                |              | -         |              | 1,518  |              | 0.20%  |            | -         |   | 3,114 |   | 0.40% |   | - |   | 3,403 |   | 0.45% |
| Loan fees                                                                                                                                                                                                                                                                         |              | -         |              | 75     |              | 0.01%  |            | -         |   | 39 |   | 0.00% |   | - |   | 393 |   | 0.05% |
| Total loans                                                                                                                                                                                                                                                                       |              | 757,532   |              | 40,267 |              | 5.32%  |            | 782,464   |   | 43,211 |   | 5.52% |   | 747,203 |   | 50,604 |   | 6.77% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Investments - taxable                                                                                                                                                                                                                                                             |              | 110,493   |              | 3,490  |              | 3.16%  |            | 81,642    |   | 3,477 |   | 4.26% |   | 26,591 |   | 1,253 |   | 4.71% |
| Investments - nontaxable*                                                                                                                                                                                                                                                         |              | 109,304   |              | 5,096  |              | 4.66%  |            | 79,493    |   | 4,226 |   | 5.32% |   | 89,262 |   | 4,924 |   | 5.52% |
| Federal funds sold                                                                                                                                                                                                                                                                |              | 89        |              | -      |              | 0.00%  |            | 704       |   | 1 |   | 0.14% |   | 3,050 |   | 55 |   | 1.80% |
| Other                                                                                                                                                                                                                                                                             |              | 21,636    |              | 103    |              | 0.48%  |            | 12,377    |   | 53 |   | 0.43% |   | 10,319 |   | 293 |   | 2.84% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                                                                                                                                                                                                                     |              | 999,054   |              | 48,956 |              | 4.90%  |            | 956,680   |   | 50,968 |   | 5.33% |   | 876,425 |   | 57,129 |   | 6.52% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                                                                                                                                                                                                                                           |              | 46,124    |              |   |              |   |            | 31,225    |   |   |   |   |   | 21,331 |   |   |   |   |
| Other assets                                                                                                                                                                                                                                                                      |              | 49,765    |              |   |              |   |            | 41,866    |   |   |   |   |   | 41,626 |   |   |   |   |
| Allowance for loan losses                                                                                                                                                                                                                                                         |              | (16,807   | )                 |   |              |   |            | (13,514   | ) |   |   |   |   | (9,583 | ) |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                                                                                                                                                                                                      | $                 | 1,078,136 |              |   |              |   |            | 1,016,257 |   |   |   |   |   | 929,799 |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                                                                                                                                                                     |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                                                                                                                                                                                                                                      | $                 | 133,401   |              | 1,674  |              | 1.25%  |            | 112,452   |   | 1,373 |   | 1.22% |   | 92,612 |   | 1,269 |   | 1.37% |
| Regular savings accounts                                                                                                                                                                                                                                                          |              | 82,018    |              | 879    |              | 1.07%  |            | 35,762    |   | 368 |   | 1.03% |   | 17,423 |   | 50 |   | 0.29% |
| Money market accounts                                                                                                                                                                                                                                                             |              | 96,736    |              | 919    |              | 0.95%  |            | 94,537    |   | 1,224 |   | 1.29% |   | 93,564 |   | 1,930 |   | 2.06% |
| Time deposits                                                                                                                                                                                                                                                                     |              | 405,300   |              | 6,786  |              | 1.67%  |            | 412,127   |   | 9,687 |   | 2.35% |   | 406,127 |   | 15,008 |   | 3.70% |
| FHLB / FRB borrowings                                                                                                                                                                                                                                                             |              | 71,989    |              | 3,285  |              | 4.56%  |            | 84,547    |   | 3,596 |   | 4.25% |   | 79,417 |   | 3,616 |   | 4.55% |
| Demand notes payable to U.S. Treasury                                                                                                                                                                                                                                             |              | 815       |              | -      |              | 0.00%  |            | 805       |   | - |   | 0.00% |   | 859 |   | 14 |   | 1.63% |
| Trust preferred securities                                                                                                                                                                                                                                                        |              | 20,619    |              | 411    |              | 1.99%  |            | 20,619    |   | 546 |   | 2.65% |   | 20,619 |   | 1,016 |   | 4.93% |
| Other                                                                                                                                                                                                                                                                             |              | 38,991    |              | 394    |              | 1.01%  |            | 35,411    |   | 393 |   | 1.11% |   | 29,857 |   | 624 |   | 2.09% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                                                                                                                                                                                                                                |              | 849,870   |              | 14,348 |              | 1.69%  |            | 796,260   |   | 17,187 |   | 2.16% |   | 740,478 |   | 23,527 |   | 3.18% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                                                                                                                                                                                                                                   |              | 122,887   |              |   |              |   |            | 117,197   |   |   |   |   |   | 111,192 |   |   |   |   |
| Other liabilities                                                                                                                                                                                                                                                                 |              | 3,513     |              |   |              |   |            | 2,428     |   |   |   |   |   | 4,021 |   |   |   |   |
| Shareholders' equity                                                                                                                                                                                                                                                              |              | 101,529   |              |   |              |   |            | 101,162   |   |   |   |   |   | 76,241 |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholder's equity                                                                                                                                                                                                                                        | $                 | 1,077,799 |              |   |              |   |            | 1,017,047 |   |   |   |   |   | 931,932 |   |   |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                                                                                                                                                                                                                                                               |              |      |              | 34,608 |              | 3.21%  |            |      |   | 33,781 |   | 3.17% |   |   |   | 33,602 |   | 3.34% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Net yield on interest-earning assets                                                                                                                                                                                                                                              |              |      |              |   |              | 3.46%  |            |      |   |   |   | 3.53% |   |   |   |   |   | 3.83% |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Taxable equivalent adjustment                                                                                                                                                                                                                                                     |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
|         Investment securities                                                                                                                                                                                                             |              |      |              | 1,276  |              |   |            |      |   | 931 |   |   |   |   |   | 806 |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                                                                                                                                                                                                                               |              |      |              | 33,332 |              |   |            |      |   | 32,850 |   |   |   |   |   | 32,796 |   |   |
|                                                                                                                                                                                                                                                                              |              |      |              |   |              |   |            |      |   |   |   |   |   |   |   |   |   |   |
| *Includes U.S. government agency securities that are non-taxable for state income tax purposes of $50.3 million in 2010, $45.5 million in 2009 and $63.6 million in 2008. An effective tax rate of 6.90% was used to calculate the tax equivalent yield on these securities. |

----

| Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis |                      |                     |                      |
|--------------------------------------------------------------|---------------------------|--------------------------|---------------------------|
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |
|                                                         | December 31, 2010         |                     |                      | December 31, 2009 |
| (Dollars in thousands)                                       | Changes in average volume | Changes in average rates | Total Increase (Decrease) |   | Changes in average volume | Changes in average rates | Total Increase (Decrease) |
| Interest income:                                             |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |
| Loans: Net of unearned income                                | $                         | (1,351                   | )                         | (1,593 | ) | (2,944 | ) |   | 2,168 |   | (9,561 | ) | (7,393 | ) |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| Investments - taxable                                        |                      | 1,070                    |                      | (1,057 | ) | 13 |   |   | 2,470 |   | (246 | ) | 2,224 |   |
| Investments - nontaxable                                     |                      | 1,487                    |                      | (617 | ) | 870 |   |   | (529 | ) | (169 | ) | (698 | ) |
| Federal funds sold                                           |                      | (1                       | )                         | - |   | (1 | ) |   | (23 | ) | (31 | ) | (54 | ) |
| Other                                                        |                      | 43                       |                      | 7 |   | 50 |   |   | 33 |   | (273 | ) | (240 | ) |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| Total interest income                                        |                      | 1,248                    |                      | (3,260 | ) | (2,012 | ) |   | 4,119 |   | (10,280 | ) | (6,161 | ) |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                                            |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                 |                      | 259                      |                      | 42 |   | 301 |   |   | 257 |   | (153 | ) | 104 |   |
| Regular savings accounts                                     |                      | 486                      |                      | 25 |   | 511 |   |   | 121 |   | 197 |   | 318 |   |
| Money market accounts                                        |                      | 25                       |                      | (330 | ) | (305 | ) |   | 16 |   | (722 | ) | (706 | ) |
| Time deposits                                                |                      | (137                     | )                         | (2,764 | ) | (2,901 | ) |   | 181 |   | (5,502 | ) | (5,321 | ) |
| FHLB / FRB Borrowings                                        |                      | (554                     | )                         | 243 |   | (311 | ) |   | 226 |   | (246 | ) | (20 | ) |
| Demand notes payable to                                      |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
|    U.S. Treasury                              |                      | -                        |                      | - |   | - |   |   | - |   | (14 | ) | (14 | ) |
| Trust Preferred Securities                                   |                      | -                        |                      | (135 | ) | (135 | ) |   | - |   | (470 | ) | (470 | ) |
| Other                                                        |                      | 38                       |                      | (37 | ) | 1 |   |   | 89 |   | (320 | ) | (231 | ) |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| Total interest expense                                       |                      | 117                      |                      | (2,956 | ) | (2,839 | ) |   | 890 |   | (7,230 | ) | (6,340 | ) |
|                                                         |                      |                     |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                          | $                         | 1,131                    |                      | (304 | ) | 827 |   |   | 3,229 |   | (3,050 | ) | 179 |   |

----

| Table 3 - Non-Interest Income             |   |   |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                      |   |   |   |   |   |   |
| (Dollars in thousands)                    | 2010   | 2009   | 2008   |
| Service charges                           | $      | 5,626  |   | 5,573  |   | 5,203  |   |
| Other service charges and fees            |   | 2,195  |   | 2,058  |   | 2,399  |   |
| Other than temporary impairment losses    |   | (291   | )      | (723   | )      | (300   | ) |
| Gain on sale of securities                |   | 3,348  |   | 1,795  |   | 133    |   |
| Mortgage banking income                   |   | 532    |   | 827    |   | 660    |   |
| Insurance and brokerage commissions       |   | 390    |   | 414    |   | 426    |   |
| Loss on foreclosed and repossessed assets |   | (704   | )      | (501   | )      | (287   | ) |
| Miscellaneous                             |   | 2,788  |   | 2,380  |   | 2,261  |   |
| Total non-interest income                 | $      | 13,884 |   | 11,823 |   | 10,495 |   |

----

| Table 4 - Non-Interest Expense                        |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                  |   |   |   |   |   |
| (Dollars in thousands)                                | 2010   | 2009   | 2008   |
| Salaries and wages                                    | $      | 11,408 |   | $      | 11,530 |   | 11,591 |
| Employee benefits                                     |   | 2,716  |   |   | 3,228  |   | 3,603 |
|      Total personnel expense |   | 14,124 |   |   | 14,758 |   | 15,194 |
| Occupancy expense                                     |   | 5,436  |   |   | 5,409  |   | 5,029 |
| Office supplies                                       |   | 391    |   |   | 426    |   | 564 |
| FDIC deposit insurance                                |   | 1,434  |   |   | 1,766  |   | 547 |
| Professional services                                 |   | 467    |   |   | 358    |   | 422 |
| Postage                                               |   | 352    |   |   | 342    |   | 360 |
| Telephone                                             |   | 629    |   |   | 616    |   | 476 |
| Director fees and expense                             |   | 263    |   |   | 350    |   | 450 |
| Advertising                                           |   | 714    |   |   | 860    |   | 1,076 |
| Consulting fees                                       |   | 288    |   |   | 198    |   | 385 |
| Taxes and licenses                                    |   | 320    |   |   | 248    |   | 193 |
| Other operating expense                               |   | 4,530  |   |   | 4,552  |   | 4,197 |
| Total non-interest expense                            | $      | 28,948 |   | $      | 29,883 |   | 28,893 |

----

| Table 5 - Interest Sensitivity Analysis                                 |      |                         |        |    |                                     |                              |   |     |
|-------------------------------------------------------------------------|-----------|------------------------------|-------------|---------|------------------------------------------|-----------------------------------|--------|----------|
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |
| (Dollars in thousands)                                                  | Immediate | 1-3    months | 4-12 months |    | Total Within One     Year | Over One Year & Non-sensitive | Total  |
| Interest-earning assets:                                                |      |                         |        |    |                                     |                              |   |     |   |   |   |
| Loans                                                                   | $         | 448,896                      |        | 9,683   |                                     | 14,514                            |   | 473,093  |   | 253,067 |   | 726,160 |
| Mortgage loans held for  sale                                 |      | 3,814                        |        | -       |                                     | -                                 |   | 3,814    |   | - |   | 3,814 |
| Investment securities available for sale                                |      | -                            |        | 9,743   |                                     | 28,959                            |   | 38,702   |   | 233,747 |   | 272,449 |
| Interest-bearing deposit accounts                                       |      | 1,456                        |        | -       |                                     | -                                 |   | 1,456    |   | - |   | 1,456 |
| Certificates of deposit                                                 |      | -                            |        | -       |                                     | 735                               |   | 735      |   | - |   | 735 |
| Other interest-earning assets                                           |      | -                            |        | -       |                                     | -                                 |   | -        |   | 6,369 |   | 6,369 |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Total interest-earning assets                                           |      | 454,166                      |        | 19,426  |                                     | 44,208                            |   | 517,800  |   | 493,183 |   | 1,010,983 |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Interest-bearing liabilities:                                           |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| NOW, savings, and money market deposits                                 |      | 332,511                      |        | -       |                                     | -                                 |   | 332,511  |   | - |   | 332,511 |
| Time deposits                                                           |      | 24,318                       |        | 92,162  |                                     | 126,852                           |   | 243,332  |   | 148,077 |   | 391,409 |
| Other short term borrowings                                             |      | 1,600                        |        | -       |                                     | -                                 |   | 1,600    |   | - |   | 1,600 |
| FHLB borrowings                                                         |      | -                            |        | -       |                                     | -                                 |   | -        |   | 70,000 |   | 70,000 |
| Securities sold under                                                   |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| agreement to repurchase                                                 |      | 34,094                       |        | -       |                                     | -                                 |   | 34,094   |   | - |   | 34,094 |
| Trust preferred securities                                              |      | -                            |        | 20,619  |                                     | -                                 |   | 20,619   |   | - |   | 20,619 |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Total interest-bearing liabilities                                      |      | 392,523                      |        | 112,781 |                                     | 126,852                           |   | 632,156  |   | 218,077 |   | 850,233 |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Interest-sensitive gap                                                  | $         | 61,643                       |        | (93,355 | )                                        | (82,644                           | )      | (114,356 | ) | 275,106 |   | 160,750 |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Cumulative interest-sensitive gap                                       | $         | 61,643                       |        | (31,712 | )                                        | (114,356                          | )      | (114,356 | ) | 160,750 |   |   |
|                                                                    |      |                         |        |    |                                     |                              |   |     |   |   |   |   |
| Interest-earning assets as a percentage of interest-bearing liabilities |      |                         |        |    |                                     |                              |   |     |
|                                                                    |      | 115.70%                      |        | 17.22%  |                                     | 34.85%                            |   | 81.91%   |   | 226.15% |   |   |

