##### Table of Contents







UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2007

OR



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

For the transition period from  to
.

COMMISSION FILE NUMBER 000-30517





AMERICAN COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in
its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|NORTH CAROLINA                                                 |  | 56-2179531                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                                                 |  |           
|---------------------------------------------------------------- |  | ----------
|4500 CAMERON VALLEY PARKWAY, SUITE 150 CHARLOTTE, NORTH CAROLINA |  | 28211     
|(Address of Principal Executive Offices)                         |  | (Zip Code)

Registrants Telephone number, including area code: (704) 225-8444

Securities registered pursuant to Section 12(b) of the Act

NONE

Securities registered pursuant to Section 12(g) of the Act

COMMON STOCK, PAR VALUE $1.00 PER SHARE





Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ̈  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ̈  Yes    x  No

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   ̈

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

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

(Do not check if a smaller reporting company)

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most recently completed second fiscal quarter. $81,460,000

Indicate the number of
shares outstanding of each of the registrants classes of common stock as of the latest practicable date. 6,542,091 shares of Common Stock outstanding as of March 13, 2008:

Documents Incorporated by Reference.

Portions of the registrants definitive proxy
statement as filed with the Federal Deposit Insurance Corporation in connection with its 2008 annual meeting are incorporated into Part III of this report.









---

##### Table of Contents

FORM 10-K CROSS-REFERENCE INDEX



|                                                                                                                      |  |           |  |                |  |              
|--------------------------------------------------------------------------------------------------------------------- |  | --------- |  | -------------- |  | -------------
|PART I                                                                                                                |  | FORM 10-K |  | PROXYSTATEMENT |  | ANNUAL REPORT
|                                                                                                                      |  |           | 
|Item 1  Business                                                                                                     |  | X         |  |                |  |              
|Item 1A  Risk Factors                                                                                                |  | X         |  |                |  |              
|Item 1B  Unresolved Staff Comments                                                                                   |  | X         |  |                |  |              
|Item 2  Properties                                                                                                   |  | X         |  |                |  |              
|Item 3  Legal Proceedings                                                                                            |  | X         |  |                |  |              
|Item 4  Submission of Matters to a Vote Of Security Holders                                                          |  | X         |  |                |  |              
|                                                                                                                      |  |           | 
|PART II                                                                                                               |  |           |  |                |  |              
|                                                                                                                      |  |           | 
|Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | X         |  |                |  |              
|Item 6  Selected Financial Data                                                                                      |  | X         |  |                |  |              
|Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |           |  |                |  | X            
|Item 7A  Quantitative and Qualitative Disclosures About Market Risk                                                  |  |           |  |                |  | X            
|Item 8  Financial Statements and Supplementary Data                                                                  |  |           |  |                |  | X            
|Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                        |  | X         |  |                |  |              
|Item 9A  Controls and Procedures                                                                                     |  | X         |  |                |  |              
|Item 9B  Other Information                                                                                           |  | X         |  |                |  |              
|                                                                                                                      |  |           | 
|PART III                                                                                                              |  |           |  |                |  |              
|                                                                                                                      |  |           | 
|Item 10  Directors, Executive Officers, and Corporate Governance                                                     |  | X         |  | X              |  |              
|Item 11  Executive Compensation                                                                                      |  |           |  | X              |  |              
|Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  |           |  | X              |  |              
|Item 13  Certain Relationships and Related Transactions, and Director Independence                                   |  |           |  | X              |  |              
|Item 14  Principal Accountant Fees and Services                                                                      |  |           |  | X              |  |              
|                                                                                                                      |  |           | 
|PART IV                                                                                                               |  |           |  |                |  |              
|                                                                                                                      |  |           | 
|Item 15  Exhibits, Financial Statement Schedules                                                                     |  | X         |  |                |  |              



2



---

##### Table of Contents

PART 1

ITEM 1  BUSINESS

Who We Are

American Community Bancshares, Inc. (Bancshares) is a bank holding company that owns all of the common stock of American Community Bank (American Community or the Bank) a state-chartered commercial bank
that is insured by the Deposit Insurance Fund of the FDIC. Bancshares was incorporated on February 16, 2000 as a North Carolina-chartered corporation and became the holding company for American Community on April 28, 2000. To become
American Communitys holding company, Bancshares received approval of the Federal Reserve Board as well as American Communitys shareholders. Upon receiving such approvals, each share of the common stock of American Community was exchanged
on a one-for-one basis for shares of the common stock of Bancshares. Bancshares acquired FNB Bancshares, Inc. and its subsidiary bank First National Bank of the Carolinas (First National) based in Gaffney, South Carolina on
April 15, 2004. First National was merged into American Community on April 1, 2005.

Since opening in November of 1998, we have accomplished the
following:



| |  |  | Grown the bank to over $500 million in assets with a compound annualized growth rate of 27.2% since 1999;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Assembled a management team consisting of resident bankers from local markets who each have over 25 years of banking experience;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Assembled an experienced and diverse board of directors that provides strategic expertise unique to a community bank of our size;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Completed the acquisition in 2004 of FNB Bancshares, Inc. and its subsidiary, First National Bank of the Carolinas, Gaffney, SC, thus giving us branch expansion
opportunities into South Carolina;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Currently operating thirteen (13) full service banking offices throughout North and South Carolina;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Listed our common stock for quotation on the Nasdaq Capital Market under the symbol ACBA;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Developed a local identity in the communities we serve by sponsoring a wide variety of civic and charitable events;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Implemented a shareholder dividend reinvestment program and stock purchase plan;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Implemented a stock repurchase plan;
| | - |  | ------------------------------------



| |  |  | Currently paying an annual cash dividend of $0.20 per share.
| | - |  | ------------------------------------------------------------

The Bank operates for the primary purpose of serving the banking needs of individuals, and small to medium-sized businesses in our market areas. While numerous banks in our market have chosen to focus on the affluent and high net worth
individuals, we have chosen to focus on middle income households and the entrepreneurial segment of our market. We offer a wide range of banking services including checking, certificates of deposit and savings accounts, commercial, consumer and
personal loans, mortgage and other associated financial services.

Our Market Area

We consider our primary market area to be the Southern Piedmont area of North Carolina, including Union, Mecklenburg and adjoining counties. In South Carolina our primary markets include Cherokee and York
Counties. The Bank serves our market area through thirteen full service branch locations with nine located in Union and Mecklenburg County in North Carolina. The Bank also offers four convenient locations throughout York and Cherokee Counties
of South Carolina. The Banks customers may access various banking services through ATMs owned by the Bank and ATMs owned by others, through debit cards, and through the Banks automated telephone and online banking products.



3



---

##### Table of Contents

Union County had an estimated 2007 population of 183,000 and
Mecklenburg County has an estimated 2007 population of 872,000. Both counties have a balanced and diversified economy. Monroe, with a population of approximately 36,000, is the largest city in Union County. Union County is currently the
fastest growing county in North Carolina and 12thfastest growing county in the country. The population of Union County has grown 42% since 2000.
Charlotte, which is ranked 21stin U.S. population, is Mecklenburg Countys and North Carolinas largest city and has consistently been
one of the fastest growing areas of the Southeast. The population of Charlotte and Mecklenburg County had a growth rate of 19% between 2000 and 2006. The most recent unemployment rate was 4.0% for Union County and 4.5% for Mecklenburg County;
both lower than the North Carolina state rate of 4.7%. Cherokee County, previous headquarters for the First National Bank of the Carolinas, has an estimated population of 54,000 and an estimated growth rate of 3%. York County, South Carolina is
the regions second fastest growing county and has an estimated population of 200,000. York County also averaged a 21% growth rate between 2000 and 2006, ranking 4thin per capita income in South Carolina. It is also the second fastest growing county in the region behind Union County.

Strategy

American Community has expanded aggressively since opening for business in November 1998. Because of its strong capital position
created during its incorporation stage, American Community had the requisite capital needed to permit it to immediately establish branch offices. American Communitys branching strategy is opportunistic. It has established nine branch offices
in growing areas within Union and Mecklenburg Counties, North Carolina. The Bank also offers four full-service banking offices located in York and Cherokee Counties, South Carolina. The Bank seeks markets where there are opportunities to hire
successful local bankers who have a loyal following of deposit and loan customers. To date we have centered each of our branch offices on such a local and experienced banker. Management also believes it is important in the early formation years
to build branches that will provide convenience and efficiencies in its operational infrastructure. The Charlotte region is a highly competitive banking market with many competitors including money center, super-regional and community
banks. American Communitys strategy is to develop a branch network to take advantage of opportunities that present themselves in both new geographic and new product markets. We will continue to search for opportunities, either for de
novo branching, branch purchase or whole bank acquisitions that we believe will add long term enhanced value for our shareholders. The acquisition of First National Bank of the Carolinas in 2004 provided us the opportunity to expand across the South
Carolina state line into York County, one of the fastest growing counties in South Carolina. We are one of a handful of banks in North Carolina that has expansion ability across the South Carolina state line. We believe this adds to the long
term franchise value of our Company since it is hard to replicate due to the regulatory restrictions that prohibit most out-of-state banks from branching into South Carolina. In addition, we will remain open to opportunistic expansion through
acquisition of additional whole banks in other growing metropolitan areas of North Carolina and South Carolina if the acquisition enhances shareholder value and there exists synergies of operations and compatible corporate culture (i.e. a community
bank serving a communitys needs).

Lending Activities

General. The Bank provides to its customers a full range of short- to medium-term commercial, agricultural, Small Business Administration guaranteed, mortgage, construction and personal loans, both secured and unsecured. The Bank
also makes real estate mortgage and construction loans. The Bank has maintained a good balance between variable and fixed rate loans within its portfolio. Variable rate loans accounted for 63% of the loan balances outstanding at December 31,
2007 while fixed rate loans accounted for 37% of the balances.

The Banks loan policies and procedures establish the basic guidelines governing its
lending operations. Generally, the guidelines address the types of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans
or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Bank, including the indebtedness of any guarantor. The policies are reviewed and approved
at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by external loan examiners experienced in loan review work. The Bank has
focused its portfolio lending activities on typically higher yielding commercial, construction and consumer loans.



4



---

##### Table of Contents

Loan Composition. The following table sets forth at the dates indicated the Banks loan portfolio composition
by type of loan:



|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | - | ------- | - | ------- | - |  | ------ | -
|                                              |  | 2007                   |         |   | 2006    |        |   | 2005   |   |         | 2004    |  |        | 2003   | 
|                                              |  | Amount                 |         |   | Percent |        |   | Amount |   |         | Percent |  |        | Amount |  |   | Percent |   |  | Amount |   |  | Percent |         |   | Amount |        |   | Percent |  
|                                              |  | (Dollars in Thousands) |        
|Real estate - mortgage loans:                 |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|1-4 family                                    |  | $                      | 35,680  |   |         | 9.08   | % |        | $ | 32,414  |         |  | 8.75   | %      |  | $ | 28,933  |   |  | 8.70   | % |  | $       | 27,161  |   |        | 8.81   | % |         | $ | 15,894  |   |  | 7.77   | %
|Commercial mortgage                           |  |                        | 104,209 |   |         | 26.51  | % |        |   | 96,946  |         |  | 26.16  | %      |  |   | 84,694  |   |  | 25.45  | % |  |         | 84,621  |   |        | 27.47  | % |         |   | 80,395  |   |  | 39.32  | %
|Construction/development                      |  |                        | 136,531 |   |         | 34.73  | % |        |   | 93,643  |         |  | 25.27  | %      |  |   | 44,037  |   |  | 13.24  | % |  |         | 39,844  |   |        | 12.93  | % |         |   | 28,469  |   |  | 13.92  | %
|Home equity lines of credit                   |  |                        | 34,784  |   |         | 8.85   | % |        |   | 24,388  |         |  | 6.58   | %      |  |   | 27,732  |   |  | 8.33   | % |  |         | 24,575  |   |        | 7.98   | % |         |   | 16,526  |   |  | 8.08   | %
|Commercial and industrial loans               |  |                        | 57,958  |   |         | 14.74  | % |        |   | 78,086  |         |  | 21.07  | %      |  |   | 97,197  |   |  | 29.21  | % |  |         | 85,911  |   |        | 27.88  | % |         |   | 41,121  |   |  | 20.11  | %
|Loans to individuals                          |  |                        | 20,010  |   |         | 5.09   | % |        |   | 36,782  |         |  | 9.93   | %      |  |   | 35,941  |   |  | 10.80  | % |  |         | 30,813  |   |        | 10.00  | % |         |   | 8,672   |   |  | 4.25   | %
|Lease financing, net                          |  |                        | 3,941   |   |         | 1.00   | % |        |   | 8,316   |         |  | 2.24   | %      |  |   | 14,193  |   |  | 4.27   | % |  |         | 15,177  |   |        | 4.93   | % |         |   | 13,397  |   |  | 6.55   | %
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Subtotal                                      |  |                        | 393,113 |   |         | 100.00 | % |        |   | 370,575 |         |  | 100.00 | %      |  |   | 332,727 |   |  | 100.00 | % |  |         | 308,102 |   |        | 100.00 | % |         |   | 204,474 |   |  | 100.00 | %
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Less: allowance for loan losses               |  |                        | (5,740  | ) |         |        |   |        |   | (5,628  | )       |  |        |        |  |   | (4,331  | ) |  |        |   |  |         | (3,488  | ) |        |        |   |         |   | (2,529  | ) |  |        |  
|Plus: net unamortized deferred fees and costs |  |                        | (154    | ) |         |        |   |        |   | (144    | )       |  |        |        |  |   | (19     | ) |  |        |   |  |         | (114    | ) |        |        |   |         |   | 59      |   |  |        |  
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total                                         |  | $                      | 387,219 |   |         |        |   |        | $ | 364,803 |         |  |        |        |  | $ | 328,377 |   |  |        |   |  | $       | 304,500 |   |        |        |   |         | $ | 202,004 |   |  |        |  
|                                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  



5



---

##### Table of Contents

The following table sets forth the contractual maturity of loans at December 31, 2007:



|                                |  |                        |         |                                    |   |                  |  |       |     |  |   |        
|------------------------------- |  | ---------------------- | ------- | ---------------------------------- | - | ---------------- |  | ----- | --- |  | - | -------
|                                |  | One YearOr Less        |         | Greater thanOne YearThrough5 Years |   | More Than5 Years |  | Total
|                                |  | (Dollars in thousands)
|Real estate  mortgage loans:   |  |                        |         |                                    |   |                  |  |       |     |  |   |        
|1-4 family                      |  | $                      | 12,165  |                                    | $ | 23,515           |  | $     |    |  | $ | 35,680 
|Commercial mortgage             |  |                        | 29,159  |                                    |   | 74,746           |  |       | 304 |  |   | 104,209
|Construction/development        |  |                        | 97,032  |                                    |   | 39,473           |  |       | 26  |  |   | 136,531
|Home equity lines of credit     |  |                        | 8,266   |                                    |   | 26,466           |  |       | 52  |  |   | 34,784 
|Commercial and industrial loans |  |                        | 37,476  |                                    |   | 20,307           |  |       | 175 |  |   | 57,958 
|Loans to individuals            |  |                        | 8,585   |                                    |   | 11,269           |  |       | 156 |  |   | 20,010 
|Lease financing, net            |  |                        | 526     |                                    |   | 3,415            |  |       |    |  |   | 3,941  
|                                |  |                        |         |                                    |   |                  |  |       |     |  |   |        
|Total                           |  | $                      | 193,209 |                                    | $ | 199,191          |  | $     | 713 |  | $ | 393,113
|                                |  |                        |         |                                    |   |                  |  |       |     |  |   |        

The following table sets forth loans with fixed and variable rates having contractual maturities greater than one
year at December 31, 2007:



|                                |  |                        |         |              |   |        |  |   |        
|------------------------------- |  | ---------------------- | ------- | ------------ | - | ------ |  | - | -------
|                                |  | FixedRate              |         | VariableRate |   | Total 
|                                |  | (Dollars in thousands)
|Real estate  mortgage loans    |  | $                      | 90,674  |              | $ | 47,390 |  | $ | 138,064
|Home equity lines of credit     |  |                        | 52      |              |   | 26,466 |  |   | 26,518 
|Commercial and industrial loans |  |                        | 10,713  |              |   | 9,769  |  |   | 20,482 
|Loans to individuals            |  |                        | 9,891   |              |   | 1,534  |  |   | 11,425 
|Lease financing, net            |  |                        | 3,415   |              |   |       |  |   | 3,415  
|                                |  |                        |         |              |   |        |  |   |        
|                                |  | $                      | 114,745 |              | $ | 85,159 |  | $ | 199,904
|                                |  |                        |         |              |   |        |  |   |        

Real Estate Loans. Real estate loans are made for purchasing, constructing and refinancing one-to-four
family, five or more family and commercial properties. The Bank offers fixed and adjustable rate options, but typically limits the maximum fixed rate term to five years. The Bank provides customers access to long-term conventional real estate loans
through its mortgage loan department, which makes loans for the account of third parties.

Residential one-to-four family loans amounted to $35.7 million
at December 31, 2007. The Banks residential mortgage loans are typically construction loans that convert into permanent financing and are secured by properties located within the Banks market areas. Most of the permanent one-to-four
family residential mortgage loans that the Bank originates are for the account of third parties. Such loans are closed by the third party and therefore are not shown in the Banks financial statements. The Bank receives a fee for each such loan
originated, with such fees aggregating $326,000 for the year ended December 31, 2007. The Bank anticipates that it will continue to be an active originator of residential loans for the account of third parties.

The Bank has made, and anticipates continuing to make, commercial real estate loans. Commercial real estate loans equaled $104.2 million at December 31, 2007. This
lending has involved loans secured principally by owner occupied commercial buildings for office, storage and warehouse space. The Bank generally requires the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to
service the debt. Loans secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or
management of the properties.



6



---

##### Table of Contents

Another primary lending focus for the Bank is construction/development lending with balances outstanding as of
December 31, 2007 of $136.5 million. The Bank originates one to four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the
construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an outside banking entity prior to financing the construction of pre-sold homes. The Bank is active in the construction market and on
occasion makes construction loans to builders of homes that are not pre-sold, but limits the number of speculative loans to any one builder. This type of lending is only done with local, well established builders and not with large or national tract
builders. The Bank lends to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management believes it understands and in which it is comfortable with the economic
conditions. The Bank also makes commercial real estate construction loans, primarily for owner-occupied properties. The Bank further endeavors to limit its construction lending risk through adherence to established underwriting procedures. The Bank
generally requires documentation of all draw requests and utilizes third party appraisers to inspect the project prior to paying any draw requests from the builder. With few exceptions, the Bank requires personal guarantees and secondary sources of
repayment on construction loans.

Commercial Loans. Commercial business lending is also a focus of the Banks lending activities. At
December 31, 2007, the Banks commercial loan portfolio equaled $58.0 million. Commercial loans include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans
generally are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, cash flow, management
and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment. Commercial loans generally provide greater yields and reprice
more frequently than other types of loans, such as real estate loans. More frequent repricing means that yields on our commercial loans adjust with changes in interest rates.

Loans to Individuals and Home Equity Lines of Credit. Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and
miscellaneous secured and unsecured personal loans and totaled $54.8 million at December 31, 2007. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly
depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other
personal factors. The Bank attempts to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.

Leasing. At December 31, 2007 the Banks lease portfolio equaled $3.9 million. This type of lease financing is generally limited to heavy machinery,
manufacturing equipment, and specific vehicles. The leasing division also requires personal guarantees on the majority of our leases. In 2006, the Bank determined that the leasing business has become extremely competitive and is dominated by a few
large players. The Bank felt that leasing is not the best use of its capital and has contracted with a third party leasing company to liquidate the remaining leases in our portfolio. The bank no longer originates leases and is allowing the portfolio
to pay down.

Other Loan Products. The Bank is an active home mortgage originator and several of our offices have trained lending personnel to
originate home mortgage loans for the account of third parties. We currently have four lending relationships to which we sell all home mortgages to enable us to satisfy special lending requests of our borrowing customers. The Bank offers a credit
card on an agency basis as an accommodation to its customers. The Bank assumes none of the underwriting risk associated with credit card accounts established through this agency arrangement.

Loan Approvals.The Banks loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address
the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and
amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank.
The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by independent, outside professionals experienced in loan review. Responsibility for loan review and loan underwriting resides with the
Chief Credit Officer. He is responsible for loan processing, loan underwriting and approval. On an annual basis, the Board of Directors of the Bank determines the Presidents lending authority, who then delegates lending authorities



7



---

##### Table of Contents

to the Chief Credit Officer and other lending officers of the Bank. Delegated authorities may include loans, letters of credit, overdrafts, uncollected funds
and such other authorities as determined by the Board of Directors or the President within his delegated authority.

The President of American Community,
and the Chief Credit Officer each have the authority to approve loans up to the lending limits set by the Board of Directors, which were $2,000,000 and $1,500,000, respectively, at December 31, 2007. These limits are based upon the total credit
exposure in a relationship and not based on loan transaction size. The President and Chief Credit Officer together can approve up to $3,000,000 of total customer credit exposure with the following exceptions. Any acquisition and development loan
over $1,500,000, speculative construction loans over $1,500,000, land acquisition and hold transactions greater than $1,000,000 and any loans to non-profit organizations greater than $1,000,000 must be approved by the Loan Committee. All loans above
the lending limit of the President and Chief Credit Officer are reviewed and approved by the Loan Committee, which consists of the President, the South Carolina Regional Executive, and six outside directors. In addition, the Chief Credit Officer
serves as a non-voting member of this committee. At December 31, 2007, the Loan Committee had the authority to approve loans up to the Banks legal lending limit. The Banks legal lending limit was $7.2 million at December 31,
2007. The Bank seldom makes loans approaching its legal lending limit. All loans made to executive officers and directors must be approved by the full Board of Directors.

Non-performing Assets

The table sets forth, for the periods indicated, information about our non-accrual loans,
restructured loans, total non-performing loans (non-accrual loans plus restructured loans), and total non-performing assets.



|                                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|--------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                    |  | At December 31,        |      
|                                                    |  | 2007                   |       |   | 2006 |   |       | 2005 |  |   | 2004  |   |  | 2003 |      
|                                                    |  | (Dollars in thousands) |      
|Non-accrual loans                                   |  | $                      | 866   |   |      | $ | 563   |      |  | $ | 469   |   |  | $    | 881   |   |  | $ | 330   |  
|Non-accrual leases                                  |  |                        | 345   |   |      |   | 1,246 |      |  |   | 482   |   |  |      |      |   |  |   |      |  
|Restructured loans                                  |  |                        | 511   |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing loans                          |  |                        | 1,722 |   |      |   | 1,809 |      |  |   | 951   |   |  |      | 881   |   |  |   | 330   |  
|Foreclosed real estate and other repossessed assets |  |                        | 9     |   |      |   | 201   |      |  |   | 479   |   |  |      | 311   |   |  |   | 157   |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing assets                         |  | $                      | 1,731 |   |      | $ | 2,010 |      |  | $ | 1,430 |   |  | $    | 1,192 |   |  | $ | 487   |  
|                                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans past due 90 days or more             |  | $                      |      |   |      | $ | 291   |      |  | $ | 1,402 |   |  | $    | 1,117 |   |  | $ | 597   |  
|Allowance for loan losses                           |  |                        | 5,740 |   |      |   | 5,628 |      |  |   | 4,331 |   |  |      | 3,488 |   |  |   | 2,529 |  
|Non-performing loans to period end loans            |  |                        | 0.44  | % |      |   | 0.49  | %    |  |   | 0.29  | % |  |      | 0.29  | % |  |   | 0.16  | %
|Allowance for loan losses to period end loans       |  |                        | 1.46  | % |      |   | 1.52  | %    |  |   | 1.30  | % |  |      | 1.13  | % |  |   | 1.24  | %
|Allowance for loan losses to non-performing loans   |  |                        | 333   | % |      |   | 311   | %    |  |   | 455   | % |  |      | 396   | % |  |   | 766   | %
|Non-performing assets to total assets               |  |                        | 0.34  | % |      |   | 0.41  | %    |  |   | 0.33  | % |  |      | 0.30  | % |  |   | 0.17  | %



8



---

##### Table of Contents

The financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on
loans, unless a loan is placed on non-accrual basis. Loans are accounted for on a non-accrual basis when there are serious doubts about the collectibility of principal or interest. Loans are placed on non-accrual status in cases where there is
uncertainty as to whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected.
Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrowers weakened financial
condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. In 2007, the Bank had one troubled debt restructured loan for $511,000. Due to the
borrowers inability to make the payments required under the original loan terms, the Bank modified the terms by granting a longer amortized repayment structure in exchange for obtaining real estate as collateral. The restructured loan is
currently recorded as a non-accrual loan, has a related allowance for loan loss of $103,000 and is not past due. Potential problem loans are loans which are currently performing and are not included in non-accrual or restructured loans above, but
about which we have serious doubts as to the borrowers ability to comply with present repayment terms. These loans are likely to be included later in non-accrual, past due or restructured loans, so they are considered by management in
assessing the adequacy of the allowance for loan losses. At December 31, 2007, no major loans had been identified as potential problem loans.

At
December 31, 2007, the Bank had $1,211,000 in non-accrual loans and leases. Interest foregone on non-accrual loans was approximately $44,000 for the year ended December 31, 2007 and $42,000 for the year ended December 31, 2006.

Other real estate owned consists of foreclosed properties. At December 31, 2007, foreclosed real estate and other repossessed assets totaled $9,000
or less than .01% of total assets, and consisted of equipment and one vehicle. At December 31, 2006, foreclosed real estate and other repossessed assets totaled $201,000 or .04% of total assets, and consisted of seven residences and two
vehicles.

Analysis of Allowance for Loan Losses

The
allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is increased by provisions charged to operations and by recoveries of amounts previously charged off, and
reduced by loans charged off. The adequacy of the allowance is evaluated at least quarterly. In evaluating the adequacy of the allowance, the growth, composition and industry diversification of the portfolio, historical loan loss experience, current
delinquency levels, adverse situations that may affect a borrowers ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors are all considered. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the allowance for loan losses and may require adjustments to the allowance for loan losses based upon judgments different from those of management.

The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program,
risk grades are initially assigned by loan officers, reviewed by Credit Administration, and reviewed by a third party on a test basis. The Bank strives to maintain the loan portfolio in accordance with conservative loan underwriting policies that
result in loans specifically tailored to the needs of the Banks market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Bank has no foreign loans and does not engage in highly
leveraged transactions.

The Bank follows a loan review program designed to evaluate the credit risk in the loan portfolio. Through this loan review
process, an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses is maintained. In establishing the appropriate classification for specific assets,
management considers, among other factors, the estimated value of the underlying collateral, the borrowers ability to repay, the borrowers payment history and the current delinquency status. As a result of this process, certain loans are
categorized as substandard, doubtful or loss and reserves are allocated based on managements judgment and historical experience.



9



---

##### Table of Contents

Loans classified as substandard are those loans with clear and defined weaknesses such as unfavorable
financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some losses if the deficiencies are not
corrected. Loans classified as doubtful are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. Loans classified as
loss are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or
desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above
classification categories, loans are also categorized based upon risk grade and loan type, assigning an allowance allocation based upon each category.

Growth in loans outstanding has been the primary reason for increases in the allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among the major loan
categories, with the concentrations of major loan categories being relatively consistent in recent years. For the five years ended December 31, 2007, the range of each major category of loans as a percentage of total loans outstanding is as
follows: 1-4 family mortgage loans  8% to 9%, commercial mortgage loans  25% to 39%, construction/development real estate loans  13% to 35%; home equity loans - 7% to 9%; commercial and industrial loans -15% to 29%; loans to
individuals - 4% to 11%; and lease financing - 1% to 7%. For all full fiscal years through 2007, loan loss experience was similar to that of other banks our age, with net loan charge-offs in each year no greater than 0.37% of average loans
outstanding. The allowance for loan losses at December 31, 2007 of $5.7 million represents 1.46% of total loans and 333% of non-performing loans. The increase in the allowance for loan losses is primarily attributable to the increase in total
loans outstanding at December 31, 2007.

The allowance for loan losses represents managements estimate of an amount adequate to provide for
known and inherent losses in the loan portfolio in the normal course of business. Specific allowances are made that are allocated to certain individual loans and pools of loans based on risk characteristics. While management believes that it uses
the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the portfolio, will
not require adjustments to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or
that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the financial condition and results of
operations of Bancshares.