----

| Table 6 - Derivative Instruments             |            |          |                |   |
|----------------------------------------------|-----------------|---------------|---------------------|--------|
| (Dollars in thousands)                       |            |          |                |   |
|  Type of Derivative                     | Notional Amount | Contract Rate | Year-to-date Income |
| Interest rate swap contact expiring 06/01/11 |            | 50,000        |                | 6.245% |   |   | 1,518 |
|                                         | $               | 50,000        |                |   |   | $ | 1,518 |

----

| Table 7 - Summary of Investment Portfolio        |   |    |   |    |   |
|--------------------------------------------------|--------|---------|--------|---------|--------|
|                                             |   |    |   |    |   |
| (Dollars in thousands)                           | 2010   |    | 2009   |    | 2008   |
| Obligations of United States government          |   |    |   |    |   |
| sponsored enterprises                            | $      | 42,640  |   | 41,142  |   | 58,487 |
|                                             |   |    |   |    |   |   |
| Obligations of states and political subdivisions |   | 87,829  |   | 44,336  |   | 26,973 |
|                                             |   |    |   |    |   |   |
| Mortgage-backed securities                       |   | 139,361 |   | 107,526 |   | 37,271 |
|                                             |   |    |   |    |   |   |
| Trust preferred securities                       |   | 1,250   |   | 1,250   |   | 1,250 |
|                                             |   |    |   |    |   |   |
| Equity securities                                |   | 1,369   |   | 861     |   | 935 |
|                                             |   |    |   |    |   |   |
| Total securities                                 | $      | 272,449 |   | 195,115 |   | 124,916 |

| Table 8 - Maturity Distribution and Weighted Average Yield on Investments |             |   |            |   |             |    |
|---------------------------------------------------------------------------|------------------|--------|-----------------|--------|------------------|---------|
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                      |             |   |            |   | After One Year   |    | After 5 Years |   |   |   |   |   |   |   |   |
|                                                                      | One Year or Less |   | Through 5 Years |   | Through 10 Years |    | After 10 Years |   | Totals |
| (Dollars in thousands)                                                    | Amount           |   | Yield           |   | Amount           |    | Yield |   | Amount |   | Yield |   | Amount |   | Yield |   | Amount |   | Yield |
| Book value:                                                               |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States Government                                                  |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sponsored enterprises                                                     | $                | 85     |            | 3.28%  |             | 35,248  |   | 2.94% |   | 6,179 |   | 2.98% |   | 1,128 |   | 3.27% |   | 42,640 |   | 3.09% |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| States and political subdivisions                                         |             | 3,626  |            | 4.69%  |             | 18,083  |   | 3.82% |   | 47,826 |   | 3.57% |   | 18,295 |   | 4.25% |   | 87,831 |   | 4.08% |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities                                                |             | 32,373 |            | 3.11%  |             | 88,814  |   | 3.08% |   | 13,786 |   | 3.00% |   | 4,388 |   | 3.33% |   | 139,361 |   | 3.12% |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trust preferred securities                                                |             | -      |            | -      |             | -       |   | - |   | 1,000 |   | 4.40% |   | 250 |   | 5.30% |   | 1,250 |   | 4.94% |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity securities                                                         |             | -      |            | -      |             | -       |   | - |   | - |   | - |   | 982 |   | 0.00% |   | 982 |   | 0.00% |
|                                                                      |             |   |            |   |             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total securities                                                          | $                | 36,084 |            | 2.22%  |             | 142,145 |   | 1.97% |   | 68,791 |   | 2.79% |   | 25,043 |   | 3.23% |   | 272,063 |   | 3.05% |

----

| Table 9 - AD&C Loans                                |   |            |                |                |    |   |
|---------------------------------------------------------|--------|-----------------|---------------------|---------------------|---------|--------|
|                                                    |   |            |                |                |    |   |
| (Dollars in thousands)                                  |   | Number of Loans | Balance Outstanding | Non-accrual Balance |
| Land acquisition and development - commercial purposes  |   | 81              |                | $                   | 25,190  |   | $ | 3,292 |
| Land acquisition and development - residential purposes |   | 371             |                |                | 84,499  |   |   | 19,053 |
| 1 to 4 family residential construction                  |   | 45              |                |                | 13,039  |   |   | 342 |
| Commercial construction                                 |   | 3               |                |                | 1,320   |   |   | 248 |
| Total acquisition, development and construction         |   | 500             |                | $                   | 124,048 |   | $ | 22,935 |

----

| Table 10 - Loan Portfolio       |   |    |       |    |   |   |       |   |    |   |       |   |    |
|---------------------------------|--------|---------|------------|---------|--------|--------|------------|--------|---------|--------|------------|--------|---------|
|                            |   |    |       |    |   |   |       |   |    |   |       |   |    |   |   |   |   |   |   |
|                            | 2010   |    | 2009       |    | 2008   |   | 2007       |   | 2006    |
| (Dollars in thousands)          | Amount |    | % of Loans |    | Amount |   | % of Loans |   | Amount  |   | % of Loans |   | Amount  |   | % of Loans |   | Amount |   | % of Loans |
| Breakdown of loan receivables:  |   |    |       |    |   |   |       |   |    |   |       |   |    |   |   |   |   |   |   |
| Commercial                      | $      | 60,994  |       | 8.40%   |   | $      | 67,487     |   | 8.67%   |   | 76,945     |   | 9.85%   |   | 82,190 |   | 11.38% |   | 85,064 |   | 13.06% |
| Real estate - mortgage          |   | 507,250 |       | 69.85%  |   |   | 512,963    |   | 65.93%  |   | 474,732    |   | 60.77%  |   | 417,709 |   | 57.83% |   | 364,595 |   | 55.97% |
| Real estate - construction      |   | 124,048 |       | 17.08%  |   |   | 169,680    |   | 21.81%  |   | 216,188    |   | 27.67%  |   | 209,644 |   | 29.03% |   | 187,960 |   | 28.86% |
| Consumer                        |   | 33,868  |       | 4.66%   |   |   | 27,926     |   | 3.59%   |   | 13,323     |   | 1.71%   |   | 12,734 |   | 1.76% |   | 13,762 |   | 2.11% |
|                            |   |    |       |    |   |   |       |   |    |   |       |   |    |   |   |   |   |   |   |   |   |
| Total loans                     | $      | 726,160 |       | 100.00% |   | $      | 778,056    |   | 100.00% |   | 781,188    |   | 100.00% |   | 722,277 |   | 100.00% |   | 651,381 |   | 100.00% |
|                            |   |    |       |    |   |   |       |   |    |   |       |   |    |   |   |   |   |   |   |   |   |
| Less: Allowance for loan losses |   | 15,493  |       |    |   |   | 15,413     |   |    |   | 11,025     |   |    |   | 9,103 |   |   |   | 8,303 |   |   |
|                            |   |    |       |    |   |   |       |   |    |   |       |   |    |   |   |   |   |   |   |   |   |
| Net loans                       | $      | 710,667 |       |    |   | $      | 762,643    |   |    |   | 770,163    |   |    |   | 713,174 |   |   |   | 643,078 |   |   |

| Table 11 - Maturity and Repricing Data for Loans |                           |                              |                    |                     |   |   |   |
|--------------------------------------------------|--------------------------------|-----------------------------------|-------------------------|--------------------------|--------|--------|--------|
|                                             |                           |                              |                    |                     |   |   |   |
| (Dollars in thousands)                           |   Within one year or less | After one year through five years |   After five years |    Total loans |
| Commercial                                       | $                              | 50,968                            |                    | 9,220                    |   | 806    |   | 60,994 |
| Real estate - mortgage                           |                           | 287,256                           |                    | 151,011                  |   | 68,983 |   | 507,250 |
| Real estate - construction                       |                           | 114,322                           |                    | 8,479                    |   | 1,247  |   | 124,048 |
| Consumer                                         |                           | 20,548                            |                    | 11,884                   |   | 1,436  |   | 33,868 |
|                                             |                           |                              |                    |                     |   |   |   |   |
| Total loans                                      | $                              | 473,094                           |                    | 180,594                  |   | 72,472 |   | 726,160 |
|                                             |                           |                              |                    |                     |   |   |   |   |
| Total fixed rate loans                           | $                              | 25,349                            |                    | 148,198                  |   | 72,472 |   | 246,019 |
| Total floating rate loans                        |                           | 447,745                           |                    | 32,396                   |   | -      |   | 480,141 |
|                                             |                           |                              |                    |                     |   |   |   |   |
| Total loans                                      | $                              | 473,094                           |                    | 180,594                  |   | 72,472 |   | 726,160 |

----

| ·   | the Bank’s loan loss experience; |
|--------------------|----------------------------------------|

| ·   | the amount of past due and non-performing loans; |
|--------------------|--------------------------------------------------|

| ·   | specific known risks; |
|--------------------|-----------------------|

| ·   | the status and amount of other past due and non-performing assets; |
|--------------------|--------------------------------------------------------------------|

| ·   | underlying estimated values of collateral securing loans; |
|--------------------|-----------------------------------------------------------|

| ·   | current and anticipated economic conditions; and |
|--------------------|--------------------------------------------------|

| ·   | other factors which management believes affect the allowance for potential credit losses. |
|--------------------|-------------------------------------------------------------------------------------------|

----

| Table 12 - Loan Risk Grade Analysis |                |   |
|-------------------------------------|---------------------|--------|
|                                | Percentage of Loans |
|                                | By Risk Grade*      |
| Risk Grade                          | 2010                | 2009   |
| Risk Grade 1 (Excellent Quality)    | 3.36%               | 3.51%  |
| Risk Grade 2 (High Quality)         | 16.60%              | 16.30% |
| Risk Grade 3 (Good Quality)         | 47.00%              | 50.99% |
| Risk Grade 4 (Management Attention) | 21.31%              | 17.12% |
| Risk Grade 5 (Watch)                | 2.84%               | 7.41%  |
| Risk Grade 6 (Substandard)          | 3.09%               | 1.45%  |
| Risk Grade 7 (Low Substandard)      | 0.00%               | 0.04%  |
| Risk Grade 8 (Doubtful)             | 0.00%               | 0.00%  |
| Risk Grade 9 (Loss)                 | 0.00%               | 0.00%  |
|                                |                |   |
| * Excludes non-accrual loans        |                |   |

----

| Table 13 - Analysis of Allowance for Loan Losses |   |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                             |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                           | 2010   | 2009   | 2008   | 2007   | 2006   |
| Allowance for loan losses at beginning           | $      | 15,413 |   | $      | 11,025 |   | 9,103 |   | 8,303 |   | 7,425 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Loans charged off:                               |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                       |   | 1,730  |   |   | 697    |   | 249 |   | 414 |   | 505 |
| Real estate - mortgage                           |   | 4,194  |   |   | 3,384  |   | 1,506 |   | 471 |   | 568 |
| Real estate - construction                       |   | 10,224 |   |   | 1,754  |   | 644 |   | 252 |   | 250 |
| Consumer                                         |   | 763    |   |   | 835    |   | 748 |   | 489 |   | 636 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Total loans charged off                          |   | 16,911 |   |   | 6,670  |   | 3,147 |   | 1,626 |   | 1,959 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries of losses previously charged off:     |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                       |   | 62     |   |   | 111    |   | 87 |   | 86 |   | 64 |
| Real estate - mortgage                           |   | 162    |   |   | 161    |   | 8 |   | 21 |   | 108 |
| Real estate - construction                       |   | 89     |   |   | 36     |   | 30 |   | 102 |   | 2 |
| Consumer                                         |   | 240    |   |   | 215    |   | 150 |   | 179 |   | 150 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Total recoveries                                 |   | 553    |   |   | 523    |   | 275 |   | 388 |   | 324 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Net loans charged off                            |   | 16,358 |   |   | 6,147  |   | 2,872 |   | 1,238 |   | 1,635 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                        |   | 16,438 |   |   | 10,535 |   | 4,794 |   | 2,038 |   | 2,513 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses at end of year         | $      | 15,493 |   | $      | 15,413 |   | 11,025 |   | 9,103 |   | 8,303 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Loans charged off net of recoveries, as          |   |   |   |   |   |   |   |   |   |   |   |
| a percent of average loans outstanding           |   | 2.16%  |   |   | 0.79%  |   | 0.38% |   | 0.19% |   | 0.27% |
|                                             |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses as a percent           |   |   |   |   |   |   |   |   |   |   |   |
| of total loans outstanding at end of year        |   | 2.13%  |   |   | 1.98%  |   | 1.41% |   | 1.26% |   | 1.27% |

----

| Table 14 - Non-performing Assets                  |   |   |   |   |   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                              |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                            | 2010   | 2009   | 2008   | 2007   | 2006   |
| Non-accrual loans                                 | $      | 40,062 |   | $      | 22,789 |   | 11,815 |   | 7,987 |   | 7,560 |
| Loans 90 days or more past due and still accruing |   | 210    |   |   | 1,977  |   | 514 |   | - |   | 78 |
| Total non-performing loans                        |   | 40,272 |   |   | 24,766 |   | 12,329 |   | 7,987 |   | 7,638 |
| All other real estate owned                       |   | 6,673  |   |   | 3,997  |   | 1,867 |   | 483 |   | 344 |
| Total non-performing assets                       | $      | 46,945 |   | $      | 28,763 |   | 14,196 |   | 8,470 |   | 7,982 |
|                                              |   |   |   |   |   |   |   |   |   |   |   |
| As a percent of total loans at year end           |   |   |   |   |   |   |   |   |   |   |   |
| Non-accrual loans                                 |   | 5.52%  |   |   | 2.93%  |   | 1.51% |   | 1.11% |   | 1.16% |
| Loans 90 days or more past due and still accruing |   | 0.03%  |   |   | 0.25%  |   | 0.07% |   | 0.00% |   | 0.01% |
| Total non-performing assets                       |   | 6.46%  |   |   | 3.70%  |   | 1.82% |   | 1.17% |   | 1.23% |
|                                              |   |   |   |   |   |   |   |   |   |   |   |
| Total non-performing assets                       |   |   |   |   |   |   |   |   |   |   |   |
| as a percent of total assets at year end          |   | 4.40%  |   |   | 2.74%  |   | 1.47% |   | 0.93% |   | 0.97% |

| Table 15 - Maturities of Time Deposits over $100,000 |   |
|------------------------------------------------------|--------|
|                                                 |   |
| (Dollars in thousands)                               | 2010   |
| Three months or less                                 | $      | 72,430 |
| Over three months through six months                 |   | 28,025 |
| Over six months through twelve months                |   | 44,508 |
| Over twelve months                                   |   | 96,403 |
| Total                                                | $      | 241,366 |