10



---

##### Table of Contents

The following table describes the allocation of the allowance for loan losses among various categories of loans and
certain other information for the dates indicated. The allocation is made for analytical purposes only and is not necessarily indicative of the categories in which future losses may occur.



|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  
|------------------------------- |  | ---------------------- | ----- | ------------------- | ------ | - | ------ | ---- | ------------------- |  | ------ | ------ |  | ------------------- | ----- |  | ------ | - | ------------------- | - | ----- | ------ | ------ | ------------------- |  | - | ----- |  | ------ | -
|                                |  | At December 31,        |      
|                                |  | 2007                   |       |                     | 2006   |   |        | 2005 |                     |  | 2004   |        |  | 2003                |      
|                                |  | Amount                 |       | % of TotalLoans (1) |        |   | Amount |      | % of TotalLoans (1) |  |        | Amount |  | % of TotalLoans (1) |       |  | Amount |   | % of TotalLoans (1) |   |       | Amount |        | % of TotalLoans (1) | 
|                                |  | (Dollars in thousands) |      
|Real estate loans               |  | $                      | 3,450 |                     | 60.10  | % |        | $    | 2,340               |  | 41.58  | %      |  | $                   | 2,155 |  | 47.39  | % |                     | $ | 2,149 |        | 49.21  | %                   |  | $ | 1,283 |  | 61.01  | %
|Home equity lines of credit     |  |                        | 177   |                     | 3.08   | % |        |      | 130                 |  | 2.31   | %      |  |                     | 137   |  | 8.33   | % |                     |   | 72    |        | 7.98   | %                   |  |   | 50    |  | 8.08   | %
|Commercial and industrial loans |  |                        | 1,121 |                     | 19.53  | % |        |      | 1,132               |  | 20.11  | %      |  |                     | 929   |  | 29.21  | % |                     |   | 731   |        | 27.88  | %                   |  |   | 676   |  | 20.11  | %
|Loans to individuals            |  |                        | 340   |                     | 5.92   | % |        |      | 405                 |  | 7.20   | %      |  |                     | 215   |  | 10.80  | % |                     |   | 232   |        | 10.00  | %                   |  |   | 162   |  | 4.25   | %
|Lease financing, net            |  |                        | 652   |                     | 11.36  | % |        |      | 1,621               |  | 28.80  | %      |  |                     | 895   |  | 4.27   | % |                     |   | 304   |        | 4.93   | %                   |  |   | 358   |  | 6.55   | %
|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  
|Total                           |  | $                      | 5,740 |                     | 100.00 | % |        | $    | 5,628               |  | 100.00 | %      |  | $                   | 4,331 |  | 100.00 | % |                     | $ | 3,488 |        | 100.00 | %                   |  | $ | 2,529 |  | 100.00 | %
|                                |  |                        |       |                     |        |   |        |      |                     |  |        |        |  |                     |       |  |        |   |                     |   |       |        |        |                     |  |   |       |  |        |  



|(1) | Represents total of all outstanding loans in each category as a percent of total loans outstanding.
|--- | ---------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

The following table presents for the periods indicated information regarding changes in the allowance for loan losses:



|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  | At or for the Years Ended December 31, |        
|                                                                        |  | 2007                                   |         |   | 2006 |   |         | 2005 |  |   | 2004    |   |  | 2003 |        
|                                                                        |  | (Dollars in thousands)                 |        
|Balance at beginning of period                                          |  | $                                      | 5,628   |   |      | $ | 4,331   |      |  | $ | 3,488   |   |  | $    | 2,529   |   |  | $ | 2,375   |  
|Charge-offs:                                                            |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                                       |  |                                        | 19      |   |      |   | 10      |      |  |   |        |   |  |      | 51      |   |  |   |        |  
|Home equity lines of credit                                             |  |                                        |        |   |      |   | 43      |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                                         |  |                                        | 180     |   |      |   | 64      |      |  |   | 8       |   |  |      | 211     |   |  |   | 598     |  
|Lease financing, net                                                    |  |                                        | 728     |   |      |   | 1,183   |      |  |   | 28      |   |  |      | 24      |   |  |   |        |  
|Loans to individuals                                                    |  |                                        | 108     |   |      |   | 50      |      |  |   | 45      |   |  |      | 54      |   |  |   | 67      |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                                       |  |                                        | 1,035   |   |      |   | 1,350   |      |  |   | 81      |   |  |      | 340     |   |  |   | 665     |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                                             |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                                       |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      | 1       |   |  |   |        |  
|Home equity lines of credit                                             |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                                         |  |                                        | 5       |   |      |   | 1       |      |  |   | 100     |   |  |      | 12      |   |  |   | 35      |  
|Lease financing, net                                                    |  |                                        | 91      |   |      |   | 26      |      |  |   | 4       |   |  |      |        |   |  |   |        |  
|Loans to individuals                                                    |  |                                        | 18      |   |      |   | 8       |      |  |   | 11      |   |  |      | 27      |   |  |   |        |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                                        |  |                                        | 114     |   |      |   | 35      |      |  |   | 115     |   |  |      | 40      |   |  |   | 35      |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs (recoveries)                                            |  |                                        | 921     |   |      |   | 1,315   |      |  |   | (34     | ) |  |      | 300     |   |  |   | 630     |  
|Allowance acquired from First National merger                           |  |                                        |         |   |      |   |        |      |  |   |        |   |  |      | 685     |   |  |   |        |  
|Provision for loan losses                                               |  |                                        | 1,033   |   |      |   | 2,612   |      |  |   | 809     |   |  |      | 574     |   |  |   | 784     |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance at end of period                                                |  | $                                      | 5,740   |   |      | $ | 5,628   |      |  | $ | 4,331   |   |  | $    | 3,488   |   |  | $ | 2,529   |  
|                                                                        |  |                                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans outstanding                                                 |  | $                                      | 392,959 |   |      | $ | 370,431 |      |  | $ | 332,708 |   |  | $    | 307,988 |   |  | $ | 204,533 |  
|Average loans outstanding                                               |  | $                                      | 370,832 |   |      | $ | 351,401 |      |  | $ | 317,986 |   |  | $    | 275,011 |   |  | $ | 182,108 |  
|Allowance for loan losses to total loans outstanding                    |  |                                        | 1.46    | % |      |   | 1.52    | %    |  |   | 1.30    | % |  |      | 1.13    | % |  |   | 1.24    | %
|Ratio of net loan charge-offs (recoveries) to average loans outstanding |  |                                        | 0.25    | % |      |   | 0.37    | %    |  |   | -0.01   | % |  |      | 0.11    | % |  |   | 0.35    | %



12



---

##### Table of Contents

Investment Activities

Bancshares portfolio of investment securities, most of which are available for sale, consists of U.S. Government agency, mortgage-backed securities, municipal bonds and other marketable equity securities.

Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with any
unrealized gains or losses reflected as an adjustment to stockholders equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be
sold in response to changes in interest rates and/or significant prepayment risks.

The following table summarizes the amortized costs, gross unrealized
gains and losses and the resulting market value of investment securities:



|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|----------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | --------- | --- |  | - | ------
|                                    |  | 2007                  
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies           |  | $                      | 13,635 |                      | $ | 341                   |  | $         | 10  |  | $ | 13,966
|Mortgage-backed securities          |  |                        | 49,116 |                      |   | 385                   |  |           | 196 |  |   | 49,305
|State and municipal bonds           |  |                        | 10,762 |                      |   | 109                   |  |           | 44  |  |   | 10,827
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        | 73,513 |                      |   | 835                   |  |           | 250 |  |   | 74,098
|Marketable equity securities        |  |                        | 907    |                      |   | 7                     |  |           |    |  |   | 914   
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities available for sale |  | $                      | 74,420 |                      | $ | 842                   |  | $         | 250 |  | $ | 75,012
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        |        |                     
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities held to maturity:        |  |                        |        |                      |   |                       |  |           |     |  |   |       
|State and municipal bonds           |  | $                      | 1,770  |                      | $ | 34                    |  | $         |    |  | $ | 1,804 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities held to maturity   |  | $                      | 1,770  |                      | $ | 34                    |  | $         |    |  | $ | 1,804 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    | 
|                                    |  | 2006                  
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies           |  | $                      | 20,202 |                      | $ | 44                    |  | $         | 117 |  | $ | 20,129
|Mortgage-backed securities          |  |                        | 37,047 |                      |   | 10                    |  |           | 835 |  |   | 36,222
|State and municipal bonds           |  |                        | 6,265  |                      |   | 32                    |  |           | 42  |  |   | 6,255 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        | 63,514 |                      |   | 86                    |  |           | 994 |  |   | 62,606
|Marketable equity securities        |  |                        | 407    |                      |   | 5                     |  |           |    |  |   | 412   
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities available for sale |  | $                      | 63,920 |                      | $ | 91                    |  | $         | 994 |  | $ | 63,018
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        |        |                     
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities held to maturity:        |  |                        |        |                      |   |                       |  |           |     |  |   |       
|State and municipal bonds           |  | $                      | 2,174  |                      | $ | 18                    |  | $         |    |  | $ | 2,192 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities held to maturity   |  | $                      | 2,174  |                      | $ | 18                    |  | $         |    |  | $ | 2,192 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       



13



---

##### Table of Contents

The following table summarizes the amortized cost and recorded market values of investment securities (excluding
marketable equity securities) at December 31, 2007, by contractual maturity groups:



|                                                   |  |                        |        |           |   |               |  |      |  
|-------------------------------------------------- |  | ---------------------- | ------ | --------- | - | ------------- |  | ---- | -
|                                                   |  | AmortizedCost          |        | FairValue |   | BookYield (1) | 
|                                                   |  | (Dollars in thousands) |       
|Securities available for sale and held to maturity |  |                        |        |           |   |               |  |      |  
|U. S. Government agencies                          |  |                        |        |           |   |               |  |      |  
|Due within one year                                |  | $                      | 3,000  |           | $ | 3,000         |  | 4.25 | %
|Due after one but within five years                |  |                        | 499    |           |   | 501           |  | 5.44 | %
|Due after five but within ten years                |  |                        | 8,396  |           |   | 8,732         |  | 5.35 | %
|Due after ten years                                |  |                        | 1,740  |           |   | 1,733         |  | 5.67 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|                                                   |  |                        | 13,635 |           |   | 13,966        |  | 5.15 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|Mortgage-backed securities                         |  |                        |        |           |   |               |  |      |  
|Due within one year                                |  |                        | 23     |           |   | 23            |  | 5.00 | %
|Due after one but within five years                |  |                        | 971    |           |   | 970           |  | 4.54 | %
|Due after five but within ten years                |  |                        | 10,241 |           |   | 10,239        |  | 4.46 | %
|Due after ten years                                |  |                        | 37,881 |           |   | 38,073        |  | 5.04 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|                                                   |  |                        | 49,116 |           |   | 49,305        |  | 4.91 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|Municipal bonds                                    |  |                        |        |           |   |               |  |      |  
|Due after one but within five years                |  |                        | 1,320  |           |   | 1,323         |  | 5.32 | %
|Due after five but within ten years                |  |                        | 2,617  |           |   | 2,641         |  | 5.79 | %
|Due after ten years                                |  |                        | 8,595  |           |   | 8,667         |  | 6.47 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|                                                   |  |                        | 12,532 |           |   | 12,631        |  | 5.70 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|Total investment securities                        |  |                        |        |           |   |               |  |      |  
|Due within one year                                |  | $                      | 3,023  |           | $ | 3,023         |  | 4.26 | %
|Due after one but within five years                |  |                        | 2,790  |           |   | 2,794         |  | 5.07 | %
|Due after five but within ten years                |  |                        | 21,254 |           |   | 21,612        |  | 4.98 | %
|Due after ten years                                |  |                        | 48,216 |           |   | 48,473        |  | 5.32 | %
|                                                   |  |                        |        |           |   |               |  |      |  
|                                                   |  | $                      | 75,283 |           | $ | 75,902        |  | 5.09 | %
|                                                   |  |                        |        |           |   |               |  |      |  



|(1) | Yields on tax-exempt investments have been adjusted to tax equivalent basis using an assumed tax rate of 34% for 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

Deposit Activities

The Bank provides a range of deposit services, including non-interest bearing checking accounts, interest bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts generally earn interest at
rates established by management based on competitive market factors and the desire to increase or decrease certain types or maturities of deposits.

The
Bank periodically uses brokered deposits consistent with asset and liability management policies. At December 31, 2007 the Bank had $12,001,000 in brokered deposits. We rarely bid on political funds for municipalities as such deposits are
extremely rate sensitive and due to fiduciary pressures on government officials, not as stable as regular corporate and individual customers.

The Bank
offers a variety of deposit programs to individuals and to small-to-medium size businesses and other organizations at interest rates generally competitive with local market conditions. For some of our corporate customers who require such a service,
we provide a courier service for non-cash deposit pickup. The following table sets forth the average balances and rates for each of the deposit categories for the periods indicated:



|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|-------------------------------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                                         |  | Year Ended December 31, |        
|                                                         |  | 2007                    |         |             | 2006 |   |                | 2005 |            
|                                                         |  | AverageBalance          |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                                         |  | (Dollars in thousands)  |        
|Interest bearing NOW, savings, and money market accounts |  | $                       | 100,047 |             | 2.24 | % |                | $    | 91,792      |  | 1.78 | %              |  | $           | 82,270  |  | 1.28 | %
|Other time deposits                                      |  |                         | 128,382 |             | 4.84 | % |                |      | 102,697     |  | 3.76 | %              |  |             | 87,656  |  | 3.05 | %
|Time deposits greater than $100,000                      |  |                         | 112,416 |             | 5.05 | % |                |      | 120,443     |  | 4.78 | %              |  |             | 108,547 |  | 3.28 | %
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest bearing deposits                          |  |                         | 340,845 |             | 4.15 | % |                |      | 314,932     |  | 3.57 | %              |  |             | 278,473 |  | 2.62 | %
|Demand and other non-interest bearing deposits           |  |                         | 59,376  |             |      |   |                |      | 58,705      |  |      |                |  |             | 53,753  |  |      |  
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total average deposits                                   |  | $                       | 400,221 |             | 3.53 | % |                | $    | 373,637     |  | 3.01 | %              |  | $           | 332,226 |  | 2.19 | %
|                                                         |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  



15



---

##### Table of Contents

The following table indicates the amount of the Banks certificates of deposit by interest rate and by time
remaining until maturity as of December 31, 2007.



|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  
|---------------------------------- |  | ---------------------- | ------ |  | ----------------------------------- | - |  | ------------------------------- | ------ |  | ------------------ | - |  | ----- | ------ |  | ---- | - |  | - | ------ |  | ---- | - |  | - | ------- |  | ---- | -
|                                   |  | Three months or less   |        |  | More than three monthsto six months |   |  | More than six monthsto one year |        |  | More than one year |   |  | Total |       
|                                   |  | (Dollars in thousands) |       
|Certificates of $100,000 or more   |  | $                      | 48,920 |  | 5.01                                | % |  | $                               | 24,623 |  | 5.08               | % |  | $     | 54,923 |  | 4.89 | % |  | $ | 15,266 |  | 4.69 | % |  | $ | 143,732 |  | 4.94 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        | 
|Certificates of less than $100,000 |  |                        | 40,524 |  | 4.90                                | % |  |                                 | 23,417 |  | 4.89               | % |  |       | 36,198 |  | 4.76 | % |  |   | 9,406  |  | 4.37 | % |  |   | 109,545 |  | 4.81 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  
|Total                              |  | $                      | 89,444 |  | 4.96                                | % |  | $                               | 48,040 |  | 4.99               | % |  | $     | 91,121 |  | 4.84 | % |  | $ | 24,672 |  | 4.57 | % |  | $ | 253,277 |  | 4.88 | %
|                                   |  |                        |        |  |                                     |   |  |                                 |        |  |                    |   |  |       |        |  |      |   |  |   |        |  |      |   |  |   |         |  |      |  



16



---

##### Table of Contents

Borrowings

Borrowed
funds consist of advances from the Federal Home Loan Bank of Atlanta (FHLB), securities sold under agreement to repurchase, federal funds purchased, obligations under a capitalized lease for the Banks main office facility and
junior subordinated debentures. The following table summarizes balance and rate information for borrowed funds as of the dates and for the periods indicated.