----

| Table 16 - Contractual Obligations and Other Commitments |            |               |                |               |
|----------------------------------------------------------|-----------------|--------------------|---------------------|--------------------|
|                                                     |            |               |                |               |   |   |   |   |   |
| (Dollars in thousands)                                   | Within One Year | One to Three Years | Three to Five Years | Five Years or More | Total |
| Contractual Cash Obligations                             |            |               |                |               |   |   |   |   |   |
| Long-term borrowings                                     | $               | -                  |                | -                  |   | 10,000 |   | 60,000 |   | 70,000 |
| Junior subordinated debentures                           |            | -                  |                | -                  |   | - |   | 20,619 |   | 20,619 |
| Operating lease obligations                              |            | 600                |                | 727                |   | 453 |   | 1,440 |   | 3,220 |
|                                                     |            |               |                |               |   |   |   |   |   |   |
| Total                                                    | $               | 600                |                | 727                |   | 10,453 |   | 82,059 |   | 93,839 |
|                                                     |            |               |                |               |   |   |   |   |   |   |
| Other Commitments                                        |            |               |                |               |   |   |   |   |   |   |
| Commitments to extend credit                             | $               | 41,000             |                | 6,592              |   | 1,397 |   | 88,026 |   | 137,015 |
| Standby letters of credit                                |            |               |                |               |   |   |   |   |   |   |
| and financial guarantees written                         |            | 3,590              |                | -                  |   | - |   | - |   | 3,590 |
|                                                     |            |               |                |               |   |   |   |   |   |   |
| Total                                                    | $               | 44,590             |                | 6,592              |   | 1,397 |   | 88,026 |   | 140,605 |

----

----

| Table 17 - Equity Ratios                                            |    |   |   |   |   |
|---------------------------------------------------------------------|---------|--------|--------|--------|--------|
|                                                                |    |   |   |   |   |
|                                                                | 2010    |   | 2009   |   | 2008   |
| Return on average assets                                            | 0.17%   |   | 0.29%  |   | 0.69%  |
| Return on average equity                                            | 1.81%   |   | 2.88%  |   | 8.38%  |
| Dividend payout ratio *                                             | 100.11% |   | 86.22% |   | 41.93% |
| Average equity to average assets                                    | 9.62%   |   | 9.95%  |   | 8.20%  |
|                                                                |    |   |   |   |   |
| * As a percentage of net earnings available to common shareholders. |    |   |   |   |   |

| Table 18 - Quarterly Financial Data              |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             | 2010   |   | 2009   |
| (Dollars in thousands, except per share amounts) | First  | Second | Third  | Fourth | First  | Second | Third  | Fourth |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest income                            | $      | 11,930 |   | 11,879 |   | 11,995 |   | 11,876 |   | $      | 12,581 |   | 12,523 |   | 12,403 |   | 12,530 |
| Total interest expense                           |   | 3,825  |   | 3,682  |   | 3,516  |   | 3,325  |   |   | 4,702 |   | 4,324 |   | 4,132 |   | 4,029 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                              |   | 8,105  |   | 8,197  |   | 8,479  |   | 8,551  |   |   | 7,879 |   | 8,199 |   | 8,271 |   | 8,501 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                        |   | 2,382  |   | 3,179  |   | 4,656  |   | 6,221  |   |   | 1,766 |   | 2,251 |   | 3,139 |   | 3,379 |
| Other income                                     |   | 2,610  |   | 3,130  |   | 3,857  |   | 4,287  |   |   | 2,186 |   | 4,251 |   | 2,503 |   | 2,883 |
| Other expense                                    |   | 7,189  |   | 7,057  |   | 7,182  |   | 7,520  |   |   | 7,342 |   | 7,956 |   | 7,344 |   | 7,241 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                       |   | 1,144  |   | 1,091  |   | 498    |   | (903   | )      |   | 957 |   | 2,243 |   | 291 |   | 764 |
| Income taxes                                     |   | 269    |   | 227    |   | (42    | )      | (465   | )      |   | 332 |   | 883 |   | (9 | ) | 133 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                     |   | 875    |   | 864    |   | 540    |   | (438   | )      |   | 625 |   | 1,360 |   | 300 |   | 631 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends and accretion of preferred stock       |   | 348    |   | 349    |   | 348    |   | 349    |   |   | 201 |   | 349 |   | 348 |   | 348 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) available                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to common shareholders                           | $      | 527    |   | 515    |   | 192    |   | (787   | )      | $      | 424 |   | 1,011 |   | (48 | ) | 283 |
|                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings per common share                  | $      | 0.10   |   | 0.09   |   | 0.03   |   | (0.14  | )      | $      | 0.08 |   | 0.18 |   | (0.01 | ) | 0.05 |
| Diluted earnings per common share                | $      | 0.10   |   | 0.09   |   | 0.03   |   | (0.14  | )      | $      | 0.08 |   | 0.18 |   | (0.01 | ) | 0.05 |

----

| Table 19 - Market Risk Table                  |                                                          |    |   |            |       |   |       |   |
|-----------------------------------------------|---------------------------------------------------------------|---------|--------|-----------------|------------|--------|------------|--------|
|                                          |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |
| (Dollars In Thousands)                        | Principal/Notional Amount Maturing in Year Ended December 31, |
| Loans Receivable                              | 2011                                                          | 2012    | 2013   | 2014 & 2015 | Thereafter | Total  | Fair Value |
| Fixed rate                                    | $                                                             | 37,748  |   | 33,980          |       | 43,539 |       | 75,720 |   | 55,032 |   | 246,020 |   | 248,249 |
| Average interest rate                         |                                                          | 6.45%   |   | 6.85%           |       | 6.36%  |       | 5.92%  |   | 8.07% |   |   |   |   |
| Variable rate                                 | $                                                             | 174,299 |   | 56,362          |       | 45,545 |       | 63,453 |   | 140,484 |   | 480,142 |   | 478,124 |
| Average interest rate                         |                                                          | 4.67%   |   | 4.52%           |       | 4.58%  |       | 4.70%  |   | 5.05% |   |   |   |   |
|                                          |                                                          |    |   |            |       |   |       |   |   |   |   | 726,163 |   | 726,373 |
| Investment Securities                         |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |   |
| Interest bearing cash                         | $                                                             | 1,456   |   | -               |       | -      |       | -      |   | - |   | 1,456 |   | 1,456 |
| Average interest rate                         |                                                          | 0.01%   |   | -               |       | -      |       | -      |   | - |   |   |   |   |
| Securities available for sale                 | $                                                             | 40,621  |   | 28,292          |       | 31,912 |       | 47,095 |   | 124,529 |   | 272,449 |   | 272,449 |
| Average interest rate                         |                                                          | 4.26%   |   | 4.93%           |       | 5.06%  |       | 4.74%  |   | 4.62% |   |   |   |   |
| Nonmarketable equity securities               | $                                                             | -       |   | -               |       | -      |       | -      |   | 5,761 |   | 5,761 |   | 5,761 |
| Average interest rate                         |                                                          | -       |   | -               |       | -      |       | -      |   | 0.34% |   |   |   |   |
| Certificates of Deposit                       | $                                                             | 735     |   | -               |       | -      |       | -      |   | - |   | 735 |   | 735 |
| Average interest rate                         |                                                          | 1.49%   |   | -               |       | -      |       | -      |   | - |   |   |   |   |
|                                          |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |   |
| Debt Obligations                              |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |   |
| Deposits                                      | $                                                             | 243,154 |   | 114,373         |       | 23,400 |       | 10,478 |   | 447,307 |   | 838,712 |   | 837,779 |
| Average interest rate                         |                                                          | 1.07%   |   | 2.04%           |       | 2.24%  |       | 2.36%  |   | 0.76% |   |   |   |   |
| Advances from FHLB                            | $                                                             | -       |   | -               |       | 20,000 |       | 25,000 |   | 25,000 |   | 70,000 |   | 79,950 |
| Average interest rate                         |                                                          | -       |   | -               |       | 4.27%  |       | 4.20%  |   | 4.30% |   |   |   |   |
| Demand notes payable to U.S. Treasury         | $                                                             | 1,600   |   | -               |       | -      |       | -      |   | - |   | 1,600 |   | 1,600 |
| Average interest rate                         |                                                          | -       |   | -               |       | -      |       | -      |   | - |   |   |   |   |
| Securities sold under agreement to repurchase | $                                                             | 34,094  |   | -               |       | -      |       | -      |   | - |   | 34,094 |   | 34,094 |
| Average interest rate                         |                                                          | 0.94%   |   | -               |       | -      |       | -      |   | - |   |   |   |   |
| Junior subordinated debentures                | $                                                             | -       |   | -               |       | -      |       | -      |   | 20,619 |   | 20,619 |   | 20,619 |
| Average interest rate                         |                                                          | -       |   | -               |       | -      |       | -      |   | 1.87% |   |   |   |   |
|                                          |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |   |
| Derivative Instruments (notional amount)      |                                                          |    |   |            |       |   |       |   |   |   |   |   |   |   |
| Interest rate swap contracts                  | $                                                             | 50,000  |   | -               |       | -      |       | -      |   | - |   | 50,000 |   | 648 |
| Average interest rate                         |                                                          | 6.25%   |   | -               |       | -      |       | -      |   | - |   |   |   |   |

----

| Table 20 - Interest Rate Risk                  |   |                                                |
|------------------------------------------------|--------|-----------------------------------------------------|
|                                           |   |                                                |   |   |
| (Dollars in thousands)                         |   |                                                |
|                                           |   | Estimated Resulting Theoretical Net Interest Income |
| Hypothetical rate change (ramp over 12 months) |   | Amount                                              | % Change |
|                                           | +3%    |                                                | $ | 33,879 |   | -2.39% |
|                                           | +2%    |                                                | $ | 33,822 |   | -2.55% |
|                                           | +1%    |                                                | $ | 34,030 |   | -1.95% |
|                                           | 0%     |                                                | $ | 34,707 |   | 0.00% |
|                                           | -1%    |                                                | $ | 34,650 |   | -0.16% |
|                                           | -2%    |                                                | $ | 33,858 |   | -2.45% |
|                                           | -3%    |                                                | $ | 32,954 |   | -5.05% |
|                                           |   |                                                |   |   |   |   |
|                                           |   |                                                |   |   |   |   |
|                                           |   |                                                |   |   |   |   |
|                                           |   |                                                | Estimated Resulting Theoretical Market Value of Equity |
| Hypothetical rate change (immediate shock)     |   | Amount                                              | % Change |
|                                           | +3%    |                                                | $ | 86,322 |   | -23.17% |
|                                           | +2%    |                                                | $ | 97,155 |   | -13.53% |
|                                           | +1%    |                                                | $ | 104,931 |   | -6.61% |
|                                           | 0%     |                                                | $ | 112,356 |   | 0.00% |
|                                           | -1%    |                                                | $ | 113,002 |   | 0.57% |
|                                           | -2%    |                                                | $ | 111,772 |   | -0.52% |
|                                           | -3%    |                                                | $ | 104,816 |   | -6.71% |

----

|                                                                                             |                                                                                             | PAGE(S)     |   |
|--------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|-------------|--------|
|                                                                                             |                                                                                             |        |   |
| Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements | A-30                                                                                             |        |
|                                                                                             |                                                                                             |        |   |
| Financial Statements                                                                             |                                                                                             |        |
|                                                                                             | Consolidated Balance Sheets at December 31, 2010 and 2009                                        | A-31        |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             | Consolidated Statements of Earnings for the years ended December 31, 2010, 2009 and 2008         | A-32        |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             | Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,      |        |   |
|                                                                                             | 2010, 2009 and 2008                                                                              | A-33        |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             | Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 |        |   |
|                                                                                             | and 2008                                                                                    | A-34        |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             | Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008       | A-35 - A-36 |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             | Notes to Consolidated Financial Statements                                                       | A-37 - A-63 |   |
|                                                                                             |                                                                                             |        |   |
|                                                                                             |                                                                                             |        |   |

----

|   | /s/ | Porter Keadle Moore, LLP |
|--------|-----|--------------------------|

| Certified Public Accountants |
|------------------------------|
| Suite 1800                   |   ● | 235 Peachtree Street NE |   ● | Atlanta, Georgia 30303 |   ● | Phone 404-588-4200 |   ● | Fax 404-588-4222 |   ● | www.pkm.com |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     |   |
|--------------------------------------------------------------|--------|
|                                                         |   |   |   |   |
| Consolidated Balance Sheets                                  |   |
|                                                         |   |   |   |   |
| December 31, 2010 and 2009                                   |   |
|                                                         |   |   |   |   |
| (Dollars in thousands)                                       |   |
| Assets                                                       | 2010   |   | 2009 |   |
|                                                         |   |   |   |   |
|                                                         |   |   |   |   |
| Cash and due from banks, including reserve requirements      | $      | 22,521 |   | 29,633 |   |
| of $8,698,000 and $5,017,000                                 |   |   |   |   |   |
| Interest bearing deposits                                    |   | 1,456 |   | 1,707 |   |
| Cash and cash equivalents                                    |   | 23,977 |   | 31,340 |   |
|                                                         |   |   |   |   |   |
| Certificates of deposit                                      |   | 735 |   | 3,345 |   |
|                                                         |   |   |   |   |   |
| Investment securities available for sale                     |   | 272,449 |   | 195,115 |   |
| Other investments                                            |   | 5,761 |   | 6,346 |   |
| Total securities                                             |   | 278,210 |   | 201,461 |   |
|                                                         |   |   |   |   |   |
| Mortgage loans held for sale                                 |   | 3,814 |   | 2,840 |   |
|                                                         |   |   |   |   |   |
| Loans                                                        |   | 726,160 |   | 778,056 |   |
| Less allowance for loan losses                               |   | (15,493 | ) | (15,413 | ) |
| Net loans                                                    |   | 710,667 |   | 762,643 |   |
|                                                         |   |   |   |   |   |
| Premises and equipment, net                                  |   | 17,334 |   | 17,947 |   |
| Cash surrender value of life insurance                       |   | 7,539 |   | 7,282 |   |
| Accrued interest receivable and other assets                 |   | 25,376 |   | 21,636 |   |
| Total assets                                                 | $      | 1,067,652 |   | 1,048,494 |   |
|                                                         |   |   |   |   |   |
| Liabilities and Shareholders' Equity                         |   |   |   |   |   |
|                                                         |   |   |   |   |   |
| Deposits:                                                    |   |   |   |   |   |
| Non-interest bearing demand                                  | $      | 114,792 |   | 117,636 |   |
| NOW, MMDA & savings                                      |   | 332,511 |   | 290,273 |   |
| Time, $100,000 or more                                       |   | 241,366 |   | 233,142 |   |
| Other time                                                   |   | 150,043 |   | 168,292 |   |
| Total deposits                                               |   | 838,712 |   | 809,343 |   |
|                                                         |   |   |   |   |   |
| Demand notes payable to U.S. Treasury                        |   | 1,600 |   | 636 |   |
| Securities sold under agreement to repurchase                |   | 34,094 |   | 36,876 |   |
| FHLB borrowings                                              |   | 70,000 |   | 77,000 |   |
| Junior subordinated debentures                               |   | 20,619 |   | 20,619 |   |
| Accrued interest payable and other liabilities               |   | 5,769 |   | 4,797 |   |
| Total liabilities                                            |   | 970,794 |   | 949,271 |   |
|                                                         |   |   |   |   |   |
| Commitments                                                  |   |   |   |   |   |
|                                                         |   |   |   |   |   |
| Shareholders' equity:                                        |   |   |   |   |   |
|                                                         |   |   |   |   |   |
| Series A preferred stock, $1,000 stated value; authorized    |   |   |   |   |   |
| 5,000,000 shares; issued and outstanding                     |   |   |   |   |   |
| 25,054 shares in 2010 and 2009                               |   | 24,617 |   | 24,476 |   |
| Common stock, no par value; authorized                       |   |   |   |   |   |
| 20,000,000 shares; issued and outstanding                    |   |   |   |   |   |
| 5,541,413 shares in 2010 and 5,539,056 shares in 2009        |   | 48,281 |   | 48,269 |   |
| Retained earnings                                            |   | 23,573 |   | 23,573 |   |
| Accumulated other comprehensive income                       |   | 387 |   | 2,905 |   |
| Total shareholders' equity                                   |   | 96,858 |   | 99,223 |   |
|                                                         |   |   |   |   |   |
| Total liabilities and shareholders' equity                   | $      | 1,067,652 |   | 1,048,494 |   |
|                                                         |   |   |   |   |   |
| See accompanying notes to consolidated financial statements. |   |   |   |   |   |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     |   |
|--------------------------------------------------------------|--------|
|                                                         |   |   |   |   |   |   |
| Consolidated Statements of Earnings                          |   |
|                                                         |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008         |   |
|                                                         |   |   |   |   |   |   |
| (Dollars in thousands, except per share amounts)             |   |
|                                                         |   |   |   |   |   |   |
|                                                         | 2010   |   | 2009 |   | 2008 |   |
|                                                         |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |
| Interest income:                                             |   |   |   |   |   |   |
| Interest and fees on loans                                   | $      | 40,267 |   | 43,211 |   | 50,604 |   |
| Interest on federal funds sold                               |   | -   |   | 1 |   | 55 |   |
| Interest on investment securities:                           |   |   |   |   |   |   |   |
| U.S. Government sponsored enterprises                        |   | 5,035 |   | 5,461 |   | 4,392 |   |
| States and political subdivisions                            |   | 2,173 |   | 1,242 |   | 904 |   |
| Other                                                        |   | 205 |   | 122 |   | 367 |   |
| Total interest income                                        |   | 47,680 |   | 50,037 |   | 56,322 |   |
|                                                         |   |   |   |   |   |   |   |
| Interest expense:                                            |   |   |   |   |   |   |   |
| NOW, MMDA & savings deposits                             |   | 3,472 |   | 2,965 |   | 3,249 |   |
| Time deposits                                                |   | 6,786 |   | 9,687 |   | 15,008 |   |
| FHLB borrowings                                              |   | 3,285 |   | 3,577 |   | 3,616 |   |
| Junior subordinated debentures                               |   | 411 |   | 546 |   | 1,016 |   |
| Other                                                        |   | 394 |   | 412 |   | 637 |   |
| Total interest expense                                       |   | 14,348 |   | 17,187 |   | 23,526 |   |
|                                                         |   |   |   |   |   |   |   |
| Net interest income                                          |   | 33,332 |   | 32,850 |   | 32,796 |   |
|                                                         |   |   |   |   |   |   |   |
| Provision for loan losses                                    |   | 16,438 |   | 10,535 |   | 4,794 |   |
|                                                         |   |   |   |   |   |   |   |
| Net interest income after provision for loan losses          |   | 16,894 |   | 22,315 |   | 28,002 |   |
|                                                         |   |   |   |   |   |   |   |
| Other income:                                                |   |   |   |   |   |   |   |
| Service charges                                              |   | 5,626 |   | 5,573 |   | 5,203 |   |
| Other service charges and fees                               |   | 2,195 |   | 2,058 |   | 2,399 |   |
| Other than temporary impairment losses                       |   | (291 | ) | (723 | ) | (300 | ) |
| Gain on sale of securities                                   |   | 3,348 |   | 1,795 |   | 133 |   |
| Mortgage banking income                                      |   | 532 |   | 827 |   | 660 |   |
| Insurance and brokerage commissions                          |   | 390 |   | 414 |   | 426 |   |
| Loss on sale and write-down of                               |   |   |   |   |   |   |   |
| other real estate and  repossessed assets          |   | (704 | ) | (501 | ) | (287 | ) |
| Miscellaneous                                                |   | 2,788 |   | 2,380 |   | 2,261 |   |
| Total non-interest income                                    |   | 13,884 |   | 11,823 |   | 10,495 |   |
|                                                         |   |   |   |   |   |   |   |
| Non-interest expense:                                        |   |   |   |   |   |   |   |
| Salaries and employee benefits                               |   | 14,124 |   | 14,758 |   | 15,194 |   |
| Occupancy                                                    |   | 5,436 |   | 5,409 |   | 5,029 |   |
| Other                                                        |   | 9,388 |   | 9,716 |   | 8,670 |   |
| Total non-interest expense                                   |   | 28,948 |   | 29,883 |   | 28,893 |   |
|                                                         |   |   |   |   |   |   |   |
| Earnings before income taxes                                 |   | 1,830 |   | 4,255 |   | 9,604 |   |
|                                                         |   |   |   |   |   |   |   |
| Income tax (benefit) expense                                 |   | (11 | ) | 1,339 |   | 3,213 |   |
|                                                         |   |   |   |   |   |   |   |
| Net earnings                                                 |   | 1,841 |   | 2,916 |   | 6,391 |   |
|                                                         |   |   |   |   |   |   |   |
| Dividends and accretion of preferred stock                   |   | 1,394 |   | 1,246 |   | -   |   |
|                                                         |   |   |   |   |   |   |   |
| Net earnings available to common shareholders                | $      | 447 |   | 1,670 |   | 6,391 |   |
|                                                         |   |   |   |   |   |   |   |
| Basic net earnings per common share                          | $      | 0.08 |   | 0.30 |   | 1.14 |   |
| Diluted net earnings per common share                        | $      | 0.08 |   | 0.30 |   | 1.13 |   |
| Cash dividends declared per common share                     | $      | 0.08 |   | 0.26 |   | 0.48 |   |
|                                                         |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
| See accompanying notes to consolidated financial statements. |   |   |   |   |   |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC.                    |
|------------------------------------------------------------|
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statements of Changes in Shareholders' Equity |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008       |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                                     |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   | Other |   |   |   |
|                                                       |   | Stock Shares |   |   | Stock Amount |   | Retained |   | Comprehensive |   |   |   |
|                                                       |   | Preferred |   | Common |   |   | Preferred |   | Common |   | Earnings |   | Income |   | Total |   |
| Balance, December 31, 2007                                 |   | - |   | 5,624,234 |   |  $ | - |   | 48,652 |   | 19,742 |   | 1,708 |   | 70,102 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative effect of                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| adoption of EITF 06-4                                      |   | - |   | - |   |   | - |   | - |   | (467 | ) | - |   | (467 | ) |
| Issuance of Series A                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| preferred stock                                            |   | 25,054 |   | - |   |   | 24,350 |   | 704 |   | - |   | - |   | 25,054 |   |
| Cash dividends declared on                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common stock                                               |   | - |   | - |   |   | - |   | - |   | (2,681 | ) | - |   | (2,681 | ) |
| Repurchase and retirement of                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common stock                                               |   | - |   | (90,500 | ) |   | - |   | (1,126 | ) | - |   | - |   | (1,126 | ) |
| Exercise of stock options                                  |   | - |   | 5,322 |   |   | - |   | 44 |   | - |   | - |   | 44 |   |
| Restricted stock/stock option                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| compensation expense                                       |   | - |   | - |   |   | - |   | (5 | ) | - |   | - |   | (5 | ) |
| Net earnings                                               |   | - |   | - |   |   | - |   | - |   | 6,391 |   | - |   | 6,391 |   |
| Change in accumulated other                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| comprehensive income,                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| net of tax                                                 |   | - |   | - |   |   | - |   | - |   | - |   | 3,816 |   | 3,816 |   |
| Balance, December 31, 2008                                 |   | 25,054 |   | 5,539,056 |   |  $ | 24,350 |   | 48,269 |   | 22,985 |   | 5,524 |   | 101,128 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment to the                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative effect of                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| adoption of EITF 06-4                                      |   | - |   | - |   |   | - |   | - |   | 358 |   | - |   | 358 |   |
| Accretion of Series A                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| preferred stock                                            |   | - |   | - |   |   | 126 |   | - |   | (126 | ) | - |   | - |   |
| Cash dividends declared on                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series A preferred stock                                   |   | - |   | - |   |   | - |   | - |   | (1,120 | ) | - |   | (1,120 | ) |
| Cash dividends declared on                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common stock                                               |   | - |   | - |   |   | - |   | - |   | (1,440 | ) | - |   | (1,440 | ) |
| Net earnings                                               |   | - |   | - |   |   | - |   | - |   | 2,916 |   | - |   | 2,916 |   |
| Change in accumulated other                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| comprehensive income,                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| net of tax                                                 |   | - |   | - |   |   | - |   | - |   | - |   | (2,619 | ) | (2,619 | ) |
| Balance, December 31, 2009                                 |   | 25,054 |   | 5,539,056 |   |  $ | 24,476 |   | 48,269 |   | 23,573 |   | 2,905 |   | 99,223 |   |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accretion of Series A                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| preferred stock                                            |   | - |   | - |   |   | 141 |   |   |   | (141 | ) | - |   | - |   |
| Cash dividends declared on                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Series A preferred stock                                   |   | - |   | - |   |   | - |   | - |   | (1,253 | ) | - |   | (1,253 | ) |
| Cash dividends declared on                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common stock                                               |   | - |   | - |   |   | - |   |   |   | (447 | ) | - |   | (447 | ) |
| Restricted stock payout                                    |   | - |   | 2,357 |   |   | - |   | 12 |   | - |   | - |   | 12 |   |
| Net earnings                                               |   | - |   | - |   |   | - |   | - |   | 1,841 |   | - |   | 1,841 |   |
| Change in accumulated other                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| comprehensive income,                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| net of tax                                                 |   | - |   | - |   |   | - |   | - |   | - |   | (2,518 | ) | (2,518 | ) |
| Balance, December 31, 2010                                 |   | 25,054 |   | 5,541,413 |   |  $ | 24,617 |   | 48,281 |   | 23,573 |   | 387 |   | 96,858 |   |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     |
|--------------------------------------------------------------|
|                                                         |   |   |   |   |   |   |
| Consolidated Statements of Comprehensive Income (Loss)       |
|                                                         |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008         |
|                                                         |   |   |   |   |   |   |
| (Dollars in thousands)                                       |
|                                                         |   |   |   |   |   |   |
|                                                         | 2010 |   | 2009 |   | 2008 |   |
|                                                         |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |
| Net earnings                                                 | $ | 1,841 |   | 2,916 |   | 6,391 |   |
|                                                         |   |   |   |   |   |   |   |
| Other comprehensive income (loss):                           |   |   |   |   |   |   |   |
| Unrealized holding gains on securities                       |   |   |   |   |   |   |   |
| available for sale                                           |   | 46 |   | 214 |   | 2,145 |   |
| Reclassification adjustment for other than temporary         |   |   |   |   |   |   |   |
| impairment losses included in net earnings                   |   | 291 |   | 723 |   | 300 |   |
| Reclassification adjustment for gains on sales of            |   |   |   |   |   |   |   |
| securities available for sale included in net earnings       |   | (3,348 | ) | (1,795 | ) | (133 | ) |
| Unrealized holding (losses) gains on derivative         |   |   |   |   |   |   |   |
| financial instruments qualifying as cash flow                |   |   |   |   |   |   |   |
| hedges                                                       |   | (1,114 | ) | (2,726 | ) | 3,744 |   |
| Reclassification adjustment for gains on                     |   |   |   |   |   |   |   |
| derivative financial instruments qualifying as               |   |   |   |   |   |   |   |
| cash flow hedges included in net earnings                    |   | -    |   | (1 | ) | -    |   |
|                                                         |   |   |   |   |   |   |   |
| Total other comprehensive income (loss),                     |   |   |   |   |   |   |   |
| before income taxes                                          |   | (4,125 | ) | (3,585 | ) | 6,056 |   |
|                                                         |   |   |   |   |   |   |   |
| Income tax (benefit) expense related to other                |   |   |   |   |   |   |   |
| comprehensive income (loss):                                 |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
| Unrealized holding gains on securities                       |   |   |   |   |   |   |   |
| available for sale                                           |   | 18 |   | 83 |   | 836 |   |
| Reclassification adjustment for losses (gains) on sales      |   |   |   |   |   |   |   |
| and write-downs of securities available for sale             |   |   |   |   |   |   |   |
| included in net earnings                                     |   | (1,191 | ) | (417 | ) | 65 |   |
| Unrealized holding (losses) gains on derivative         |   |   |   |   |   |   |   |
| financial instruments qualifying as cash flow                |   |   |   |   |   |   |   |
| hedges                                                       |   | (434 | ) | (632 | ) | 1,339 |   |
|                                                         |   |   |   |   |   |   |   |
| Total income tax (benefit) expense related to                |   |   |   |   |   |   |   |
| other comprehensive income                                   |   | (1,607 | ) | (966 | ) | 2,240 |   |
|                                                         |   |   |   |   |   |   |   |
| Total other comprehensive (loss) income,                     |   |   |   |   |   |   |   |
| net of tax                                                   |   | (2,518 | ) | (2,619 | ) | 3,816 |   |
|                                                         |   |   |   |   |   |   |   |
| Total comprehensive (loss) income                            | $ | (677 | ) | 297 |   | 10,207 |   |
|                                                         |   |   |   |   |   |   |   |
| See accompanying notes to consolidated financial statements. |   |   |   |   |   |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC.                               |
|-----------------------------------------------------------------------|
|                                                                  |   |   |   |   |   |   |
| Consolidated Statements of Cash Flows                                 |
|                                                                  |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008                  |
|                                                                  |   |   |   |   |   |   |
| (Dollars in thousands)                                                |
|                                                                  |   |   |   |   |   |   |
|                                                                  | 2010 |   | 2009 |   | 2008 |   |
|                                                                  |   |   |   |   |   |   |
|                                                                  |   |   |   |   |   |   |
| Cash flows from operating activities:                                 |   |   |   |   |   |   |
| Net earnings                                                          | $ | 1,841 |   | 2,916 |   | 6,391 |   |
| Adjustments to reconcile net earnings to                              |   |   |   |   |   |   |   |
| net cash provided by operating activities:                            |   |   |   |   |   |   |   |
| Depreciation, amortization and accretion                              |   | 4,971 |   | 2,931 |   | 1,679 |   |
| Provision for loan losses                                             |   | 16,438 |   | 10,535 |   | 4,794 |   |
| Deferred income taxes                                                 |   | (523 | ) | (1,720 | ) | (485 | ) |
| Gain on sale of investment securities                                 |   | (3,348 | ) | (1,795 | ) | (133 | ) |
| Write-down of investment securities                                   |   | 291 |   | 723 |   | 300 |   |
| Gain on ineffective portion of derivative financial instruments       |   | -    |   | (1 | ) | -    |   |
| (Gain)/loss on sale of other real estate and repossessions            |   | (191 | ) | 24 |   | 47 |   |
| Write-down of other real estate and repossessions                     |   | 895 |   | 477 |   | 240 |   |
| Restricted stock expense                                              |   | 10 |   | 4 |   | 12 |   |
| Change in:                                                            |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                          |   | (974 | ) | (2,840 | ) | -    |   |
| Cash surrender value of life insurance                                |   | (257 | ) | (263 | ) | (243 | ) |
| Other assets                                                          |   | (2,316 | ) | (6,581 | ) | (19 | ) |
| Other liabilities                                                     |   | 961 |   | 300 |   | (1,851 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Net cash provided by operating activities                             |   | 17,798 |   | 4,710 |   | 10,732 |   |
|                                                                  |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                 |   |   |   |   |   |   |   |
| Net change in certificates of deposit                                 |   | 2,610 |   | (3,345 | ) | -    |   |
| Purchases of investment securities available for sale                 |   | (232,915 | ) | (141,770 | ) | (41,659 | ) |
| Proceeds from calls, maturities and paydowns of investment securities |   |   |   |   |   |   |   |
| available for sale                                                    |   | 86,935 |   | 40,629 |   | 16,488 |   |
| Proceeds from sales of investment securities available for sale       |   | 65,774 |   | 30,743 |   | 23,448 |   |
| Purchases of other investments                                        |   | -    |   | (1,426 | ) | (4,180 | ) |
| Proceeds from sale of other investments                               |   | 585 |   | 809 |   | 4,311 |   |
| Net change in loans                                                   |   | 28,703 |   | (7,916 | ) | (65,188 | ) |
| Purchases of premises and equipment                                   |   | (1,441 | ) | (1,614 | ) | (1,857 | ) |
| Proceeds from sale of premises and equipment                          |   | -    |   | 24 |   | 34 |   |
| Proceeds from sale of other real estate and repossessions             |   | 5,725 |   | 3,435 |   | 2,868 |   |
|                                                                  |   |   |   |   |   |   |   |
| Net cash used by investing activities                                 |   | (44,024 | ) | (80,431 | ) | (65,735 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                 |   |   |   |   |   |   |   |
| Net change in deposits                                                |   | 29,369 |   | 88,281 |   | 27,424 |   |
| Net change in demand notes payable to U.S. Treasury                   |   | 964 |   | (964 | ) | -    |   |
| Net change in securities sold under agreement to repurchase           |   | (2,782 | ) | (625 | ) | 9,917 |   |
| Proceeds from FHLB borrowings                                         |   | -    |   | 24,100 |   | 97,100 |   |
| Repayments of FHLB borrowings                                         |   | (7,000 | ) | (24,100 | ) | (107,600 | ) |
| Proceeds from FRB borrowings                                          |   | -    |   | 45,000 |   | 5,000 |   |
| Repayments of FRB borrowings                                          |   | -    |   | (50,000 | ) | -    |   |
| Proceeds from issuance of Series A preferred stock                    |   | -    |   | -    |   | 25,054 |   |
| Restricted stock payout                                               |   | 12 |   | -    |   | -    |   |
| Stock options exercised                                               |   | -    |   | -    |   | 44 |   |
| Common stock repurchased                                              |   | -    |   | -    |   | (1,126 | ) |
| Cash dividends paid on Series A preferred stock                       |   | (1,253 | ) | (1,120 | ) | -    |   |
| Cash dividends paid on common stock                                   |   | (447 | ) | (1,440 | ) | (2,681 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Net cash provided by financing activities                             |   | 18,863 |   | 79,132 |   | 53,132 |   |
|                                                                  |   |   |   |   |   |   |   |
| Net change in cash and cash equivalent                                |   | (7,363 | ) | 3,411 |   | (1,871 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Cash and cash equivalents at beginning of period                      |   | 31,340 |   | 27,929 |   | 29,800 |   |
|                                                                  |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of period                            | $ | 23,977 |   | 31,340 |   | 27,929 |   |