|                                              |  |                                      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | At or for the Year EndedDecember 31, |       
|                                              |  | 2007                                 |        |   | 2006 |   |        | 2005 | 
|                                              |  | (Dollars in thousands)               |       
|AMOUNTS OUTSTANDING AT END OF PERIOD:         |  |                                      |        |   |      |   |        |      |  |   |        |  
|                                              |  |                                      |       
|Advances from the FHLB                        |  |                                      |        |   |      |   |        |      |  |   |        |  
|Amount                                        |  | $                                    | 6,000  |   |      | $ | 6,000  |      |  | $ | 11,111 |  
|Weighted average rate                         |  |                                      | 3.53   | % |      |   | 3.53   | %    |  |   | 4.11   | %
|                                              |  |                                      |       
|Securities sold under agreement to repurchase |  |                                      |        |   |      |   |        |      |  |   |        |  
|Amount                                        |  | $                                    | 18,193 |   |      | $ | 15,473 |      |  | $ | 8,615  |  
|Weighted average rate                         |  |                                      | 2.88   | % |      |   | 3.69   | %    |  |   | 2.62   | %
|                                              |  |                                      |       
|Federal funds purchased                       |  |                                      |        |   |      |   |        |      |  |   |        |  
|Amount                                        |  | $                                    | 13,316 |   |      | $ |       |      |  | $ | 3,118  |  
|Weighted average rate                         |  |                                      | 4.60   | % |      |   |       |      |  |   | 4.60   | %
|                                              |  |                                      |       
|Capitalized lease obligation                  |  |                                      |        |   |      |   |        |      |  |   |        |  
|Amount                                        |  | $                                    | 1,685  |   |      | $ | 1,694  |      |  | $ | 1,702  |  
|Weighted average rate                         |  |                                      | 8.24   | % |      |   | 8.24   | %    |  |   | 8.24   | %
|                                              |  |                                      |       
|MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END:  |  |                                      |        |   |      |   |        |      |  |   |        |  
|                                              |  |                                      |       
|Advances from the FHLB                        |  | $                                    | 6,000  |   |      | $ | 11,056 |      |  | $ | 12,722 |  
|Securities sold under agreement to repurchase |  |                                      | 25,531 |   |      |   | 17,058 |      |  |   | 25,882 |  
|Federal funds purchased                       |  |                                      | 13,316 |   |      |   | 6,337  |      |  |   | 7,000  |  
|Capitalized lease obligation                  |  |                                      | 1,694  |   |      |   | 1,702  |      |  |   | 1,710  |  
|                                              |  |                                      |       
|AVERAGES DURING THE PERIOD:                   |  |                                      |        |   |      |   |        |      |  |   |        |  
|                                              |  |                                      |       
|Advances from the FHLB                        |  |                                      |        |   |      |   |        |      |  |   |        |  
|Average balance                               |  | $                                    | 6,000  |   |      | $ | 10,834 |      |  | $ | 12,215 |  
|Weighted average rate                         |  |                                      | 3.53   | % |      |   | 4.17   | %    |  |   | 3.85   | %
|                                              |  |                                      |       
|Securities sold under agreement to repurchase |  |                                      |        |   |      |   |        |      |  |   |        |  
|Average balance                               |  | $                                    | 20,977 |   |      | $ | 13,753 |      |  | $ | 13,138 |  
|Weighted average rate                         |  |                                      | 3.70   | % |      |   | 3.42   | %    |  |   | 2.18   | %
|                                              |  |                                      |       
|Federal funds purchased                       |  |                                      |        |   |      |   |        |      |  |   |        |  
|Average balance                               |  | $                                    | 340    |   |      | $ | 913    |      |  | $ | 778    |  
|Weighted average rate                         |  |                                      | 4.41   | % |      |   | 4.84   | %    |  |   | 1.80   | %
|                                              |  |                                      |       
|Capitalized lease obligation                  |  |                                      |        |   |      |   |        |      |  |   |        |  
|Average balance                               |  | $                                    | 1,692  |   |      | $ | 1,700  |      |  | $ | 1,708  |  
|Weighted average rate                         |  |                                      | 8.24   | % |      |   | 8.24   | %    |  |   | 8.24   | %



17



---

##### Table of Contents

Pursuant to collateral agreements with the FHLB, advances are secured by all of the Companys FHLB stock, investment
securities with a carrying value of $1.0 million at December 31, 2007, and a blanket lien on qualifying first mortgage loans. This agreement with the FHLB provides for a line of credit up to 15% of the Banks assets. The unused portion of
this line of credit is $69.8 million as of December 31, 2007.

Securities sold under agreement to repurchase are secured by investment securities. The
carrying value of the investment securities at December 31, 2007 was $18.5 million.

Bancshares also has unused lines of credit totaling $16.2 million
from correspondent banks at December 31, 2007.

Junior Subordinated Deferrable Interest Debentures

On December 31, 2001 we privately placed 2,000 shares of American Community Capital Trust I 9% Trust Preferred Securities, having a value of $2,000,000. On
March 1, 2002, we privately placed an additional 1,500 shares of American Community Capital Trust I 9% Trust Preferred Securities, having a liquidation value of $1,500,000. The trust preferred securities have a dividend yield equal to 9% of
their face value each year and distributions are paid on a quarterly basis. Bancshares source of funds for the required interest payments on the trust preferred securities is interest and dividends payable by the Bank to Bancshares plus
proceeds received from additional stock sold by Bancshares. Under the terms of the trust preferred securities, Bancshares is permitted to defer the payment of interest on the trust preferred securities for up to 20 consecutive calendar quarters. The
amount of any interest deferred also bears interest and must be paid at such time as funds are available to Bancshares. The Trust Preferred Securities were paid off on March 9, 2007.

During 2003, we formed a special purpose entity organized as a business trust under the laws of the State of Connecticut. This business trust, called American Community
Capital Trust II, Ltd was formed in order to allow us to issue trust preferred securities. On December 15, 2003, American Community Capital Trust II, Ltd. issued a floating rate trust preferred security in the amount of $10,000,000. The Trust
used the proceeds from the issuance of the trust preferred security to acquire a junior subordinated note of the Company. The trust preferred security essentially mirrors the debt security, carrying a floating interest rate based on 3-month LIBOR
plus 280 basis points. The initial interest rate in effect at the time of issuance was 3.97%, which is reset on a quarterly basis. The rate as of December 31, 2007 was 6.82%. The securities have a legal maturity of 30 years, and can be called
at the Companys option in whole or part after five years.

Banking Technology

We provide our customers with truncation of their deposit accounts (check imaging), on-line banking and 24 hour telephone banking that permits our depositors to check balances, recently cleared checks and recent
deposits. Due to our imaging of all documentation, our customer service representatives can access past statements and paid checks in a matter of seconds, eliminating research fees for our customers and eliminating any waiting time for such
research. We implemented Internet banking for our personal customers during the fourth quarter of 2002 and our business Internet banking was implemented in 2003.

The Bank has twelve ATM facilities attached to twelve of its existing banking offices. The Banks ATM cards
are linked to the nationwide Cirrus®, Plus® and Star® systems,
allowing the Banks customers to withdraw funds from any ATM honoring these systems.

Competition

Commercial banking in North Carolina is highly competitive in large part due to early adoption of statewide branching. We compete in our market areas with some of the
largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other
lenders engaged in the business of extending credit or taking investment monies such as mutual funds and brokerage firms. Many of our competitors have broader geographic markets and higher lending limits than us and are also able to provide more
services and make greater use of media advertising. In Union County, for example, there are currently 38 offices of 11 different commercial banks (including the largest banks in North Carolina). In Mecklenburg County, there are currently 231 offices
of 25 different commercial banks (including the largest banks in North Carolina). While we typically do not compete directly for loans with these larger banks, they do influence our deposit products. We do compete more directly with mid-size and
small community banks that have offices in our market areas. There are also a number of



18



---

##### Table of Contents

new community banks in Mecklenburg and Union Counties that have a direct competitive effect as borrowers tend to shop the terms of their loans
and deposits.

The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of our
competitors. In addition, as a result of interstate banking, out-of-state commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina. For example, Atlanta, Georgia based SunTrust, a large
multi-state financial institution has branches throughout North Carolina, including Mecklenburg County and Regions Bancshares, from Birmingham, Alabama, recently expanded their presence in North Carolina.

The banking business is highly competitive in South Carolina as well. American Community competes as a financial intermediary with other commercial banks, savings and
loan associations, credit unions, and money market mutual funds operating in the Cherokee County area and elsewhere. In Cherokee County, there are currently 13 offices of 6 different commercial banks. A number of these competitors are well
established in the Cherokee County area. Most of them have substantially greater resources and lending limits than the Bank and offer certain services, such as extensive and established branch networks and trust services that we either do not expect
to provide or do not currently provide. As a result of these competitive factors, the Bank may have to pay higher rates of interest to attract deposits.

Despite the competition in our market areas, we believe that we have certain competitive advantages that distinguish us from our competition. We believe that our primary competitive advantages are our bankers, each of whom is well known in
his or her community with strong personal and business ties to that community with a loyal customer following. We offer customers modern banking services without forsaking community values such as prompt, personal service and friendliness. We also
have established local advisory boards in certain of our communities to help us better understand their needs and to be ambassadors of the Bank. We offer many personalized services and attract customers by being responsive and sensitive
to their individualized needs. We believe our approach to business builds goodwill among our customers, shareholders, and the communities we serve which results in referrals from shareholders and satisfied customers. We also rely on traditional
marketing to attract new customers. To enhance a positive image in the community, we support and participate in local events and our officers and directors serve on boards of local civic and charitable organizations. As an example, American
Community was recognized each year from 1999 to 2007 for outstanding contributions to the United Way Campaign for Union County. American Community is very active in the Special Olympics for Union County and has been honored by Special Olympics as
Business of the Year for our sponsorship and volunteer efforts.

American Community has also entered into a revenue sharing agreement with
Smith Barney, in which the Bank receives revenue for business generated by a broker located in our offices. Currently, a Smith Barney representative is located in our main office but visits all our branch locations periodically when the opportunity
arises. As a community service providing a competitive edge, the Bank sponsors small business seminars and features various speakers on topics of interest to growing small businesses. The Bank attempts to bring together in one place a variety of
experts to discuss timely issues of importance to business owners regarding such matters as e-commerce, investments, and estate and retirement planning. This social setting also provides small business owners with an opportunity to network with
other small business owners in our communities. Further, through its Kidz Club, the Bank offers savings accounts designed for young savers. The Bank has also developed a Senior Citizens account for customers 50 years and older. These products offer
free travelers checks, free safe deposit box, interest on daily balances, free wallet-style checks, free breakfasts with guest speakers and periodic day trips. American Community also sponsors the day trips as a way to attract Senior Citizens
accounts and to further enhance their loyalty to the Bank.

Regulation of the Bank

The Bank is extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of
Bancshares and the Bank.

State Law. The Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the
Commissioner). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases,



19



---

##### Table of Contents

rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and
regulations, and the Bank is required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of
state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

Deposit Insurance. The Banks deposits are insured up to applicable limits by the Deposit Insurance Fund, or DIF, of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged in 2006. The Banks deposits, therefore, are subject to FDIC deposit insurance assessment.

The FDIC
recently amended its risk-based deposit assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005, (the Reform Act). Under the revised system, insured institutions are assigned to one
of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institutions assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky
depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDICs analysis of financial ratios, examination component
ratings and other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk
Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.

The FDIC
is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.5% of estimated insured deposits, in contrast to the statutorily fixed ratio of 1.25% under the old system. The ratio, which is viewed by the FDIC as the level that
the funds should achieve, was established by the agency at 1.25% for 2007. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated
insured deposits. The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of December 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits
can be used to offset future assessments until exhausted.

Capital Requirements. The federal banking regulators have adopted certain risk-based
capital guidelines to assist in the assessment of the capital adequacy of a banking organizations operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements,
which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for
assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A
banking organizations risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1, or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. Tier 2, or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory
convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2007, Bancshares was well-capitalized with Tier 1 and Total Risk-Based
Capital of 12.98% and 14.24%, respectively.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations
of a banks capital adequacy, an assessment of the banks interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organizations interest rate risk management include a measurement of board
of director and senior management oversight, and a determination of whether a banking organizations procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.



20



---

##### Table of Contents

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions,
including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as
well as the measures described under the Federal Deposit Insurance Corporation Improvement Act of 1991 below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce
the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.

Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of
1991 (the FDIC Improvement Act), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement
Act provides for, among other things:



| |  |  | publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the establishment of uniform accounting standards by federal banking agencies,
| | - |  | ------------------------------------------------------------------------------



| |  |  | the establishment of a prompt corrective action system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny
and restrictions placed on depository institutions with lower levels of capital,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional grounds for the appointment of a conservator or receiver, and
| | - |  | ------------------------------------------------------------------------



| |  |  | restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.

A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take prompt corrective action with respect
to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of
the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized. An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution
before appointment of a conservator or receiver.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On
October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository
institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on the operations of financial institutions. The USA PATRIOT Act of 2001 has increased costs of regulatory compliance.



21



---

##### Table of Contents

Miscellaneous. The dividends that may be paid by the Bank are subject to legal limitations. In accordance with
North Carolina banking law, dividends may not be paid by the Bank unless its capital surplus is at least 50% of its paid-in capital.

The earnings of the
Bank will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement
these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations
to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing
conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and
earnings of the Bank.

We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect
thereof on the Banks operations.

Regulation of Bancshares

Federal Regulation. Bancshares is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board
has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.

The status of Bancshares as a registered bank holding company
under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, the federal securities laws.

Bancshares is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company.
Prior Federal Reserve Board approval is required for Bancshares to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.

The merger or consolidation of
Bancshares with another bank, or the acquisition by Bancshares of assets of another bank, or the assumption of liability by Bancshares to pay any deposits in another bank, will require the prior written approval of the primary federal bank
regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in
certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.

Bancshares is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of Bancshares consolidated net worth. The Federal Reserve
Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or
written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as well capitalized and well managed under applicable regulations of the Federal
Reserve Board, that has received a composite 1 or 2 rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.



22



---

##### Table of Contents

In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any
class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:



| |  |  | making or servicing loans;
| | - |  | --------------------------



| |  |  | performing certain data processing services;
| | - |  | --------------------------------------------



| |  |  | providing discount brokerage services;
| | - |  | --------------------------------------



| |  |  | acting as fiduciary, investment or financial advisor;
| | - |  | -----------------------------------------------------



| |  |  | leasing personal or real property;
| | - |  | ----------------------------------



| |  |  | making investments in corporations or projects designed primarily to promote community welfare; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | acquiring a savings and loan association.
| | - |  | -----------------------------------------

In
evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and
adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not
previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal
Reserve Board.

However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11,
2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a financial holding
company. A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed financial in nature are,
in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities
and activities that the Federal Reserve Board considers to be closely related to banking.

A bank holding company may become a financial holding company
under the Modernization Act if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating
under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of
compliance with these requirements may be required to cease engaging in some of its activities. Bancshares has not yet elected to become a financial holding company.

Under the Modernization Act, the Federal Reserve Board serves as the primary umbrella regulator of financial holding companies, with supervisory authority over each parent company and limited authority
over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities
regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.



23



---

##### Table of Contents

Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation
of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve Boards capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:



| |  |  | a leverage capital requirement expressed as a percentage of adjusted total assets;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a risk-based requirement expressed as a percentage of total risk-weighted assets; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | a Tier 1 leverage requirement expressed as a percentage of adjusted total assets.
| | - |  | ---------------------------------------------------------------------------------

The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The
risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders equity). The Tier 1 leverage requirement
consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the
minimum levels.

Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their
depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries compliance with capital restoration plans filed with their
bank regulators, subject to certain limits.

Dividends. As a bank holding company that does not, as an entity, currently engage in separate business
activities of a material nature, Bancshares ability to pay cash dividends depends upon the cash dividends it receives from the Bank. At present, Bancshares only source of income is dividends paid by the Bank and interest earned on any
investment securities it holds. Bancshares must pay all of its operating expenses from funds it receives from the Bank. Therefore, shareholders may receive dividends from Bancshares only to the extent that funds are available after payment of our
operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention
appears consistent with the bank holding companys capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Bank will likely be limited to amounts needed to pay any
separate expenses of Bancshares, to pay our regular quarterly dividend to shareholders and to make required payments on our debt obligations, including our outstanding debentures underlying trust preferred securities.

The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository
institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institutions capital adequacy the consideration of (a) identified concentrations of credit
risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institutions potential future
exposure from derivative transactions.



24



---

##### Table of Contents

In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to
require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters
established in the agencies standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after
January 1, 1998.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would not
be applicable to Bancshares because it currently only maintains one subsidiary depository institution.

Subsidiary banks of a bank holding company are
subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the
investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish
required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, Bancshares, any subsidiary of Bancshares and related interests of such persons. Moreover,
subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the
subsidiary bank. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and
entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.

Interstate Branching

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle Act), the Federal Reserve Board may approve bank
holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement
this section of the Riegle Act. These mergers are also subject to similar aging and deposit concentration limits.

North Carolina opted-in to
the provisions of the Riegle Act. Since July 1, 1995, an out-of-state bank that did not already maintain a branch in North Carolina was permitted to establish and maintain a de novo branch in North Carolina, or acquire a branch in
North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge
with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank
involved in the interstate merger transaction permit interstate merger.

Future Legislation

We cannot predict what legislation might be enacted in the future or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.

Employees

As of December 31, 2007, we had
full-time 107 employees and 10 part-time employees. None of these employees are covered by a collective bargaining agreement. We consider relations with our employees to be good.



25



---

##### Table of Contents

ITEM 1A  RISK FACTORS

An investment in our common stock involves a number of risks. We urge you to read all of the information contained in this annual report on Form 10-K. In addition, we urge you to consider carefully the following
factors before you invest in shares of our common stock.

We may not be able to maintain and manage our growth, which may adversely affect our
results of operations and financial condition and the value of our common stock.

Our strategy has been to increase the size of our company by opening
new offices, acquiring other banks and by pursuing business development opportunities. We have grown rapidly since we commenced operations. We can provide no assurance that we will continue to be successful in increasing the volume of loans and
deposits at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our growth strategy. There can be no assurance that our further expansion will be profitable or that we will continue to
be able to sustain our historical rate of growth, either through internal growth or through successful expansion of our markets, or that we will be able to maintain capital sufficient to support our continued growth. If we grow too quickly, however,
and are not able to control costs and maintain asset quality, rapid growth also could adversely affect our financial performance. Any of these risks could negatively impact the value of our common stock.

Changes in interest rates affect our interest margins, which can adversely affect our profitability.

We may not be able to effectively manage changes in interest rates that affect what we charge as interest on our earning assets and the expense we must pay on interest-bearing liabilities, which may significantly
reduce our earnings and reduce the value of our common stock. Since rates charged on our loans often tend to react to market conditions faster than do rates paid on our deposit accounts, these rate cuts may have a negative impact on our earnings
until we could make appropriate adjustments in our deposit rates. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of our ability to continue to maintain a consistent positive spread
between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities.

Our profitability depends significantly on
economic conditions in our market area.

Our success depends to a large degree on the general economic conditions in our market areas. The local
economic conditions in these areas have a significant impact on the amount of loans that we make to our borrowers, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in
general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and performance and the value of our common
stock.

If we lose key employees with significant business contacts in our market area, our business may suffer.

Our success is largely dependent on the personal contacts of our officers and employees in our market area. If we lose key employees temporarily or permanently, our
business could be hurt and the value of our common stock could decline as a result. We could be particularly hurt if our key employees went to work for our competitors. Our future success depends on the continued contributions of our existing senior
management personnel.



26



---

##### Table of Contents

If we experience greater loan losses than anticipated, it will have an adverse effect on our net income.

While the risk of nonpayment of loans is inherent in banking, if we experience greater nonpayment levels than we anticipate, our earnings and overall
financial condition, as well as the value of our common stock, could be adversely affected.

We cannot assure you that our monitoring procedures and
policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses. In addition, as a result of the rapid growth in our loan portfolio, loan losses may be greater than managements
estimates. Loan losses can cause insolvency and failure of a financial institution and, in such an event, our shareholders could lose their entire investment. In addition, future provisions for loan losses could materially and adversely affect our
profitability. Any loan losses will reduce the loan loss allowance. A reduction in the loan loss allowance will be restored by an increase in our provision for loan losses. This would reduce our earnings which could have an adverse effect on our
stock price.

In order to be profitable, we must compete successfully with other financial institutions which have greater resources and capabilities
than we do.

The banking business in North Carolina is extremely competitive. Most of our competitors are larger and have greater resources than we do
and many have been in existence a longer period of time. We must overcome historical bank-customer relationships to attract customers away from our competition. We compete with the following types of institutions:



|                                 |  |                                  |  | 
|-------------------------------- |  | -------------------------------- |  | 
|     other commercial banks     |  |      securities brokerage firms |  | 
|     savings banks              |  |      mortgage brokers           |  | 
|     thrifts                    |  |      insurance companies        |  | 
|     credit unions              |  |      mutual funds               |  | 
|     consumer finance companies |  |      trust companies            |  | 

Some of our competitors are not regulated as extensively as we are and, therefore, may have greater flexibility in
competing for business. Some of these competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater
advertising-marketing budgets or other factors.

Our legal lending limit is determined by law. The size of the loans which we offer to our customers may be
less than the size of the loans that larger competitors are able to offer. This limit may affect to some degree our success in establishing relationships with the larger businesses in our market.

Liquidity is essential to our business and we rely, in part, on external sources to finance a significant portion of our operations.

Liquidity is essential to our business. Our liquidity could be substantially negatively affected by our inability to access secured lending markets, brokered deposit
markets or raise funding in the long-term or short-term capital markets. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to raise
funding. In addition, our ability to raise funding could be impaired if the Federal Home Loan Bank (FHLB) or deposit brokers develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could be
developed if we suffer a decline in the level of our business activity, regulatory authorities take significant action against us, or we discover employee misconduct or illegal activity, among other things. If we were unable to raise funds using the
methods described above, we would likely need to liquidate unencumbered assets, such as our investment and loan portfolios, to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from
market value, either of which could adversely affect our operations.



27



---

##### Table of Contents

New or acquired branch facilities and other facilities may not be profitable.

We may not be able to correctly identify profitable locations for new branches and the costs to start up new branch facilities or to acquire existing branches, and the
additional costs to operate these facilities, may increase our noninterest expense and decrease earnings in the short term. If other banks or branches of other banks become available for sale, we may acquire them. It may be difficult to adequately
and profitably manage our growth through the establishment of these branches. In addition, we can provide no assurance that these branch sites will successfully attract enough deposits to offset the expenses of operating these branch sites. Our
failure to identify profitable locations, or to manage such branches in a profitable manner could have a material adverse effect on our profitability and on the value of our common stock. Furthermore, any new or acquired branches will be subject to
regulatory approval, and there can be no assurance that we will succeed in securing such approvals.

Government regulations may prevent or impair our
ability to pay dividends, engage in additional acquisitions, or operate in other ways.

Current and future legislation and the policies established by
federal and state regulatory authorities will affect our operations. We are subject to supervision and periodic examination by the Federal Reserve Board and the North Carolina Commissioner of Banks. Our principal subsidiary, American Community Bank,
as a state-chartered commercial bank, also receives regulatory scrutiny from the North Carolina Commissioner of Banks and the FDIC. Banking regulations are designed primarily for the protection of depositors rather than shareholders, and they may
limit our growth and the return to you as an investor by restricting its activities, such as:



| |  |  | the payment of dividends to shareholders;
| | - |  | -----------------------------------------



| |  |  | possible transactions with or acquisitions by other institutions;
| | - |  | -----------------------------------------------------------------



| |  |  | desired investments;
| | - |  | --------------------



| |  |  | loans and interest rates;
| | - |  | -------------------------



| |  |  | interest rates paid on deposits;
| | - |  | --------------------------------



| |  |  | the possible expansion of branch offices; and
| | - |  | ---------------------------------------------



| |  |  | the ability to provide securities or trust services.
| | - |  | ----------------------------------------------------

We are registered with the Federal Reserve Board as a bank holding company. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our
business, results of operations or on the value of our common stock. The cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

Our stock trading volume has been low compared with larger bank holding companies.

The trading volume in our common
stock on the Nasdaq Capital Market has been comparable to other similarly sized bank holding companies since trading on the Capital Market began in July 2001. Nevertheless, this trading volume does not compare with more seasoned companies listed on
other stock exchanges. Thus, the market in our common stock is somewhat limited in scope relative to some other companies, which may impact the ability of our shareholders to sell their shares at a desirable price. In addition, we can provide no
assurance that a more active and liquid trading market for our stock will develop in the future.

Our articles of incorporation include anti-takeover
provisions that may prevent shareholders from receiving a premium for their shares or effecting a transaction favored by a majority of shareholders.

Our articles of incorporation include anti-takeover provisions, including a supermajority vote requirement for a merger under certain circumstances as well as a provision allowing our Board of Directors to consider the social and economic
effects of a proposed merger. Such provisions may have the effect of preventing shareholders from receiving a premium for their shares of common stock and discouraging a change of control even when favored by a majority of the shareholders.

Our securities are not FDIC insured.

Our common stock
is not a savings or deposit account or other obligation of the Bank, and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency and is subject to investment risk, including the possible loss of principal.



28



---

##### Table of Contents

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth. Because of our relatively small size and short operating history, it will be difficult for us to replicate
our historical earnings growth as we continue to expand. Consequently, our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative
considerations, and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because
a high percentage of our operating costs are fixed expenses.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by the North Carolina Office of the
Commissioner of Banks, the FDIC, and the Federal Reserve Board. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates
charged, interest rates paid on deposits, and locations of offices. We must also meet regulatory capital requirements. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity, and results of operations
would be materially and adversely affected. Our failure to remain well capitalized and well managed for regulatory purposes could affect customer confidence, our ability to grow, our cost of funds and FDIC insurance, our
ability to pay dividends on common stock, and our ability to make acquisitions.

The laws and regulations applicable to the banking industry could change
at any time, and we cannot predict the effects of these changes on our business and profitability. For example, new legislation or regulation could limit the manner in which we may conduct our business, including our ability to obtain financing,
attract deposits, and make loans. Many of these regulations are intended to protect depositors, the public, and the FDIC, not shareholders. In addition, the burden imposed by these regulations may place us at a competitive disadvantage compared to
competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies that apply to us have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the
future. Our cost of compliance could adversely affect our ability to operate profitably.

Our growth may require us to raise additional capital that may
not be available when it is needed, or at all.

We are required by regulatory authorities to maintain adequate levels of capital to support our
operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. Our ability to raise additional
capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms
acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we issue additional equity capital,
the interests of existing shareholders would be diluted.

Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and
non-compliance with the Sarbanes-Oxley Act may adversely affect us.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated
by the Securities and Exchange Commission are now applicable to us and have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. We have experienced, and we expect to continue to experience, greater
compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. We expect these new rules and regulations to continue to increase our accounting, legal, and other costs, and to make some activities more
difficult, time consuming, and costly. In the event that we are unable to achieve or maintain compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected, the value of our common stock may decline.



29



---

##### Table of Contents

We evaluate our internal control systems in order to allow management to report on, and our independent registered public
accounting firm to attest to, our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we identify significant deficiencies or material weaknesses in our internal control over financial reporting
that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting, the trading price of our common
stock could decline, our ability to obtain any necessary equity or debt financing could suffer, and our common stock could ultimately be delisted from the Nasdaq Capital Market. In this event, the liquidity of our common stock would be severely
limited and the market price of our common stock would likely decline significantly.

In addition, the rules adopted as a result of the Sarbanes-Oxley Act
could make it more difficult or more costly for us to obtain certain types of insurance, including directors and officers liability insurance, which could make it more difficult for us to attract and retain qualified persons to serve on
our board of directors or as executive officers.

The holder of our junior subordinated debenture has rights that are senior to those of our common
shareholders.

We have supported our continued growth through the issuance of trust preferred securities from special purpose trust and the accompanying
sale of a $10.0 million junior subordinated debenture to such trust. Payments of the principal and interest on the trust preferred securities of this trust are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures
that we issued to the trust are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the holder of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred
securities) for up to five years, however, in the event of such a deferral, no dividends may be paid on our common stock.

ITEM 1B 
UNRESOLVED STAFF COMMENTS

None



30



---

##### Table of Contents

ITEM 2  PROPERTIES

The following table sets forth the location of American Communitys main office and branch offices, as well as certain information relating to these offices.



|                                                                  |  |            |  |                          |  |              
|----------------------------------------------------------------- |  | ---------- |  | ------------------------ |  | -------------
|Office Location                                                   |  | YearOpened |  | ApproximateSquareFootage |  | OwnedorLeased
|Main Office 2593 West Roosevelt Boulevard Monroe NC 28110         |  | 1999       |  | 14,774                   |  | Leased       
|                                                                  |  |            | 
|Indian Trail 13860 East Independence Blvd Indian Trail NC 28079   |  | 1999       |  | 3,850                    |  | Leased       
|                                                                  |  |            | 
|Sunset 120 East Sunset Drive Monroe, NC 28111                     |  | 1999       |  | 450                      |  | Leased       
|                                                                  |  |            | 
|Wal-Mart Superstore 2406 West Roosevelt Blvd Monroe NC 28110      |  | 2000       |  | 600                      |  | Leased       
|                                                                  |  |            | 
|Marshville 7001 East Marshville Blvd Marshville NC 28103          |  | 2000       |  | 3,500                    |  | Leased       
|                                                                  |  |            | 
|Mint Hill 7200 Matthews-Mint Hill Rd Mint Hill NC 28227           |  | 2000       |  | 2,500                    |  | Leased       
|                                                                  |  |            | 
|Mountain Island 3500 Mt. Holly-Huntersville Rd Charlotte NC 28216 |  | 2000       |  | 4,500                    |  | Owned        
|                                                                  |  |            | 
|South Park 4500 Cameron Valley Parkway Charlotte NC               |  | 2003       |  | 2,800                    |  | Leased       
|                                                                  |  |            | 
|South End 2130 South Boulevard Charlotte NC 28203                 |  | 2005       |  | 5,405                    |  | Leased       
|                                                                  |  |            | 
|Gaffney Main 217 N. Granard Street Gaffney S.C. 29341             |  | 1999       |  | 11,000                   |  | Owned        
|                                                                  |  |            | 
|Blacksburg 207 W. Cherokee Street Blacksburg SC 29702             |  | 2000       |  | 2,550                    |  | Owned        
|                                                                  |  |            | 
|Chesnee Highway 626 Chesnee Highway Gaffney S.C 29341             |  | 2001       |  | 2,550                    |  | Owned        
|                                                                  |  |            | 
|Tega Cay 1738 Gold Hill Road Tega Cay SC 29708                    |  | 2005       |  | 3,082                    |  | Owned        



31



---

##### Table of Contents

In 1999 American Community entered into a Commercial Lease Agreement with TyPar Realty, Inc. for the lease of a portion
of a two-story building constructed by L. C. Tyson Construction, Inc. This building serves as the main office of American Community. TyPar Realty, Inc. and L. C. Tyson Construction, Inc. are related interests of Carlton Tyson, a former director of
Bancshares. The lease was for thirty years commencing in 1999 with increases every five years plus our share of common area expenses. American Community has a right of first refusal to lease the remainder of the building as it becomes available and
to purchase the building should it be offered for sale. This lease was entered into at arms-length and at then current market rates. The lease was reviewed by an independent third party real estate appraiser for assurance that the terms of the lease
are not more favorable than would be engaged with any other party. Additionally, after a sealed bid process, L. C. Tyson Construction, Inc. was awarded as low bidder, the construction contract for American Communitys permanent buildings in
Marshville and Mountain Island. American Community believes the terms of that contract are fair to the bank.