----

| PEOPLES BANCORP OF NORTH CAROLINA, INC.                      |
|--------------------------------------------------------------|
|                                                         |   |   |   |   |   |
| Consolidated Statements of Cash Flows, continued             |
|                                                         |   |   |   |   |   |
| For the Years ended December 31, 2010, 2009 and 2008         |
|                                                         |   |   |   |   |   |
| (Dollars in thousands)                                       |
|                                                         |   |   |   |   |   |
|                                                         |   |   |   |   |   |
|                                                         | 2010 |   | 2009 |   | 2008 |
|                                                         |   |   |   |   |   |
|                                                         |   |   |   |   |   |
| Supplemental disclosures of cash flow information:           |   |   |   |   |   |
| Cash paid during the year for:                               |   |   |   |   |   |
| Interest                                                     | $ | 14,419 |   | 17,541 |   | 23,799 |
| Income taxes                                                 | $ | 1,700 |   | 2,230 |   | 4,166 |
|                                                         |   |   |   |   |   |   |
| Noncash investing and financing activities:                  |   |   |   |   |   |   |
| Change in unrealized gain on investment securities           |   |   |   |   |   |   |
|  available for sale, net                                | $ | 1,838 |   | (524 | ) | 1,411 |
| Change in unrealized gain on derivative financial            |   |   |   |   |   |   |
|  instruments, net                                       | $ | 680 |   | (2,095 | ) | 2,405 |
| Transfer of loans to other real estate and repossessions     | $ | 9,105 |   | 6,067 |   | 4,539 |
| Financed portion of sale of other real estate                | $ | 2,270 |   | 1,166 |   | 1,133 |
| Accretion of Series A preferred stock                        | $ | 141 |   | 126 |   | -    |
| Cumulative effect and resulting adjustment of                |   |   |   |   |   |   |
| adoption of EITF 06-4                                        | $ | -    |   | (358 | ) | 467 |
|                                                         |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |
| See accompanying notes to consolidated financial statements. |   |   |   |   |   |   |

----

| (1) |     Summary of Significant Accounting Policies |
|-----|---------------------------------------------------------------|

|   |    Organization |
|--------|--------------------------------|

----

| ·   | the Bank’s loan loss experience; |
|--------------------|----------------------------------------|

| ·   | the amount of past due and non-performing loans; |
|--------------------|--------------------------------------------------|

| ·   | specific known risks; |
|--------------------|-----------------------|

| ·   | the status and amount of other past due and non-performing assets; |
|--------------------|--------------------------------------------------------------------|

| ·   | underlying estimated values of collateral securing loans; |
|--------------------|-----------------------------------------------------------|

| ·   | current and anticipated economic conditions; and |
|--------------------|--------------------------------------------------|

| ·   | other factors which management believes affect the allowance for potential credit losses. |
|--------------------|-------------------------------------------------------------------------------------------|

----

| Buildings and improvements |   |    10 - 50 years      |
|----------------------------|--------|--------------------------------------|
| Furniture and equipment    |   |     3 - 10 years |

----

----

| Stock Option Activity                                |
|------------------------------------------------------|
| For the years ended December 31, 2010, 2009 and 2008 |
|                                                 |
|                                                 |   |   |   |   |   |
|                                                 | Shares |   | Weighted Average Option Price Per Share |   | Weighted Average Remaining Contractual Term (in years) |
| Outstanding, December 31, 2007                       | 192,725 |   | $ | 8.24 |   |   |
|                                                 |   |   |   |   |   |   |
| Granted during the period                            | -   |   | $ | -   |   |   |
| Forfeited during the period                          | (2,458 | ) | $ | 8.02 |   |   |
| Exercised during the period                          | (5,322 | ) | $ | 8.26 |   |   |
|                                                 |   |   |   |   |   |   |
| Outstanding, December 31, 2008                       | 184,945 |   | $ | 8.24 |   |   |
|                                                 |   |   |   |   |   |   |
| Granted during the period                            | -   |   | $ | -   |   |   |
| Expired during the period                            | (15,483 | ) | $ | 9.02 |   |   |
| Exercised during the period                          | -   |   | $ | -   |   |   |
|                                                 |   |   |   |   |   |   |
| Outstanding, December 31, 2009                       | 169,462 |   | $ | 8.17 |   |   |
|                                                 |   |   |   |   |   |   |
| Granted during the period                            | -   |   | $ | -   |   |   |
| Expired during the period                            | (19,391 | ) | $ | 6.99 |   |   |
| Exercised during the period                          | -   |   | $ | -   |   |   |
|                                                 |   |   |   |   |   |   |
| Outstanding, December 31, 2010                       | 150,071 |   | $ | 8.32 |   |                             1.50 |
|                                                 |   |   |   |   |   |   |
| Exercisable, December 31, 2010                       | 150,071 |   | $ | 8.32 |   |                             1.50 |

----

| For the year ended December 31, 2010:      | Net Earnings Available to Common Shareholders (Dollars in thousands) |          | Common Shares |      | Per Share Amount |
|---------------------------------------------------------------------|----------------------------------------------------------------------|---------------|--------------------|-----------|------------------|
| Basic earnings per common share                                     | $                                                                    | 447           |               | 5,539,308 |             | $ | 0.08 |
| Effect of dilutive securities:                                      |                                                                 |          |               |      |             |   |   |
| Stock options                                                       |                                                                 | -   |               | 4,107     |             |   |   |
| Diluted earnings per common share                                   | $                                                                    | 447           |               | 5,543,415 |             | $ | 0.08 |
|                                                                |                                                                 |          |               |      |             |   |   |
| For the year ended December 31, 2009:      | Net Earnings Available to Common Shareholders (Dollars in thousands) |          | Common Shares      |      | Per Share Amount |
| Basic earnings per common share                                     | $                                                                    | 1,670         |               | 5,539,056 |             | $ | 0.30 |
| Effect of dilutive securities:                                      |                                                                 |          |               |      |             |   |   |
| Stock options                                                       |                                                                 | -   |               | 3,681     |             |   |   |
| Diluted earnings per common share                                   | $                                                                    | 1,670         |               | 5,542,737 |             | $ | 0.30 |
|                                                                |                                                                 |          |               |      |             |   |   |
| For the year ended December 31, 2008:      | Net Earnings Available to Common Shareholders (Dollars in thousands) |          | Common Shares      |      | Per Share Amount |
| Basic earnings per common share                                     | $                                                                    | 6,391         |               | 5,588,314 |             | $ | 1.14 |
| Effect of dilutive securities:                                      |                                                                 |          |               |      |             |   |   |
| Stock options                                                       |                                                                 | -   |               | 58,980    |             |   |   |
| Diluted earnings per common share                                   | $                                                                    | 6,391         |               | 5,647,294 |             | $ | 1.13 |