American Community sold and leased back the
Marshville branch in 2001 to Carroll Edwards in an arms-length transaction at then current market rates. In 2002 Mr. Edwards was elected to the board of directors of American Community and retired from the board in 2006.

In 2003, American Community entered into a commercial lease agreement with Zebulon Morris, Jr, a director of American Community, for the lease of a new building
constructed by Mr. Morris. The lease is for 10 years commencing in 2003. This lease was entered into at arms-length and at then current market rates. In 1998 Mr. Morris was elected to the board of directors of American Community and
retired from the board in 2006.

ITEM 3  LEGAL PROCEEDINGS

In the normal course of its operations, the Bank from time to time is party to various legal proceedings. Based upon information currently available, there are no legal proceedings to which Bancshares or the Bank is
party that would have a material adverse effect on Bancshares business, financial position, or results of operations.

ITEM 4  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

None



32



---

##### Table of Contents

PART II

ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

American Community Bancshares common stock is listed on the Nasdaq Capital Market under the symbol ACBA. It began trading on this market on July 17, 2000. There were 6,503,788 shares of our common stock outstanding at
February 15, 2008 owned by approximately 2,500 shareholders. The table below lists the high and low prices at which trades were completed during each quarter indicated for our stock and warrants to buy stock and are adjusted to reflect our
three-for-two stock split effective in the form of a 50% stock dividend in February 2006. In 2007 and 2006, the Company paid quarterly dividends in the amount of $0.05 per share.



|               |  |               |      |              |     |       |  |   |      
|-------------- |  | ------------- | ---- | ------------ | --- | ----- |  | - | -----
|               |  |               |      | Sale Price  
|               |  | DividendsPaid |      | Common Stock
|               |  |               | High |              | Low
|2007           |  |               |      |              |     |       |  |   |      
|First Quarter  |  | $             | 0.05 |              | $   | 12.69 |  | $ | 10.60
|Second Quarter |  |               | 0.05 |              |     | 12.30 |  |   | 10.87
|Third Quarter  |  |               | 0.05 |              |     | 12.50 |  |   | 10.15
|Fourth Quarter |  |               | 0.05 |              |     | 12.84 |  |   | 9.19 
|               |  |               |     
|2006           |  |               |      |              |     |       |  |   |      
|First Quarter  |  | $             | 0.05 |              | $   | 13.73 |  | $ | 12.14
|Second Quarter |  |               | 0.05 |              |     | 13.49 |  |   | 12.04
|Third Quarter  |  |               | 0.05 |              |     | 12.23 |  |   | 11.18
|Fourth Quarter |  |               | 0.05 |              |     | 11.71 |  |   | 11.00

See Item 12 of this report for disclosure regarding securities authorized for issuance and equity
compensation plans required by Item 201(d) of Regulation S-K.



33



---

##### Table of Contents

Performance Graph

The following graph compares (i) the yearly change in the cumulative total stockholder return on the Companys common stock with (ii) the cumulative return of the Nasdaq Composite (iii) the Nasdaq Bank Stock Index,
(iv) the SNL Bank and Thrift Index. The graph assumes that the value of an investment in the Companys common stock and in each index was $100 on December 31, 2002, and that all dividends were reinvested. The performance shown in the
graph represents past performance and should not be considered an indication of future performance.

LOGO



34



---

##### Table of Contents

ITEM 6  SELECTED FINANCIAL DATA

AMERICAN COMMUNITY BANCSHARES, INC.

Selected Financial Information and Other
Data

($ in thousands, except per share data)



|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ------------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | At or for the Year Ended December 31,
|                                                    |  | 2007                                  |           | 2006 |   | 2005      |  | 2004 |           | 2003
|Operating Data:                                     |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total interest income                               |  | $                                     | 35,426    |      | $ | 32,334    |  | $    | 25,584    |      | $ | 18,217    |  | $ | 13,055   
|Total interest expense                              |  |                                       | 16,193    |      |   | 13,521    |  |      | 9,180     |      |   | 6,220     |  |   | 5,169    
|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Net interest income                                 |  |                                       | 19,233    |      |   | 18,813    |  |      | 16,404    |      |   | 11,997    |  |   | 7,886    
|Provision for loan losses                           |  |                                       | 1,033     |      |   | 2,612     |  |      | 809       |      |   | 574       |  |   | 784      
|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Net interest income after provision for loan losses |  |                                       | 18,200    |      |   | 16,201    |  |      | 15,595    |      |   | 11,423    |  |   | 7,102    
|Non-interest income                                 |  |                                       | 3,391     |      |   | 3,353     |  |      | 3,294     |      |   | 3,337     |  |   | 2,645    
|Non-interest expenses                               |  |                                       | 13,702    |      |   | 12,838    |  |      | 11,742    |      |   | 10,400    |  |   | 7,552    
|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Income before income taxes                          |  |                                       | 7,889     |      |   | 6,716     |  |      | 7,147     |      |   | 4,360     |  |   | 2,195    
|Provision for income taxes                          |  |                                       | 2,869     |      |   | 2,440     |  |      | 2,639     |      |   | 1,617     |  |   | 807      
|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Net income                                          |  | $                                     | 5,020     |      | $ | 4,276     |  | $    | 4,508     |      | $ | 2,743     |  | $ | 1,388    
|                                                    |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Per Share Data: (1)                                 |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Earnings per share - basic                          |  | $                                     | 0.74      |      | $ | 0.62      |  | $    | 0.71      |      | $ | 0.56      |  | $ | 0.33     
|Earnings per share - diluted                        |  |                                       | 0.72      |      |   | 0.60      |  |      | 0.66      |      |   | 0.50      |  |   | 0.32     
|Cash dividends per share                            |  |                                       | 0.20      |      |   | 0.20      |  |      | 0.13      |      |   | 0.07      |  |   | 0.05     
|Market Price                                        |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|High                                                |  |                                       | 12.84     |      |   | 13.73     |  |      | 12.51     |      |   | 11.21     |  |   | 8.73     
|Low                                                 |  |                                       | 9.19      |      |   | 11.00     |  |      | 9.46      |      |   | 7.58      |  |   | 5.42     
|Close                                               |  |                                       | 9.59      |      |   | 11.04     |  |      | 12.43     |      |   | 10.90     |  |   | 8.30     
|Book value                                          |  |                                       | 8.31      |      |   | 7.83      |  |      | 7.43      |      |   | 7.06      |  |   | 5.71     
|Tangible book value                                 |  |                                       | 6.73      |      |   | 6.35      |  |      | 5.89      |      |   | 5.04      |  |   | 5.71     
|Weighted average shares outstanding                 |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Basis                                               |  |                                       | 6,779,635 |      |   | 6,913,534 |  |      | 6,364,336 |      |   | 4,912,256 |  |   | 4,236,564
|Diluted                                             |  |                                       | 6,938,259 |      |   | 7,171,413 |  |      | 6,819,523 |      |   | 5,513,361 |  |   | 4,315,951
|                                                    |  |                                       |           |      |  
|Selected Year-End Balance Sheet Data:               |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Loans                                               |  | $                                     | 392,959   |      | $ | 370,431   |  | $    | 332,708   |      | $ | 307,988   |  | $ | 204,533  
|Allowance for loan losses                           |  |                                       | 5,740     |      |   | 5,628     |  |      | 4,331     |      |   | 3,488     |  |   | 2,529    
|Intangible assets                                   |  |                                       | 10,296    |      |   | 10,403    |  |      | 10,510    |      |   | 10,617    |  |   |         
|Total assets                                        |  |                                       | 505,595   |      |   | 494,658   |  |      | 436,671   |      |   | 399,458   |  |   | 281,253  
|Deposits                                            |  |                                       | 399,794   |      |   | 401,137   |  |      | 345,401   |      |   | 306,665   |  |   | 208,163  
|Borrowings                                          |  |                                       | 49,504    |      |   | 37,085    |  |      | 38,464    |      |   | 54,169    |  |   | 48,319   
|Shareholders equity                                |  |                                       | 54,024    |      |   | 55,068    |  |      | 50,886    |      |   | 36,972    |  |   | 24,189   
|                                                    |  |                                       |           |      |  
|Selected Average Balances:                          |  |                                       |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                        |  | $                                     | 496,816   |      | $ | 468,908   |  | $    | 420,941   |      | $ | 366,668   |  | $ | 246,042  
|Loans                                               |  |                                       | 370,832   |      |   | 351,401   |  |      | 317,986   |      |   | 275,011   |  |   | 182,108  
|Total interest-earning assets                       |  |                                       | 455,076   |      |   | 428,679   |  |      | 385,919   |      |   | 337,292   |  |   | 230,747  
|Interest-bearing deposits                           |  |                                       | 340,845   |      |   | 314,932   |  |      | 278,473   |      |   | 239,294   |  |   | 168,307  
|Total interest-bearing liabilities                  |  |                                       | 380,996   |      |   | 355,362   |  |      | 320,230   |      |   | 292,402   |  |   | 196,469  
|Shareholders equity                                |  |                                       | 54,836    |      |   | 52,924    |  |      | 45,937    |      |   | 32,275    |  |   | 23,501   



|(1) | All share and per share amounts reflect the effects of the 50% stock dividend paid in 2006
|--- | ------------------------------------------------------------------------------------------



35



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC.

Selected Financial Information and Other Data

($ in thousands, except per
share data)



|                                                   |  |                                       |   |  |       |   |  |       |    |  |       |   |  |       |  
|-------------------------------------------------- |  | ------------------------------------- | - |  | ----- | - |  | ----- | -- |  | ----- | - |  | ----- | -
|                                                   |  | At or for the Year Ended December 31, |  
|                                                   |  | 2007                                  |   |  | 2006  |   |  | 2005  |    |  | 2004  |   |  | 2003  |  
|Selected Performance Ratios:                       |  |                                       |   |  |       |   |  |       |    |  |       |   |  |       |  
|Return on average assets                           |  | 1.01                                  | % |  | 0.91  | % |  | 1.07  | %  |  | 0.74  | % |  | 0.56  | %
|Return on average equity                           |  | 9.15                                  | % |  | 8.08  | % |  | 9.81  | %  |  | 8.50  | % |  | 5.91  | %
|Net interest margin                                |  | 4.23                                  | % |  | 4.39  | % |  | 4.25  | %  |  | 3.56  | % |  | 3.42  | %
|Noninterest expense to average assets              |  | 2.74                                  | % |  | 2.74  | % |  | 2.79  | %  |  | 2.84  | % |  | 3.07  | %
|Efficiency ratio                                   |  | 60.40                                 | % |  | 57.71 | % |  | 59.61 | %  |  | 67.82 | % |  | 71.71 | %
|Equity to assets ratio                             |  | 10.69                                 | % |  | 11.13 | % |  | 11.65 | %  |  | 9.26  | % |  | 8.60  | %
|Dividend payout ratio                              |  | 27.78                                 | % |  | 33.33 | % |  | 19.70 | %  |  | 14.00 | % |  | 15.63 | %
|                                                   |  |                                       |   |  |      
|Asset Quality Ratios:                              |  |                                       |   |  |       |   |  |       |    |  |       |   |  |       |  
|Nonperforming loans to total loans                 |  | 0.44                                  | % |  | 0.49  | % |  | 0.29  | %  |  | 0.29  | % |  | 0.16  | %
|Allowance for loan losses to period-end loans      |  | 1.46                                  | % |  | 1.52  | % |  | 1.30  | %  |  | 1.13  | % |  | 1.24  | %
|Allowance for loan losses to nonperforming loans   |  | 333                                   | % |  | 311   | % |  | 455   | %  |  | 396   | % |  | 766   | %
|Nonperforming assets to total assets               |  | 0.34                                  | % |  | 0.41  | % |  | 0.33  | %  |  | 0.30  | % |  | 0.17  | %
|Net loan charge-offs (recoveries) to average loans |  | 0.25                                  | % |  | 0.37  | % |  | (0.01 | )% |  | 0.11  | % |  | 0.35  | %



36



---

##### Table of Contents

ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following presents managements discussion and analysis of our financial condition and results of operations and should be read in
conjunction with the financial statements and related notes combined in Item 8 of this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of Bancshares. Because American Community Bancshares,
Inc. has no material operations and conducts no business on its own other than owning its subsidiary, American Community Bank (American Community), the discussion contained in this Managements Discussion and Analysis concerns
primarily the business of American Community. However, for ease of reading and because the financial statements are presented on a consolidated basis, American Community Bancshares and American Community Bank are collectively referred to herein as
American Community Bancshares or Bancshares unless otherwise noted.

OVERVIEW

In April 2000, Bancshares was formed as a holding company for American Community. Upon formation, one share of Bancshares $1.00 par value common stock was
exchanged for each of the then outstanding 1,492,063 shares of American Communitys $5.00 par value common stock. On April 15, 2004, Bancshares acquired First National Bank of the Carolinas (First National). On April 1,
2005 First National was merged into American Community. Bancshares currently has no operations and conducts no business on its own other than owning American Community.

American Community was opened for business as a North Carolina-chartered commercial bank on November 16, 1998 and completed its first full fiscal year on December 31, 1999. American Community operates out of
its main office at 2593 West Roosevelt Boulevard, Monroe, North Carolina. It also operates twelve other full service branches in Union and Mecklenburg Counties of North Carolina and Cherokee and York Counties of South Carolina.

First National commenced operations as a national banking association on October 18, 1996 and was purchased by Bancshares on April 15, 2004. First National was
merged into American Community on April 1, 2005.

The Banks lending activities are oriented to the consumer/retail customer as well as the
small-to-medium sized business located in the Union and Mecklenburg County areas of North Carolina and the Cherokee and York County area of South Carolina. The Bank offers commercial, consumer, and mortgage lending products, as well as the ability
to structure credit arrangements to fit specialized needs through accounts receivable financing, leasing arrangements and other products. The deposit services offered by the Bank include small business and personal checking and savings accounts and
certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts. Additional funding includes borrowings from the FHLB and various other
financial institutions. The Bank also offers investment services through an agreement with Smith Barney.