----

----

| (2) |     Investment Securities |
|-----|------------------------------------------|

| (Dollars in thousands)           |              |    |                   |          |                    |          |                 |
|----------------------------------|-------------------|---------|------------------------|---------------|-------------------------|---------------|----------------------|
|                             | December 31, 2010 |
|                             | Amortized Cost    |    | Gross Unrealized Gains |          | Gross Unrealized Losses |          | Estimated Fair Value |
| Mortgage-backed securities       | $                 | 137,811 |                   | 2,119         |                    | 569           |                 | 139,361 |
| U.S. government                  |              |    |                   |          |                    |          |                 |   |
| sponsored enterprises            |              | 42,933  |                   | 393           |                    | 686           |                 | 42,640 |
| State and political subdivisions |              | 89,486  |                   | 793           |                    | 2,450         |                 | 87,829 |
| Trust preferred securities       |              | 1,250   |                   | -   |                    | -   |                 | 1,250 |
| Equity securities                |              | 982     |                   | 387           |                    | -   |                 | 1,369 |
|                             |              |    |                   |          |                    |          |                 |   |
| Total                            | $                 | 272,462 |                   | 3,692         |                    | 3,705         |                 | 272,449 |

| (Dollars in thousands)           |              |    |                   |          |                    |          |                 |
|----------------------------------|-------------------|---------|------------------------|---------------|-------------------------|---------------|----------------------|
|                             | December 31, 2009 |
|                             | Amortized Cost    |    | Gross Unrealized Gains |          | Gross Unrealized Losses |          | Estimated Fair Value |
| Mortgage-backed securities       | $                 | 105,915 |                   | 1,830         |                    | 219           |                 | 107,526 |
| U.S. government                  |              |    |                   |          |                    |          |                 |   |
| sponsored enterprises            |              | 40,259  |                   | 934           |                    | 51            |                 | 41,142 |
| State and political subdivisions |              | 43,460  |                   | 1,065         |                    | 189           |                 | 44,336 |
| Trust preferred securities       |              | 1,250   |                   | -   |                    | -   |                 | 1,250 |
| Equity securities                |              | 1,233   |                   | -   |                    | 372           |                 | 861 |
|                             |              |    |                   |          |                    |          |                 |   |
| Total                            | $                 | 192,117 |                   | 3,829         |                    | 831           |                 | 195,115 |

| (Dollars in thousands)           |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |
|----------------------------------|---------------------|---------------------------------------------------|-------------------|---------------------------------------------|------------|---------------------------------------------------|-------------------|---------------------------------------------|------------|---------|-------------------|
|                             | December 31, 2010   |
|                             | Less than 12 Months |                                              | 12 Months or More |                                        | Total      |
|                             | Fair Value          |                                              | Unrealized Losses |                                        | Fair Value |                                              | Unrealized Losses |                                        | Fair Value |    | Unrealized Losses |
|                             |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |
| Mortgage-backed securities       | $                   | 59,471                                            |              | 569                                         |       | -         |              | -        |       | 59,471  |              | 569 |
| U.S. government                  |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
| sponsored enterprises            |                | 24,123                                            |              | 686                                         |       | -         |              | -             |       | 24,123  |              | 686 |
| State and political subdivisions |                | 56,374                                            |              | 2,450                                       |       | -         |              | -             |       | 56,374  |              | 2,450 |
|                             |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
| Total                            | $                   | 139,968                                           |              | 3,705                                       |       | -         |              | -             |       | 139,968 |              | 3,705 |
|                             |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
|                             | December 31, 2009   |
|                             | Less than 12 Months |                                              | 12 Months or More |                                        | Total      |
|                             | Fair Value          |                                              | Unrealized Losses |                                        | Fair Value |                                              | Unrealized Losses |                                        | Fair Value |    | Unrealized Losses |
|                             |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
| Mortgage-backed securities       | $                   | 16,970                                            |              | 219                                         |       | -              |              | -        |       | 16,970  |              | 219 |
| U.S. government                  |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
| sponsored enterprises            |                | 8,683                                             |              | 51                                          |       | -              |              | -        |       | 8,683   |              | 51 |
| State and political subdivisions |                | 9,249                                             |              | 182                                         |       | 153                                               |              | 7                                           |       | 9,402   |              | 189 |
| Equity securities                |                |  -        |              | -        |       | 861                                               |              | 372                                         |       | 861     |              | 372 |
|                             |                |                                              |              |                                        |       |                                              |              |                                        |       |    |              |   |
| Total                            | $                   | 34,902                                            |              | 452                                         |       | 1,014                                             |              | 379                                         |       | 35,916  |              | 831 |

----

| (Dollars in thousands)     |           |    |                 |
|----------------------------|----------------|---------|----------------------|
|                       | Amortized Cost |    | Estimated Fair Value |
|                       |           |    |                 |
| Due within one year        | $              | 3,679   |                 | 3,711 |
| Due from one to five years |           | 53,288  |                 | 53,330 |
| Due from five to ten years |           | 56,390  |                 | 55,005 |
| Due after ten years        |           | 20,312  |                 | 19,673 |
| Mortgage-backed securities |           | 137,811 |                 | 139,361 |
| Equity securities          |           | 982     |                 | 1,369 |
|                       |           |    |                 |   |
| Total                      | $              | 272,462 |                 | 272,449 |

| (Dollars in thousands)                        |                                      |    |                     |   |                     |    |                     |
|-----------------------------------------------|-------------------------------------------|---------|--------------------------|--------|--------------------------|---------|--------------------------|
|                                          | Fair Value Measurements December 31, 2010 |    |   Level 1 Valuation |   |   Level 2 Valuation |    |   Level 3 Valuation |
| Mortgage-backed securities                    | $                                         | 139,361 |                     | -      |                     | 139,361 |                     | - |
| U.S. government                               |                                      |    |                     |   |                     |    |                     |   |
| sponsored enterprises                         | $                                         | 42,640  |                     | -      |                     | 42,640  |                     | - |
| State and political subdivisions              | $                                         | 87,829  |                     | -      |                     | 87,829  |                     | - |
| Trust preferred securities                    | $                                         | 1,250   |                     | -      |                     | -       |                     | 1,250 |
| Equity securities                             | $                                         | 1,369   |                     | 1,369  |                     | -       |                     | - |
| Mortgage loans held for sale                  | $                                         | 3,814   |                     | -      |                     | 3,814   |                     | - |
| Market value of derivatives (in other assets) | $                                         | 648     |                     | -      |                     | 648     |                     | - |

----

| (Dollars in thousands)                        |                                      |    |              |   |              |    |              |
|-----------------------------------------------|-------------------------------------------|---------|-------------------|--------|-------------------|---------|-------------------|
|                                          | Fair Value Measurements December 31, 2009 |    | Level 1 Valuation |   | Level 2 Valuation |    | Level 3 Valuation |
| Mortgage-backed securities                    | $                                         | 107,526 |              | -      |              | 107,526 |              | - |
| U.S. government                               |                                      |    |              |   |              |    |              |   |
| sponsored enterprises                         | $                                         | 41,142  |              | -      |              | 41,142  |              | - |
| State and political subdivisions              | $                                         | 44,336  |              | -      |              | 44,336  |              | - |
| Trust preferred securities                    | $                                         | 1,250   |              | -      |              | -       |              | 1,250 |
| Equity securities                             | $                                         | 861     |              | 861    |              | -       |              | - |
| Mortgage loans held for sale                  | $                                         | 2,840   |              | -      |              | 2,840   |              | - |
| Market value of derivatives (in other assets) | $                                         | 1,762   |              | -      |              | 1,762   |              | - |

| (Dollars in thousands)                                            |                                     |
|-------------------------------------------------------------------|------------------------------------------|
|                                                              | Investment Securities Available for Sale |
|                                                              | Level 3 Valuation                        |
| Balance, beginning of period                                      | $                                        | 1,250 |
| Change in book value                                              |                                     | - |
| Change in gain/(loss) realized and unrealized                     |                                     | - |
| Purchases/(sales)                                                 |                                     | - |
| Transfers in and/or out of Level 3                                |                                     | - |
| Balance, end of period                                            | $                                        | 1,250 |
|                                                              |                                     |   |
| Change in unrealized gain/(loss) for assets still held in Level 3 | $                                        | - |

| (3) |     Loans |
|-----|--------------------------|

| (Dollars in thousands)                                                              |   |    |   |
|-------------------------------------------------------------------------------------|--------|---------|--------|
|                                                                                | 2010   |    | 2009   |
|                                                                                |   |    |   |
| Real Estate Loans                                                                   |   |    |   |
|      Construction and land development                     | $      | 124,048 |   | 169,680 |
|      Single-family residential                             |   | 287,307 |   | 281,686 |
|      Commercial                                            |   | 213,487 |   | 224,975 |
|      Multifamily and Farmland                              |   | 6,456   |   | 6,302 |
|           Total real estate loans |   | 631,298 |   | 682,643 |
|                                                                                |   |    |   |   |
| Commercial loans (not secured by real estate)                                       |   | 60,994  |   | 67,487 |
| Consumer loans (not secured by real estate)                                         |   | 11,500  |   | 12,943 |
| All other loans (not secured by real estate)                                        |   | 22,368  |   | 14,983 |
|      Total loans                                           |   | 726,160 |   | 778,056 |
|                                                                                |   |    |   |   |
| Less allowance for loan losses                                                      |   | 15,493  |   | 15,413 |
|                                                                                |   |    |   |   |
|      Total net loans                                       | $      | 710,667 |   | 762,643 |

----

| (Dollars in thousands)                                                              |                      |                |                           |                |                 |                |
|-------------------------------------------------------------------------------------|---------------------------|---------------------|--------------------------------|---------------------|----------------------|---------------------|
|                                                                                | Loans 30-89 Days Past Due |                | Loans 90 or More Days Past Due |                | Total Past Due Loans |                | Total Current Loans |   | Total Loans |   | Accruing Loans 90 or More Days Past Due |
| Real Estate Loans                                                                   |                      |                |                           |                |                 |                |   |   |   |   |   |
|      Construction and land development                     | $                         | 2,306               |                           | 8,870               |                 | 11,176              |   | 112,872 |   | 124,048 |   | 197 |
|      Single-family residential                             |                      | 19,377              |                           | 5,936               |                 | 25,313              |   | 261,994 |   | 287,307 |   | -    |
|      Commercial                                            |                      | 382                 |                           | 1,482               |                 | 1,864               |   | 211,623 |   | 213,487 |   | -    |
|      Multifamily and Farmland                              |                      | -    |                           | -    |                 | -    |   | 6,456 |   | 6,456 |   | -    |
|           Total real estate loans |                      | 22,065              |                           | 16,288              |                 | 38,353              |   | 592,945 |   | 631,298 |   | 197 |
|                                                                                |                      |                |                           |                |                 |                |   |   |   |   |   |   |
| Commercial loans (not secured by real estate)                                       |                      | 1,098               |                           | 720                 |                 | 1,818               |   | 59,176 |   | 60,994 |   | 13 |
| Consumer loans (not secured by real estate)                                         |                      | 98                  |                           | 13                  |                 | 111                 |   | 11,389 |   | 11,500 |   | -    |
| All other loans (not secured by real estate)                                        |                      | -    |                           | -    |                 | -    |   | 22,368 |   | 22,368 |   | -    |
|      Total loans                                           | $                         | 23,261              |                           | 17,021              |                 | 40,282              |   | 685,878 |   | 726,160 |   | 210 |

| (Dollars in thousands)                                                              |   |                |   |
|-------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                | 2010   |                | 2009   |
| Real Estate Loans                                                                   |   |                | $      |   |
|      Construction and land development                     |   | 22,916              |   |   | 4,787 |
|      Single-family residential                             |   | 10,837              |   |   | 11,847 |
|      Commercial                                            |   | 5,351               |   |   | 4,519 |
|      Multifamily and Farmland                              |   | -                   |   |   | 117 |
|           Total real estate loans |   | 39,104              |   |   | 21,270 |
|                                                                                |   |                |   |   |   |
| Commercial loans (not secured by real estate)                                       |   | 816                 |   |   | 1,498 |
| Consumer loans (not secured by real estate)                                         |   | 142                 |   |   | 21 |
| All other loans (not secured by real estate)                                        |   | -    |   |   | -    |
|      Total                                                 | $      | 40,062              |   |   | 22,789 |

----

| (Dollars in thousands)                                                                       |                                 |          |                                  |          |                               |          |                      |   |              |   |                        |
|----------------------------------------------------------------------------------------------|--------------------------------------|---------------|---------------------------------------|---------------|------------------------------------|---------------|---------------------------|--------|-------------------|--------|-----------------------------|
|                                                                                         | Unpaid Contractual Principal Balance |          | Recorded Investment With No Allowance |          | Recorded Investment With Allowance |          | Total Recorded Impairment |   | Related Allowance |   | Average Recorded Impairment |
| Real Estate Loans                                                                            |                                 |          |                                  |          |                               |          | $                         | -      |              |   |                        |   |
|      Construction and land development                              |                                 | 31,346        |                                  | 20,787        |                               | 2,130         |                      |   | 22,916            |   | 1,055                       |   | 18,767 |
|      Single-family residential                                      |                                 | 12,376        |                                  | 9,847         |                               | 990           |                      |   | 10,837            |   | 168                         |   | 12,573 |
|      Commercial                                                     |                                 | 6,018         |                                  | 4,991         |                               | 359           |                      |   | 5,351             |   | 148                         |   | 4,769 |
|      Multifamily and Farmland                                       |                                 | -   |                                  | -   |                               | -   |                      |   | -       |   | -                 |   | 27 |
|           Total impaired real estate loans |                                 | 49,740        |                                  | 35,625        |                               | 3,479         |                      |   | 39,104            |   | 1,371                       |   | 36,136 |
|                                                                                         |                                 |          |                                  |          |                               |          |                      |   |              |   |                        |   |   |
| Commercial loans (not secured by real estate)                                                |                                 | 1,243         |                                  | 811           |                               | 5             |                      |   | 816               |   | 5                           |   | 1,479 |
| Consumer loans (not secured by real estate)                                                  |                                 | 152           |                                  | 142           |                               | -   |                      |   | 142               |   | -                 |   | 79 |
| All other loans (not secured by real estate)                                                 |                                 | -   |                                  | -   |                               | -   |                      |   | -       |   |                        |   | -   |
|      Total impaired loans                                           | $                                    | 51,135        |                                  | 36,578        |                               | 3,484         |                      |   | 40,062            |   | 1,376                       |   | 37,694 |

| (Dollars in thousands) |                                      |   |              |   |              |   |              |   |                                                      |
|------------------------|-------------------------------------------|--------|-------------------|--------|-------------------|--------|-------------------|--------|-----------------------------------------------------------|
|                   | Fair Value Measurements December 31, 2010 |   | Level 1 Valuation |   | Level 2 Valuation |   | Level 3 Valuation |   | Total Gains/(Losses) for the Year Ended December 31, 2010 |
| Impaired loans         | $                                         | 40,062 |              | -      |              | 26,798 |              | 13,264 |                                                      | (10,591 | ) |
| Other real estate      | $                                         | 6,673  |              | -      |              | 6,673  |              | -      |                                                      | (340 | ) |
|                   |                                      |   |              |   |              |   |              |   |                                                      |   |   |
|                   |                                      |   |              |   |              |   |              |   |                                                      |   |   |
|                   | Fair Value Measurements December 31, 2009 |   | Level 1 Valuation |   | Level 2 Valuation |   | Level 3 Valuation |   | Total Gains/(Losses) for the Year Ended December 31, 2009 |
| Impaired loans         | $                                         | 22,789 |              | -      |              | 14,174 |              | 8,615  |                                                      | (1,924 | ) |
| Other real estate      | $                                         | 3,997  |              | -      |              | 3,997  |              | -      |                                                      | (100 | ) |

| (Dollars in thousands)                       |   |    |   |   |   |   |
|----------------------------------------------|--------|---------|--------|--------|--------|--------|
|                                         | 2010   |    | 2009   |   | 2008   |   |
|                                         |   |    |   |   |   |   |
| Balance at beginning of year                 | $      | 15,413  |   | 11,025 |   | 9,103  |   |
| Amounts charged off                          |   | (16,911 | )      | (6,670 | )      | (3,147 | ) |
| Recoveries on amounts previously charged off |   | 553     |   | 523    |   | 275    |   |
| Provision for loan losses                    |   | 16,438  |   | 10,535 |   | 4,794  |   |
|                                         |   |    |   |   |   |   |   |
| Balance at end of year                       | $      | 15,493  |   | 15,413 |   | 11,025 |   |

| ·   | Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists.  CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Bank's range of acceptability.  The company or individual is established with a history of successful performance though somewhat susceptible to economic changes. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Bank's range of acceptability but higher than normal. This may be a new company or an existing company in a transitional phase (e.g. expansion, acquisition, market change). |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Risk Grade 4 – Management Attention: These loans have very high risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends are evident.  These are not problem credits presently, but may be in the future if the borrower is unable to change its present course. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.  This frequently results from deviating from prudent lending practices, for instance over-advancing on collateral. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 6 – Substandard: A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any).  There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 7 – Low Substandard: These loans have the general characteristics of a Grade 6 Substandard loan, with heightened potential concerns.  The exact amount of loss is not yet known because neither the liquidation value of the collateral nor the borrower’s predicted repayment ability is known with confidence. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 8 – Doubtful: Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Risk Grade 9 – Loss: Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.  Loss is a temporary grade until the appropriate authority is obtained to charge the loan off. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (Dollars in thousands)                                                              |                                            |   |   |                                                                                            |   |                                                                                                          |
|-------------------------------------------------------------------------------------|-------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|
|                                                                                | Weighted Average Risk Grade of LoansOutstanding |   |   |  Loans Outstanding                                                                         |   | Classified Loans                                                                                              |
| Real Estate Loans                                                                   |                                            |   |   |                                                                                            |   |                                                                                                          |
|      Construction and land development                     | 4.19                                            |   | $      |            124,048                       |   |            29,890                                      |
|      Single-family residential                             | 2.97                                            |   |   |            287,307                       |   |            15,859                                      |
|      Commercial                                            | 3.33                                            |   |   |            213,487                       |   |            12,965                                      |
|      Multifamily and Farmland                              | 2.83                                            |   |   |                6,456 |   |                 223           |
|           Total real estate loans |                                            |   |   |            631,298                       |   |            58,936                                      |
|                                                                                |                                            |   |   |                                                                                            |   |                                                                                                          |
| Commercial loans (not secured by real estate)                                       | 3.09                                            |   |   |              60,994            |   |              1,710                           |
| Consumer loans (not secured by real estate)                                         | 2.48                                            |   |   |              11,500            |   |                 151           |
| All other loans (not secured by real estate)                                        | 2.77                                            |   |   |              22,368            |   |                   - |
|      Total loans                                           |                                            |   | $      |            726,160                       |   |            60,797                                      |

----

| (Dollars in thousands)                                                                  |                |   |    |                                             |   |                                              |
|-----------------------------------------------------------------------------------------|---------------------|--------|---------|--------------------------------------------------|--------|---------------------------------------------------|
|                                                                                    | Number of Contracts |   |    | Pre-Modification Outstanding Recorded Investment |   | Post-Modification Outstanding Recorded Investment |
| Real Estate Loans                                                                       |                |   |    |                                             |   | $                                                 |   |
|      Construction and land development                         | 47                  |   | $  | 27,901                                           |   |                                              | 23,121 |
|      Single-family residential                                 | 221                 |   |    | 26,808                                           |   |                                              | 25,296 |
|      Commercial                                                | 17                  |   |    | 8,155                                            |   |                                              | 6,243 |
|      Multifamily and Farmland                                  | 1                   |   |    | 322                                              |   |                                              | 223 |
|           Total real estate TDR loans | 286                 |   |    | 63,186                                           |   |                                              | 54,883 |
|                                                                                    |                |   |    |                                             |   |                                              |   |
| Commercial loans (not secured by real estate)                                           | 26                  |   |    | 6,196                                            |   |                                              | 1,719 |
| Consumer loans (not secured by real estate)                                             | 12                  |   |    | 148                                              |   |                                              | 142 |
| All other loans (not secured by real estate)                                            | -         |   |    | -                                      |   |                                              | -   |
|      Total TDR loans                                           | 324                 |   | $  | 69,530                                           |   |                                              | 56,744 |

| (4) |     Premises and Equipment |
|-----|-------------------------------------------|

| (Dollars in thousands)           |   |   |   |
|----------------------------------|--------|--------|--------|
|                             |   | 2010   |   | 2009 |
|                             |   |   |   |   |
| Land                             | $      | 3,581  |   | 3,581 |
| Buildings and improvements       |   | 14,759 |   | 14,737 |
| Furniture and equipment          |   | 15,575 |   | 18,624 |
|                             |   |   |   |   |
| Total premises and equipment     |   | 33,915 |   | 36,942 |
|                             |   |   |   |   |
| Less accumulated depreciation    |   | 16,581 |   | 18,995 |
|                             |   |   |   |   |
| Total net premises and equipment | $      | 17,334 |   | 17,947 |

| (5) |     Time Deposits |
|-----|----------------------------------|

| (Dollars in thousands) |   |
|------------------------|--------|
|                   |   |
| 2011                   | $      | 243,332 |
| 2012                   |   | 114,459 |
| 2013                   |   | 23,140 |
| 2014                   |   | 2,255 |
| 2015 and thereafter    |   | 8,223 |
|                   |   |   |
| Total                  | $      | 391,409 |

----

| (6) |     Federal Home Loan Bank and Federal Reserve Bank Borrowings |
|-----|-------------------------------------------------------------------------------|

| (Dollars in thousands) |                       |   |
|------------------------|----------------------------|--------|
|                   |                       |   |   |   |
| Maturity Date          |   Call Date      | Rate   | Rate Type | Amount |
|                   |                       |   |   |   |
| June 24, 2015          | N/A                        | 3.710% | Convertible | $ | 5,000 |
|                   |                       |   |   |   |   |
| March 25, 2019         | N/A                        | 4.260% | Convertible |   | 5,000 |
|                   |                       |   |   |   |   |
| March 31, 2016         | March 31, 2009 and every   | 4.620% | Convertible |   | 5,000 |
|                   | three months thereafter    |   |   |   |   |
|                   |                       |   |   |   |   |
| October 5, 2016        | N/A                        | 4.450% | Convertible |   | 5,000 |
|                   |                       |   |   |   |   |
| January 30, 2017       | October 30, 2008 and every |   |   |   |   |
|                   | three months thereafter    | 4.500% | Convertible |   | 5,000 |
|                   |                       |   |   |   |   |
| June 8, 2017           | December 8, 2008 and every | 4.713% | Convertible |   | 15,000 |
|                   | three months thereafter    |   |   |   |   |
|                   |                       |   |   |   |   |
| July 11, 2017          | January 11, 2008 and every | 4.440% | Convertible |   | 5,000 |
|                   | three months thereafter    |   |   |   |   |
|                   |                       |   |   |   |   |
| July 24, 2017          | April 24, 2008 and every   | 4.420% | Convertible |   | 5,000 |
|                   | month thereafter           |   |   |   |   |
|                   |                       |   |   |   |   |
| November 12, 2014      | N/A                        | 2.230% | Fixed Rate Hybrid |   | 5,000 |
|                   |                       |   |   |   |   |
| November 13, 2017      | N/A                        | 4.260% | Fixed Rate Hybrid |   | 15,000 |
|                   |                       |   |   |   |   |
|                   |                       |   |   | $ | 70,000 |

| (7) |     Junior Subordinated Debentures |
|-----|---------------------------------------------------|

----

| (8) |     Income Taxes |
|-----|---------------------------------|

| (Dollars in thousands) |   |   |   |   |   |   |
|------------------------|--------|--------|--------|--------|--------|--------|
|                   | 2010   |   | 2009   |   | 2008   |   |
| Current                | $      | 512    |   | 3,059  |   | 3,698  |   |
| Deferred               |   | (523   | )      | (1,720 | )      | (485   | ) |
| Total                  | $      | (11    | )      | 1,339  |   | 3,213  |   |

| (Dollars in thousands)                   |   |   |   |   |   |          |
|------------------------------------------|--------|--------|--------|--------|--------|---------------|
|                                     | 2010   |   | 2009   |   | 2008   |          |
| Pre-tax income at statutory rates (34%)  | $      | 622    |   | 1,447  |   | 3,265         |   |
| Differences:                             |   |   |   |   |   |          |   |
| Tax exempt interest income               |   | (721   | )      | (429   | )      | (313          | ) |
| Nondeductible interest and other expense |   | 58     |   | 38     |   | 60            |   |
| Cash surrender value of life insurance   |   | (87    | )      | (89    | )      | (83           | ) |
| State taxes, net of federal benefits     |   | (8     | )      | 100    |   | 257           |   |
| Nondeductible capital losses             |   | 99     |   | 234    |   | -   |   |
| Other, net                               |   | 26     |   | 38     |   | 27            |   |
| Total                                    | $      | (11    | )      | 1,339  |   | 3,213         |   |

| (Dollars in thousands)                                  |   |          |   |
|---------------------------------------------------------|--------|---------------|--------|
|                                                    | 2010   |          | 2009   |
| Deferred tax assets:                                    |   |          |   |
| Allowance for loan losses                               | $      | 5,973         |   | 5,942 |
| Amortizable intangible assets                           |   | -   |   | 11 |
| Accrued retirement expense                              |   | 1,086         |   | 987 |
| Income from non-accrual loans                           |   | 43            |   | 14 |
| Other                                                   |   | 507           |   | 112 |
| Total gross deferred tax assets                         |   | 7,609         |   | 7,066 |
|                                                    |   |          |   |   |
| Deferred tax liabilities:                               |   |          |   |   |
| Deferred loan fees                                      |   | 1,259         |   | 1,404 |
| Premises and equipment                                  |   | 493           |   | 328 |
| Unrealized gain (loss) on available for sale securities |   | (5            | )      | 1,168 |
| Unrealized gain on cash flow hedges                     |   | 252           |   | 686 |
| Total gross deferred tax liabilities                    |   | 1,999         |   | 3,586 |
| Net deferred tax asset                                  | $      | 5,610         |   | 3,480 |

----

| (Dollars in thousands) |   |
|------------------------|--------|
|                   |   |
| Beginning balance      | $      | 5,940 |
| New loans              |   | 7,517 |
| Repayments             |   | 7,409 |
|                   |   |   |
| Ending balance         | $      | 6,048 |

| (10) |     Commitments and Contingencies |
|------|--------------------------------------------------|

| (Dollars in thousands)   |   |
|--------------------------|--------|
|                     |   |
| Year ending December 31, |   |
| 2011                     | $      | 600 |
| 2012                     |   | 471 |
| 2013                     |   | 256 |
| 2014                     |   | 242 |
| 2015                     |   | 211 |
| Thereafter               |   | 1,440 |
|                     |   |   |
| Total minimum obligation | $      | 3,220 |

| (Dollars in thousands)                                             |               |    |   |
|--------------------------------------------------------------------|--------------------|---------|--------|
|                                                               | Contractual Amount |
|                                                               | 2010               |    | 2009   |
| Financial instruments whose contract amount represent credit risk: |               |    |   |
|                                                               |               |    |   |
| Commitments to extend credit                                       | $                  | 137,015 |   | 140,207 |
|                                                               |               |    |   |   |
| Standby letters of credit and financial guarantees written         | $                  | 3,590   |   | 3,302 |

----

| (11) |     Derivative Financial Instruments and Hedging Transactions |
|------|------------------------------------------------------------------------------|

----

| (Dollars in thousands)             |                    |   |                                                                                |   |                   |   |                                                                |
|------------------------------------|-------------------------|--------|-------------------------------------------------------------------------------------|--------|------------------------|--------|---------------------------------------------------------------------|
|                               | Asset Derivatives       |
|                               | As of December 31, 2010 |   | As of December 31, 2009                                                             |
|                               | Balance Sheet Location  |   | Fair Value                                                                          |   | Balance Sheet Location |   | Fair Value                                                          |
| Interest rate derivative contracts | Other assets            |   | $        648       |   | Other assets           |   | $      1,762      |

| (Dollars in thousands)             |                                                                                       |   |                                                                                      |   |                                                                    |   |                                                                      |   |                                                                                             |
|------------------------------------|--------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|
|                               |                                                                                       |   |                                                                                      |   |                                                                    |   |                                                                      |   |                                                                                             |
|                               | Amount of Gain (Loss) Recognized inOCI on Derivatives                                      |   | Location of Gain(Loss) Reclassifiedfrom AccumulatedOCI into Income                        |   | Amount of Gain (Loss) Reclassifiedfrom AccumulatedOCI into Income  |
|                               | Years ended December 31,                                                                   |   |                                                                                      |   | Years ended December 31,                                                |
|                               | 2010                                                                                       |   | 2009                                                                                      |   |                                                                    |   | 2010                                                                      |   | 2009                                                                                             |
| Interest rate derivative contracts |  $     404           |   | $     434           |   | Interest income                                                         |   | $   1,518          |   | $    3,114                           |
|                               |                                                                                       |   |                                                                                      |   | Non-interest income                                                     |   | -                            |   | $         46          |

| (12) |     Employee and Director Benefit Programs |
|------|-----------------------------------------------------------|

----

| (Dollars in thousands)                    |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|
|                                      | 2010   |   | 2009   |   |
|                                      |   |   |   |   |
| Benefit obligation at beginning of period | $      | 2,355  |   | 1,779  |   |
| Service cost                              |   | 244    |   | 500    |   |
| Interest cost                             |   | 53     |   | 105    |   |
| Benefits paid                             |   | (45    | )      | (29    | ) |
|                                      |   |   |   |   |   |
| Benefit obligation at end of period       | $      | 2,607  |   | 2,355  |   |

| (Dollars in thousands)    |   |                |   |
|---------------------------|--------|---------------------|--------|
|                      | 2010   |                | 2009   |
|                      |   |                |   |
| Benefit obligation        | $      | 2,607               |   | 2,355 |
| Fair value of plan assets |   | -    |   | -    |

| (Dollars in thousands)                  |   |          |   |          |
|-----------------------------------------|--------|---------------|--------|---------------|
|                                    | 2010   |          | 2009   |          |
|                                    |   |          |   |          |
| Funded status                           | $      | (2,607        | )      | (2,355        | ) |
| Unrecognized prior service cost/benefit |   | -   |   | -   |   |
| Unrecognized net actuarial loss         |   | -   |   | -   |   |
|                                    |   |          |   |          |   |
| Net amount recognized                   | $      | (2,607        | )      | (2,355        | ) |
|                                    |   |          |   |          |   |
| Unfunded accrued liability              | $      | (2,607        | )      | (2,355        | ) |
| Intangible assets                       |   | -   |   | -   |   |
|                                    |   |          |   |          |   |
| Net amount recognized                   | $      | (2,607        | )      | (2,355        | ) |

| (Dollars in thousands)                            |   |   |   |
|---------------------------------------------------|--------|--------|--------|
|                                              | 2010   |   | 2009   |
|                                              |   |   |   |
| Service cost                                      | $      | 244    |   | 500 |
| Interest cost                                     |   | 53     |   | 105 |
|                                              |   |   |   |   |
| Net periodic cost                                 | $      | 297    |   | 605 |
|                                              |   |   |   |   |
| Weighted average discount rate assumption used to |   |   |   |   |
| determine benefit obligation                      |   | 6.65%  |   | 6.66% |