Comparison of Financial Condition at
December 31, 2007 and 2006

Total assets at December 31, 2007 increased by $10.9 million or 2.1% to $505.6 million compared to $494.7 million
at December 31, 2006. Bancshares had earning assets of $472.8 million at year-end December 31, 2007 consisting of $393.0 million in gross loans, $78.9 million in investment securities and non-marketable equity securities, and $930,000 in
interest-bearing deposits with banks. Total deposits as of December 31, 2007 decreased by $1.3 million or 0.33% to $399.8 million compared to $401.1 million at December 31, 2006. Total borrowings as of December 31, 2007 increased by
$13.0 million or 33.8% from $38.5 million to $51.4 million. Stockholders equity was $54.0 million at December 31, 2007 compared to $55.1 million at December 31, 2006 for a decrease of $1.0 million or 1.9%.



37



---

##### Table of Contents

Gross loans grew by $22.6 million or 6.1% from $370.4 million as of December 31, 2006 to $393.0 million at year-end
2006. The composition of the loan portfolio, by category, as of December 31, 2007 is as follows: 9% 1-4 family mortgage loans, 26% commercial mortgage real estate loans, 35% construction/development real estate loans, 9% home equity lines of
credit, 15% commercial loans, 5% consumer and other loans to individuals and 1% leases. The real estate category grew $53.4 million from $276.4 million to $223.0 million. Within the real estate category, 1-4 family loans increased $3.3 million from
$32.4 million to $35.7 million, commercial mortgage real estate loans increased $7.3 million from $96.9 million to $104.2 million while construction/development loans increased $42.9 million from $93.6 million to $136.5 million. These
construction/development loans are primarily single family residences and owner occupied commercial properties. Net decreases in other loan categories included $20.1 million in commercial and industrial loans, $16.8 in consumer and other loans, $4.4
million in leases. Home equity lines of credit increased $10.4 million, The composition of the loan portfolio at December 31, 2006, by category, was 9% 1-4 family mortgage loans, 26% commercial mortgage real estate loans, 25%
construction/development real estate loans, 7% home equity lines of credit, 21% commercial loans, 10% consumer and other loans to individuals and 2% leases.

Bancshares recorded a $1.0 million provision for loan losses for the year ended December 31, 2007, representing a decrease of $1.6 million from the $2.6 million provision for the year ended December 31, 2006. Bancshares also
experienced net charge-offs of $921,000 in 2007 compared to net charge-offs of $1.3 million in 2006. The percentage of net loan charge-offs (recoveries) to average loans outstanding was 0.25% for the year ended December 31, 2007 as compared
with 0.37% for the year ended December 31, 2006. Non-performing loans and leases totaled $1.7 million or 0.44% of total loans at December 31, 2007, down from $1.8 million or 0.49% of total loans at December 31, 2006. The composition
of non-performing loans and leases at December 31, 2007 by category was 25% real estate, 28% commercial loans, 9% home equity lines of credit, 9% consumer and other loans to individuals and 29% leases. This compares to 17% real estate, 11%
commercial loans, 1% home equity lines of credit, 2% consumer and other loans to individuals and 69% leases at December 31, 2006. All non-performing loans and leases have been reviewed for collectibility and any specific reserves necessary have
been recorded. The allowance for loan losses at December 31, 2007 of $5.7 million represents 1.46% of total loans and 333% of non-performing loans. The allowance for loan losses at December 31, 2006 of $5.6 million represented 1.52% of
total loans and 311% of non-performing loans. The decrease in the provision for loan losses from 2006 is primarily attributable to the decrease in non-performing loan and leases and a decrease in net charge-offs in 2007. Management believes that the
allowance for loan losses as of December 31, 2007 is adequate to absorb probable losses inherent in the loan portfolio.

Bancshares had total
investment securities of $76.8 million at December 31, 2007 of which $75.0 million are accounted for as available for sale under Statement of Financial Accounting Standards (SFAS) No. 115 and are presented at fair value, and $1.8 million
are intended to be held to maturity. The investment securities portfolio increased by $11.6 million from the $65.2 million balance at December 31, 2006. Additions to the investment portfolio included $29.8 million in new securities purchases,
largely funded from $19.9 million in proceeds from investment maturities, calls, sales and principal re-payments.

Interest-earning deposits with banks
decreased by $16.4 million. The Company holds funds in interest-earning deposits with banks to provide liquidity for future loan demand and to satisfy fluctuations in deposit levels.

Non interest-earning assets decreased by $7.0 million from $45.5 million at December 31, 2006 to $38.5 million at December 31, 2007. The decrease is primarily attributable to a decrease of $5.6 million in
the cash and due from banks category. This includes cash on hand and customer deposits and other cash receipts that are in the process of collection and not available for overnight investment. Accrued interest receivable also decreased $298,000 to
$2.6 million at December 31, 2007 as a result of the decrease in interest rates during the year. Bank premises and equipment was $8.7 million at December 31, 2007 a decrease of $411,000 from December 31, 2006 primarily due to
depreciation of assets. Foreclosed real estate and repossessed assets were $-0- and $9,000, respectively, at December 31, 2007 a decrease of $192,000 from the foreclosed real estate and repossessed asset balance of $201,000 at December 31,
2006. This decrease is primarily due to the sale of nine 1-4 family foreclosed properties in 2007 and the sale of 17 repossessed vehicles.



38



---

##### Table of Contents

Total deposits decreased $1.3 million or 0.33% from $401.1 million on December 31, 2006 to $399.8 million on
December 31, 2007. The composition of the deposit base, by category, at December 31, 2007 is as follows: 14% non-interest bearing demand deposits, 6% savings deposits, 17% money market and interest bearing demand deposits and 63% time
deposits. The savings and time deposit categories experienced increases over the twelve-month period. Dollar and percentage increases by category were as follows: savings deposits, $9.1 million or 60%, and time deposits, $27.3 million or 12%. The
large increase in the savings deposit category was due to the introduction of a new savings product priced to approximate the pricing on the 90-day T-bill. The non-interest bearing demand deposit and money market and interest bearing demand deposit
categories both experienced decreases over the twelve-month period. Dollar and percentage decreases by category were as follows: non-interest bearing demand deposits, $7.3 million or 12%; and money market and interest bearing demand deposits, $30.5
million or 31%. Time deposits of $100,000 or more totaled $143.7 million, or 57% of time deposits at December 31, 2007. The composition of deposits at December 31, 2006 was 15% non-interest bearing demand deposits, 4% savings deposits, 25%
money market and interest bearing demand deposits and 56% time deposits. Time deposits of $100,000 or more at December 31, 2006 were $121.9 million, or 54%.

At December 31, 2007, $6.0 million of advances were outstanding with maturity dates ranging from July 2012 through February 2013. The balance of FHLB advances at December 31, 2006 was also $6.0 million. These advances are secured
by a blanket lien on 1-4 family mortgage loans and certain loans secured by commercial property, Federal Home Loan Bank stock, and $1.0 million in investment securities. Bancshares also maintained the capital lease for its main office. The recorded
obligation under this capital lease at December 31, 2007 was $1.7 million. In 2003, Bancshares issued junior subordinated debentures in the amount of $10.3 million all of which was eligible for inclusion as Tier 1 capital for American Community
Bancshares, Inc. in 2007. The debentures have a maturity of thirty years with a five-year continuous call provision and are re-priced monthly based on 90 day LIBOR plus 280 basis points. The Bank also offers corporate customers the option to sweep
excess checking account balances into one day maturity repurchase agreements which are collateralized by certain of the Banks investment securities. The balance of these repurchase agreements at December 31, 2007 was $18.2 million.

Other liabilities increased by $905,000 to $2.3 million at December 31, 2007 from $1.4 million at December 31, 2006. The increase was primarily
due to the increase in accrued income taxes for the year as compared to 2006.

Bancshares began 2006 with total stockholders equity of $55.1 million.
Total equity decreased to $54.0 million at December 31, 2007. This $1.1 million decrease was due to the repurchase and retirement of $6.1 million in common stock and the $1.3 million payment of cash dividends of $.20 per share in 2007. This was
offset by comprehensive income of $6.1 million and net proceeds of $211,000 from stock options exercised in 2007.

Net Interest Income

Like most financial institutions, the primary component of earnings for Bancshares is net interest income. Net interest income is the difference between interest
income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average
dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest
income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the fiscal years ended
December 31, 2007, 2006 and 2005, average interest-earning assets were $455.1 million, $428.7 million, and $385.9 million, respectively. During these same periods, Bancshares net yields on average interest-earning assets (net interest
margin) were 4.23%, 4.39%, and 4.25%, respectively.



39



---

##### Table of Contents

Average Balances and Average Rates Earned and Paid. The following table sets forth, for the periods indicated,
information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest
income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Average loans include non-accruing loans, the effect of which is to lower the average rates shown.



|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ----------- | ---------------------------- | ---- | -------------- |  | - | -------- | - | ----------- | - | ------ | -------------- | ---- | - | -------- | - | ----------- | - |  | - | ------ |  | ---- | -
|                                                                                 |  | Year Ended December 31, 2007 |         |   | Year Ended December 31, 2006 |   |             | Year Ended December 31, 2005 |     
|                                                                                 |  | AverageBalance               |         |   | Interest                     |   | AverageRate |                              |      | AverageBalance |  |   | Interest |   | AverageRate |   |        | AverageBalance |      |   | Interest |   | AverageRate |  
|                                                                                 |  | (Dollars in thousands)       |        
|Interest-earning assets:                                                         |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Loans                                                                            |  | $                            | 370,832 |   |                              | $ | 31,374      |                              | 8.46 | %              |  | $ | 351,401  |   |             | $ | 28,800 |                | 8.20 | % |          | $ | 317,986     |   |  | $ | 23,062 |  | 7.25 | %
|Investments                                                                      |  |                              | 73,152  |   |                              |   | 3,461       |                              | 4.73 | %              |  |   | 66,446   |   |             |   | 2,990  |                | 4.50 | % |          |   | 56,973      |   |  |   | 2,229  |  | 3.91 | %
|Interest-earning deposits                                                        |  |                              | 11,092  |   |                              |   | 591         |                              | 5.33 | %              |  |   | 10,832   |   |             |   | 544    |                | 5.02 | % |          |   | 10,960      |   |  |   | 293    |  | 2.67 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Total interest-earning assets                                                    |  |                              | 455,076 |   |                              |   | 35,426      |                              | 7.78 | %              |  |   | 428,679  |   |             |   | 32,334 |                | 7.54 | % |          |   | 385,919     |   |  |   | 25,584 |  | 6.63 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Other assets                                                                     |  |                              | 41,740  |   |                              |   |             |                              |      |                |  |   | 40,229   |   |             |   |        |                |      |   |          |   | 35,022      |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Total assets                                                                     |  | $                            | 496,816 |   |                              |   |             |                              |      |                |  | $ | 468,908  |   |             |   |        |                |      |   |          | $ | 420,941     |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                                    |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Deposits:                                                                        |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Savings                                                                          |  | $                            | 24,209  |   |                              |   | 606         |                              | 2.50 | %              |  | $ | 11,612   |   |             |   | 40     |                | 0.34 | % |          |   | 11,845      |   |  |   | 28     |  | 0.24 | %
|Money market and NOW                                                             |  |                              | 75,839  |   |                              |   | 1,634       |                              | 2.15 | %              |  |   | 80,180   |   |             |   | 1,597  |                | 1.99 | % |          |   | 70,425      |   |  |   | 1,021  |  | 1.45 | %
|Time                                                                             |  |                              | 240,797 |   |                              |   | 11,901      |                              | 4.94 | %              |  |   | 223,140  |   |             |   | 9,620  |                | 4.31 | % |          |   | 196,203     |   |  |   | 6,241  |  | 3.18 | %
|Borrowings(1)                                                                    |  |                              | 40,151  |   |                              |   | 2,052       |                              | 5.11 | %              |  |   | 40,430   |   |             |   | 2,264  |                | 5.60 | % |          |   | 41,757      |   |  |   | 1,890  |  | 4.53 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                               |  |                              | 380,996 |   |                              |   | 16,193      |                              | 4.25 | %              |  |   | 355,362  |   |             |   | 13,521 |                | 3.80 | % |          |   | 320,230     |   |  |   | 9,180  |  | 2.87 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Non-interest bearing deposits                                                    |  |                              | 59,376  |   |                              |   |             |                              |      |                |  |   | 58,705   |   |             |   |        |                |      |   |          |   | 53,753      |   |  |   |        |  |      |  
|Other liabilities                                                                |  |                              | 1,608   |   |                              |   |             |                              |      |                |  |   | 1,917    |   |             |   |        |                |      |   |          |   | 1,021       |   |  |   |        |  |      |  
|Stockholders equity                                                             |  |                              | 54,836  |   |                              |   |             |                              |      |                |  |   | 52,924   |   |             |   |        |                |      |   |          |   | 45,937      |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Total liabilities and stockholders equity                                       |  | $                            | 496,816 |   |                              |   |             |                              |      |                |  | $ | 468,908  |   |             |   |        |                |      |   |          | $ | 420,941     |   |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Net interest income and interest rate spread                                     |  |                              |         |   |                              | $ | 19,233      |                              | 3.53 | %              |  |   |          |   |             | $ | 18,813 |                | 3.74 | % |          |   |             |   |  | $ | 16,404 |  | 3.76 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Net yield on average interest-earning assets                                     |  |                              |         |   |                              |   |             |                              | 4.23 | %              |  |   |          |   |             |   |        |                | 4.39 | % |          |   |             |   |  |   |        |  | 4.25 | %
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              | 119.44  | % |                              |   |             |                              |      |                |  |   | 120.63   | % |             |   |        |                |      |   |          |   | 120.51      | % |  |   |        |  |      |  
|                                                                                 |  |                              |         |   |                              |   |             |                              |      |                |  |   |          |   |             |   |        |                |      |   |          |   |             |   |  |   |        |  |      |  



|(1) | Borrowings includes borrowings from the Federal Home Loan Bank, securities sold under agreement to repurchase, federal
funds sold, capital lease obligation and junior subordinated deferrable interest debentures.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40



---

##### Table of Contents

Rate/Volume Analysis

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior periods rate), (ii) changes attributable to rate (changes in rate multiplied by the prior periods volume), and (iii) net change (the sum of the previous
columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.



|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|------------------------------------ |  | -------------------------- | ----- | - | -------------------------- | - | ----- | ------------------------- |  | - | ------ | - |  | ---- | ----- | ----- |  | - | ----- |  | - | -----
|                                     |  | December 31, 2007 vs. 2006 |       |   | December 31, 2006 vs. 2005
|                                     |  | Increase (Decrease)Due to  |       |   |                            |   |       | Increase (Decrease)Due to |  |  
|                                     |  | Volume                     |       |   | Rate                       |   |       | Total                     |  |   | Volume |   |  | Rate |       | Total
|Interest income:                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Loans                                |  | $                          | 1,618 |   |                            | $ | 956   |                           |  | $ | 2,574  |   |  | $    | 2,581 |       |  | $ | 3,157 |  | $ | 5,738
|Investment securities                |  |                            | 310   |   |                            |   | 161   |                           |  |   | 471    |   |  |      | 359   |       |  |   | 402   |  |   | 761  
|Interest-earning deposits with banks |  |                            | 13    |   |                            |   | 34    |                           |  |   | 47     |   |  |      | (5    | )     |  |   | 256   |  |   | 251  
|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Total interest income                |  |                            | 1,941 |   |                            |   | 1,151 |                           |  |   | 3,092  |   |  |      | 2,935 |       |  |   | 3,815 |  |   | 6,750
|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Interest expense:                    |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Deposits                             |  |                            | 906   |   |                            |   | 1,978 |                           |  |   | 2,884  |   |  |      | 1,176 |       |  |   | 2,791 |  |   | 3,967
|Borrowings                           |  |                            | (15   | ) |                            |   | (197  | )                         |  |   | (212   | ) |  |      | (67   | )     |  |   | 441   |  |   | 374  
|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Total interest expense               |  |                            | 891   |   |                            |   | 1,781 |                           |  |   | 2,672  |   |  |      | 1,109 |       |  |   | 3,232 |  |   | 4,341
|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      
|Net interest income                  |  | $                          | 1,050 |   |                            | $ | (630  | )                         |  | $ | 420    |   |  | $    | 1,826 |       |  | $ | 583   |  | $ | 2,409
|                                     |  |                            |       |   |                            |   |       |                           |  |   |        |   |  |      |       |       |  |   |       |  |   |      



41



---

##### Table of Contents

Comparison of Results of Operations for the Years Ended December 31, 2007 and 2006

Net Income.Bancshares generated net income in 2007 of $5.0 million compared to net income in 2006 of $4.3 million. On a per share basis, fully diluted earnings
were $.72 for 2007 compared to $.60 for 2006. Return on average assets was 1.01% and 0.91% and return on average equity was 9.15% and 8.08% for the years ended December 31, 2007 and 2006, respectively.