----

| (Dollars in thousands)   |   |
|--------------------------|--------|
|                     |   |
| Year ending December 31, |   |
| 2011                     | $      | 54 |
| 2012                     | $      | 62 |
| 2013                     | $      | 199 |
| 2014                     | $      | 222 |
| 2015                     | $      | 252 |
| Thereafter               | $      | 9,108 |

|                             |   | 2010   |   | 2009                                        |                            | 2008   |
|----------------------------------|--------|--------|--------|---------------------------------------------|---------------------------------|--------|
|                             |   | Shares |   | Weighted Average Price of Book Value Shares | Shares                          |   | Weighted Average Price of Book Value Shares | Shares |   | Weighted Average Price of Book Value Shares |
| Outstanding, beginning of period |   | -      |   | $                                           | -      |   | 97,377 |   | $ | 7.38 |   | 97,377 |   | $ | 7.38 |
| Exercised during the period      |   | -      |   | $                                           | -      |   | (97,377 | ) | $ | 7.38 |   | -    |   | $ | -   |
|                             |   |   |   |                                        |                            |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end of period       |   | -      |   | $                                           | -      |   | -    |   | $ | -   |   | 97,377 |   | $ | 7.38 |
|                             |   |   |   |                                        |                            |   |   |   |   |   |   |   |   |   |   |
| Number of shares exercisable     |   | -      |   | $                                           | -      |   | -    |   | $ | -   |   | 89,580 |   | $ | 7.27 |

| (13) |     Regulatory Matters |
|------|---------------------------------------|

----

| (Dollars in thousands)                   |   |    |                          |   |                                                             |   |   |   |
|------------------------------------------|--------|---------|-------------------------------|--------|------------------------------------------------------------------|--------|--------|--------|
|                                     | Actual |    | For Capital Adequacy Purposes |   | To Be Well Capitalized Under Prompt Corrective Action Provisions |
|                                     |   |    |                          |   |                                                             |   |   |   |   |   |   |
|                                     | Amount |    | Ratio                         |   | Amount                                                           |   | Ratio  |   | Amount |   | Ratio |
|                                     |   |    |                          |   |                                                             |   |   |   |   |   |   |
| As of December 31, 2010:                 |   |    |                          |   |                                                             |   |   |   |   |   |   |
|                                     |   |    |                          |   |                                                             |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |   |    |                          |   |                                                             |   |   |   |   |   |   |
| Consolidated                             | $      | 126,912 |                          | 15.51% |                                                             | 65,455 |   | 8.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 107,294 |                          | 13.15% |                                                             | 65,291 |   | 8.00%  |   | 81,614 |   | 10.00% |
| Tier 1 Capital (to Risk-Weighted Assets) |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Consolidated                             | $      | 116,470 |                          | 14.24% |                                                             | 32,728 |   | 4.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 96,853  |                          | 11.87% |                                                             | 32,646 |   | 4.00%  |   | 48,968 |   | 6.00% |
| Tier 1 Capital (to Average Assets)       |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Consolidated                             | $      | 116,470 |                          | 10.70% |                                                             | 43,533 |   | 4.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 96,853  |                          | 8.91%  |                                                             | 43,491 |   | 4.00%  |   | 54,363 |   | 5.00% |
|                                     |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| As of December 31, 2009:                 |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
|                                     |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Consolidated                             | $      | 126,689 |                          | 15.00% |                                                             | 67,586 |   | 8.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 105,217 |                          | 12.48% |                                                             | 67,444 |   | 8.00%  |   | 84,305 |   | 10.00% |
| Tier 1 Capital (to Risk-Weighted Assets) |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Consolidated                             | $      | 116,091 |                          | 13.74% |                                                             | 33,793 |   | 4.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 94,619  |                          | 11.22% |                                                             | 33,722 |   | 4.00%  |   | 50,583 |   | 6.00% |
| Tier 1 Capital (to Average Assets)       |   |    |                          |   |                                                             |   |   |   |   |   |   |   |
| Consolidated                             | $      | 116,091 |                          | 11.42% |                                                             | 40,650 |   | 4.00%  |   | N/A   |   | N/A   |
| Bank                                     | $      | 94,619  |                          | 9.33%  |                                                             | 40,581 |   | 4.00%  |   | 50,726 |   | 5.00% |

| (14) |     Shareholders’ Equity |
|------|-----------------------------------------------|

----

| (15) |     Other Operating Expense |
|------|--------------------------------------------|

| (Dollars in thousands)  |   |   |   |   |   |
|-------------------------|--------|--------|--------|--------|--------|
|                    | 2010   |   | 2009   |   | 2008   |
| Advertising             | $      | 714    |   | 860    |   | 1,076 |
| FDIC insurance          | $      | 1,434  |   | 1,766  |   | 547 |
| Visa debit card expense | $      | 606    |   | 1,064  |   | 761 |
| Telephone               | $      | 629    |   | 616    |   | 476 |

| (16) |     Fair Value of Financial Instruments |
|------|--------------------------------------------------------|

----

----

|                                     | December 31, 2010      |    | December 31, 2009    |
|------------------------------------------|------------------------|---------|----------------------|
|                                     | Carrying Amount        |    | Estimated Fair Value |   | Carrying Amount |   | Estimated Fair Value |
|                                     | (dollars in thousands) |
|                                     |                   |    |                 |   |   |   |   |
| Assets:                                  |                   |    |                 |   |   |   |   |
| Cash and cash equivalents                | $                      | 23,977  |                 | 23,977 |   | 31,340 |   | 31,340 |
| Certificates of deposit                  | $                      | 735     |                 | 735 |   | 3,345 |   | 3,345 |
| Investment securities available for sale | $                      | 272,449 |                 | 272,449 |   | 195,115 |   | 195,115 |
| Other investments                        | $                      | 5,761   |                 | 5,761 |   | 6,346 |   | 6,346 |
| Mortgage loans held for sale             | $                      | 3,814   |                 | 3,814 |   | 2,840 |   | 2,840 |
| Loans, net                               | $                      | 710,667 |                 | 710,880 |   | 762,643 |   | 763,939 |
| Cash surrender value of life insurance   | $                      | 7,539   |                 | 7,539 |   | 7,282 |   | 7,282 |
| Derivative instruments                   | $                      | 648     |                 | 648 |   | 1,762 |   | 1,762 |
|                                     |                   |    |                 |   |   |   |   |   |
| Liabilities:                             |                   |    |                 |   |   |   |   |   |
| Deposits and demand notes payable        | $                      | 840,312 |                 | 839,379 |   | 809,979 |   | 809,717 |
| Securities sold under agreements         |                   |    |                 |   |   |   |   |   |
| to repurchase                            | $                      | 34,094  |                 | 34,094 |   | 36,876 |   | 36,876 |
| FHLB borrowings                          | $                      | 70,000  |                 | 79,950 |   | 77,000 |   | 86,680 |
| Junior subordinated debentures           | $                      | 20,619  |                 | 20,619 |   | 20,619 |   | 20,619 |

----

| (17) |     Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements |
|------|-----------------------------------------------------------------------------------------------------------------|

| Balance Sheets                             |
|--------------------------------------------|
|                                       |   |   |   |
| December 31, 2010 and 2009                 |
| (Dollars in thousands)                     |
|                                       |   |   |   |
| Assets                                     | 2010 |   | 2009 |
|                                       |   |   |   |
| Cash                                       | $ | 425 |   | 300 |
| Interest-bearing time deposit              |   | 17,000 |   | 19,000 |
| Investment in subsidiaries                 |   | 98,164 |   | 98,455 |
| Investment securities available for sale   |   | 1,659 |   | 1,668 |
| Other assets                               |   | 393 |   | 437 |
|                                       |   |   |   |   |
| Total assets                               | $ | 117,641 |   | 119,860 |
|                                       |   |   |   |   |
| Liabilities and Shareholders' Equity       |   |   |   |   |
|                                       |   |   |   |   |
| Accrued expenses                           | $ | 164 |   | 18 |
| Junior subordinated debentures             |   | 20,619 |   | 20,619 |
| Shareholders' equity                       |   | 96,858 |   | 99,223 |
|                                       |   |   |   |   |
| Total liabilities and shareholders' equity | $ | 117,641 |   | 119,860 |

| Statements of Earnings                                       |
|--------------------------------------------------------------|
|                                                         |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008         |
| (Dollars in thousands)                                       |
|                                                         |   |   |   |   |   |   |
| Revenues:                                                    | 2010 |   | 2009 |   | 2008 |   |
|                                                         |   |   |   |   |   |   |
| Dividends from subsidiaries                                  | $ | -   |   | -   |   | 1,929 |   |
| Interest and dividend income                                 |   | 311 |   | 454 |   | 443 |   |
| Loss on sale of securities                                   |   | (291 | ) | (149 | ) | (327 | ) |
|                                                         |   |   |   |   |   |   |   |
| Total revenues                                               |   | 20 |   | 305 |   | 2,045 |   |
|                                                         |   |   |   |   |   |   |   |
| Expenses:                                                    |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |
| Interest                                                     |   | 411 |   | 546 |   | 1,016 |   |
| Other operating expenses                                     |   | 191 |   | 230 |   | 244 |   |
|                                                         |   |   |   |   |   |   |   |
| Total expenses                                               |   | 602 |   | 776 |   | 1,260 |   |
|                                                         |   |   |   |   |   |   |   |
| (Loss) earnings before income tax benefit and equity in |   |   |   |   |   |   |   |
| undistributed earnings of subsidiaries                       |   | (582 | ) | (471 | ) | 785 |   |
|                                                         |   |   |   |   |   |   |   |
| Income tax benefit                                           |   | 24 |   | 84 |   | 389 |   |
|                                                         |   |   |   |   |   |   |   |
| (Loss) earnings before equity in undistributed          |   |   |   |   |   |   |   |
| earnings of subsidiaries                                     |   | (558 | ) | (387 | ) | 1,174 |   |
|                                                         |   |   |   |   |   |   |   |
| Equity in undistributed earnings of subsidiaries             |   | 2,399 |   | 3,303 |   | 5,217 |   |
|                                                         |   |   |   |   |   |   |   |
| Net earnings                                                 | $ | 1,841 |   | 2,916 |   | 6,391 |   |

----

| Statements of Cash Flows                                             |
|----------------------------------------------------------------------|
|                                                                 |   |   |   |   |   |   |
| For the Years Ended December 31, 2010, 2009 and 2008                 |
| (Dollars in thousands)                                               |
|                                                                 |   |   |   |   |   |   |
|                                                                 | 2010 |   | 2009 |   | 2008 |   |
| Cash flows from operating activities:                                |   |   |   |   |   |   |
|                                                                 |   |   |   |   |   |   |
| Net earnings                                                         | $ | 1,841 |   | 2,916 |   | 6,391 |   |
| Adjustments to reconcile net earnings to net                         |   |   |   |   |   |   |   |
| cash (used) provided by operating activities:                   |   |   |   |   |   |   |   |
| Book value shares accrual                                            |   | -   |   | (720 | ) | 136 |   |
| Equity in undistributed earnings of subsidiaries                     |   | (2,399 | ) | (3,303 | ) | (5,217 | ) |
| Deferred income tax benefit                                          |   | -   |   | 278 |   | (53 | ) |
| Loss on sale of investment securities                                |   | 291 |   | 149 |   | 327 |   |
| Change in:                                                           |   |   |   |   |   |   |   |
| Other assets                                                         |   | (66 | ) | (319 | ) | (3 | ) |
| Accrued income                                                       |   | -   |   | 17 |   | (17 | ) |
| Accrued expense                                                      |   | 147 |   | 252 |   | 15 |   |
|                                                                 |   |   |   |   |   |   |   |
| Net cash (used) provided by operating activities                |   | (186 | ) | (730 | ) | 1,579 |   |
|                                                                 |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                |   |   |   |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |
| Purchases of investment securities available for sale                |   | (36,000 | ) | (15,000 | ) | (1,000 | ) |
| Proceeds from maturities of investment securities available for sale |   | 36,000 |   | 15,000 |   | -   |   |
| Proceeds from sales of investment securities available for sale      |   | -   |   | -   |   | 3 |   |
| Net change in interest-bearing time deposit                          |   | 2,000 |   | (14,000 | ) | 3,000 |   |
| Payments for investments in subsidiaries                             |   | -   |   | (8,010 | ) | -   |   |
|                                                                 |   |   |   |   |   |   |   |
| Net cash provided (used) by investing activities                     |   | 2,000 |   | (22,010 | ) | 2,003 |   |
|                                                                 |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                |   |   |   |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |
| Proceeds from issuance of Series A preferred stock                   |   | -   |   | -   |   | 25,054 |   |
| Cash dividends paid on Series A preferred stock                      |   | (1,253 | ) | (1,120 | ) | -   |   |
| Cash dividends paid on common stock                                  |   | (448 | ) | (1,440 | ) | (2,680 | ) |
| Common stock repurchased                                             |   | -   |   | -   |   | (1,126 | ) |
| Restricted stock payout                                              |   | 12 |   |   |   |   |   |
| Proceeds from exercise of stock options                              |   | -   |   | -   |   | 44 |   |
|                                                                 |   |   |   |   |   |   |   |
| Net cash (used) provided by financing activities                |   | (1,689 | ) | (2,560 | ) | 21,292 |   |
|                                                                 |   |   |   |   |   |   |   |
| Net change in cash                                                   |   | 125 |   | (25,300 | ) | 24,874 |   |
|                                                                 |   |   |   |   |   |   |   |
| Cash at beginning of year                                            |   | 300 |   | 25,600 |   | 726 |   |
|                                                                 |   |   |   |   |   |   |   |
| Cash at end of year                                                  | $ | 425 |   | 300 |   | 25,600 |   |
|                                                                 |   |   |   |   |   |   |   |
| Noncash investing and financing activities:                          |   |   |   |   |   |   |   |
| Change in unrealized gain on investment securities                   |   |   |   |   |   |   |   |
|  available for sale, net                                        | $ | (172 | ) | 3 |   | (142 | ) |

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