Earnings for the year ended December 31, 2007 were positively impacted by solid growth in average earning assets and by a $1.6 million decrease in the provision for
loan losses. The impact of the growth in average earning assets was further enhanced by the increase in the yield on interest-earning assets, which increased to 7.78% in 2007 from 7.54% in 2006. Earnings were negatively impacted by an increase in
the average cost of interest-bearing liabilities from 3.80% in 2006 to 4.25% in 2007, as deposit cost increases outpaced increases in asset yields.

Net
Interest Income.Net interest income increased $420,000 from $18.8 million in 2006 to $19.2 million in 2007. Total interest income benefited from strong growth in average earning assets.

Total average earning assets increased $26.4 million or 6.2% from an average of $428.7 million in 2006 to an average of $455.1 million in 2007. Bancshares experienced
solid loan growth during 2007 with average loan balances increasing by $19.4 million. The increase in the average balances for investment securities and interest-earning deposits was $7.0 million. Total interest income increased $3.1 million due to
the increase in average earning assets of $26.4 million, complemented by an increase in yield on earning assets from 7.54% in 2006 to 7.78% in 2007. Average total interest-bearing liabilities increased by $25.6 million during 2007, consisting of a
$25.9 million increase in average interest-bearing deposits while average borrowings decreased $279,000.

Net interest margin is interest income earned on
loans, securities and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the year ended 2007 was 4.23% compared to 4.39% for 2006. The
decrease in net interest margin resulted from the differences between the terms and conditions of earning assets and interest-bearing liabilities. Interest rates on a significant portion of our earning assets, such as certain loans and short-term
investments, are tied to index rates, including the prime lending rate and the Federal Funds rate. The Federal Open Market Committee (FOMC) raised the target Federal Funds Rate to a high in this interest rate cycle of 5.25% on June 6, 2006. The
increases through that date resulted in immediate increases in the yield on our loans based on the bank prime rate resulting in an average rate in 2006 of 8.20%. The FOMC left the target Federal Funds Rate unchanged until September 17, 2007 and
then reduced it 100 basis points through the end of December 31, 2007 resulting in an average rate on loans in 2007 of 8.46% or a 26 basis point increase. Investments and interest-earning deposits were also similarly affected by the change in
rates. The rate on total interest-earning assets increased by 24 basis points from 7.54% in 2006 to 7.78% in 2007. Conversely, rates on a significant portion of interest-bearing liabilities such as certificates of deposits and borrowings remain
fixed until maturity. While we benefited from the increase in rates through June of 2006, the stabilization of rates in late 2006 resulted in an increase in our funding costs as fixed rate liabilities matured and were re-priced at current higher
rates. Time deposit cost was most affected as the average rate increased 63 basis points from 4.31% in 2006 to 4.94% for 2007. The overall cost of interest-bearing liabilities increased 45 basis points from 3.80% in 2006 to 4.25% in 2007. During the
last half of 2007, the FOMC rate decreases resulted in immediate decreases in income on loans while the cost of funding sources remained relatively unchanged. Such interest rates are significantly affected by competitive pressures in the
marketplace.

Provision for Loan Losses.Bancshares provision for loan losses for 2007 was $1.0 million, representing a $1.6 million or 60.1%
decrease from the $2.6 million recorded for 2006. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on factors discussed under Analysis of Loan
Losses. The allowance for loan losses was $5.7 million at December 31, 2007, representing 1.46% of total outstanding loans and 333% of non-performing loans. The allowance for loan losses at December 31, 2006 was $5.6 million,
representing 1.52% of total outstanding loans at that date and 311% of non-performing loans. The decrease in provision for 2007 was primarily related to a decrease in net charge-offs in the leasing portfolio during the year. Net lease charge-offs
totaled $637,000 in 2007 as compared to $1.2 million in 2006. In addition, non-accrual loans and leases decreased $858,000 from $1.8 million at December 31, 2006 to $1.2 million at December 31, 2007. Management has provided individual
reserves for these leases and is aggressively pursuing collection and liquidating any underlying collateral as necessary.



42



---

##### Table of Contents

Non-interest Income. Non-interest income increased by $38,000 or 1.1% to $3.4 million for the year ended
December 31, 2007. The largest components of non-interest income were service charges on deposit accounts of $2.4 million in 2007, an increase of $26,000 from 2006, fees from mortgage banking operations of $326,000 in 2007 as compared to
$352,000 in 2006, a $26,000 or 7.4% decrease, and a gain on derivative transactions of $214,000 as compared to a gain of $10,000 in 2006. There were no gains on derivative transactions in 2005.

Non-interest Expenses.Total non-interest expense increased $856,000 from $12.8 million in 2006 to $13.7 million in 2007. This 6.7% increase was primarily due to
increases in compensation and increases in other expenses related to branch growth. Salaries and benefits expense was $6.9 million for the year ended December 31, 2007, representing a $419,000 or 6.5% increase over the $6.5 million recorded for
the prior year. Occupancy and equipment costs were $2.2 million for the year ended December 31, 2007 representing a $67,000 or 3.0% decrease over the $2.3 million for the prior year. Other expenses increased $428,000 or 10.4% from 2006 the
majority of which was due to increases in data processing and technology expenses and to professional fees in 2007. In addition, the Bank recorded an other than temporary loss on non-marketable equity securities of $76,000 in 2007 related to an
investment in a trust company, whose primary shareholders are ten community banks located throughout North Carolina. There were no other than temporary impairments in 2006.

Provision for Income Taxes.Bancshares had tax expense of $2.9 million, or 36.4% of income before income taxes, for the year ended December 31, 2007 compared to an income tax expense of $2.4 million in
2006 or 36.3% of income before income taxes.

Comparison of Results of Operations for the Years Ended December 31, 2006 and 2005

Net Income.Bancshares generated net income in 2006 of $4.3 million compared to net income in 2005 of $4.5 million. On a per share basis, fully diluted earnings
were $.60 for 2006 compared to $.66 for 2005. Return on average assets was .91% and 1.07% and return on average equity was 8.08% and 9.81% for the years ended December 31, 2006 and 2005, respectively.

Earnings for the year ended December 31, 2006 were positively impacted by strong growth in average earning assets and by increases in net interest income. The
impact of the growth in average earning assets was further enhanced by the increase in the yield on interest-earning assets, which increased to 7.54% in 2006 from 6.63% in 2005. Earnings were negatively impacted by a $1.8 million increase in the
provision for loan losses. This increase in the provision was primarily a result of losses incurred within the leasing portfolio.

Net Interest Income.Net interest income increased $2.4 million from $16.4 million in 2005 to $18.8 million in 2006. Total interest income benefited from strong growth in average earning assets combined with an increase in net interest margin from 4.25% in 2005 to
4.39% in 2006.

Total average earning assets increased $42.8 million or 10.8% from an average of $385.9 million in 2005 to an average of $428.7 million in
2006. Bancshares experienced solid loan growth during 2006 with average loan balances increasing by $33.4 million. The increase in the average balances for investment securities and interest-earning deposits was $9.3 million. Total interest income
increased $6.8 million due to an increase in average earning assets of $42.8 million, complemented by an increase in yield on earning assets from 6.63% in 2005 to 7.54% in 2006. Average total interest-bearing liabilities increased by $35.1 million
during 2006, consisting of a $36.5 million increase in average interest-bearing deposits while average borrowings decreased $1.3 million.

Net interest
margin is interest income earned on loans, securities and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the year ended 2006 was
4.39% compared to 4.25% for 2005. The increase in net interest margin resulted from the differences between the terms and conditions of earning assets and interest-bearing liabilities. Interest rates on a significant portion of our earning assets,
such as certain loans and short-term investments, are tied to index rates, including the prime lending rate and the Federal Funds rate. Conversely, rates on a significant portion of interest-bearing liabilities such as certificates of deposits and
borrowings remain fixed until maturity. During 2006, the Federal Reserve Open Market Committee increased short-term interest rates four times for a total of 100 basis points. When an interest rate increase occurs, yields on certain assets are
increased immediately while the impact on deposits and borrowings is delayed until such time as these instruments mature and are replaced with instruments that reflect the interest rate increase. The average yield on earning assets for 2006 was
7.54% or 91 basis points higher than the 6.63% for 2005. The 2006 average cost of interest-bearing liabilities was 3.80% or 93 basis points higher than the 2.87% for 2005. As a result, the interest rate spread, which is the difference between the
average yield on earning assets and the cost of interest-bearing funds, decreased to 3.74% in 2006 from 3.76% in 2005.



43



---

##### Table of Contents

Provision for Loan Losses.Bancshares provision for loan losses for 2006 was $2.6 million, representing a
$1.8 million or 14.7% increase from the $809,000 recorded for 2005. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on factors discussed under Analysis
of Loan Losses. The allowance for loan losses was $5.6 million at December 31, 2006, representing 1.52% of total outstanding loans and 311% of non-performing loans. The allowance for loan losses at December 31, 2005 was $4.3 million,
representing 1.30% of total outstanding loans at that date and 455% of non-performing loans. The increase in provision for 2006 was primarily related to an increase in net charge-offs in the leasing portfolio during the year. Net lease charge-offs
totaled $1.2 million in 2006 as compared to $24,000 in 2005. In addition, non-accrual loans and leases increased $858,000 from $951,000 at December 31, 2005 to $1.8 million at December 31, 2006. Management has provided individual reserves
for these leases and is aggressively pursuing collection and liquidating any underlying collateral as necessary.

Non-interest Income. Non-interest
income increased by $59,000 or 1.8% to $3.4 million for the year ended December 31, 2006. The largest components of non-interest income were service charges on deposit accounts of $2.4 million in 2006, an increase of $88,000 from 2005, fees
from mortgage banking operations of $352,000 in 2006 as compared to $385,000 in 2005, a $33,000 or 8.6% decrease, and fees from accounts receivable financing of $102,000 in 2006 as compared to $110,000 in 2005, a 7.3% decrease. Fees from mortgage
banking operations decreased as long-term rates increased in 2006.

Non-interest Expenses.Total non-interest expense increased $1.1 million from
$11.7 million in 2005 to $12.8 million in 2006. This 9.3% increase was primarily due to increases in compensation associated with the addition of two branches in 2005 in operation for all of 2006 and other growth and increases in occupancy and
equipment expenses related to branch growth. Salaries and benefits expense was $6.5 million for the year ended December 31, 2006, representing a $735,000 or 12.8% increase over the $5.7 million recorded for the prior year. Occupancy and
equipment costs were $2.3 million for the year ended December 31, 2006 representing a $111,000 or 5.2% increase over the $2.2 million for the prior year. Other expenses increased $250,000 or 6.5% from 2005 primarily due to increases in office
expenses, advertising and promotion, and professional fees related to the new branches in operation for all of 2006.

Provision for Income
Taxes.Bancshares had tax expense of $2.4 million, or 36.3% of income before income taxes, for the year ended December 31, 2006 compared to an income tax expense of $2.6 million in 2005 or 36.9% of income before income taxes.

Liquidity and Capital Resources

Maintaining adequate liquidity while managing interest rate risk is the primary goal of Bancshares asset and liability management strategy. Liquidity is the ability to fund the needs of Bancshares borrowers and depositors, pay
operating expenses, and meet regulatory liquidity requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposit growth and borrowings from the Federal Home Loan Bank and other lenders are presently the main
sources of Bancshares liquidity. Bancshares primary uses of liquidity are to fund loans, operating expenses, deposit withdrawals, repay borrowings and to make investments.

As of December 31, 2007, liquid assets (cash and due from banks, interest-earning deposits with banks, and investment securities available for sale) were approximately $90.3 million, which represents 18% of total
assets and 20% of total deposits and borrowings. Supplementing this liquidity, Bancshares has lines of credit from correspondent banks of approximately $29.5 million and an additional line of credit with the FHLB equal to 15% of assets (subject to
available qualified collateral, with borrowings of $6.0 million outstanding from the FHLB at December 31, 2007). At December 31, 2007, outstanding commitments to extend credit were $7.5 million and available line of credit balances totaled
$63.2 million. Management believes that the combined aggregate liquidity position of Bancshares is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Certificates of deposit represented 63.4% of Bancshares total deposits at December 31, 2007 an increase from 56.3% at December 31, 2006. Bancshares
growth strategy will include efforts focused on increasing the relative volume of transaction deposit accounts. Certificates of deposit of $100,000 or more represented 36.0% of Bancshares total deposits at December 31, 2007. These
deposits are generally considered rate sensitive, but management believes most of them are relationship-oriented. While Bancshares will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will
determine Bancshares continued retention of those deposits.



44



---

##### Table of Contents

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The FDIC and the
Federal Reserve, the primary regulators of the Bank and Bancshares, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions
are expected to maintain a level of capital commensurate with the risk profile assigned to its assets in accordance with these guidelines. At December 31, 2007, Bancshares maintained capital levels exceeding the minimum levels for adequately
capitalized bank holding companies and banks.

Capital Ratios

Bancshares and the Bank are subject to minimum capital requirements. As the following table indicates, at December 31, 2007, we exceeded our regulatory capital requirements.



|                                |  |                      |   |  |                    |   |  |                             |  
|------------------------------- |  | -------------------- | - |  | ------------------ | - |  | --------------------------- | -
|                                |  | At December 31, 2007 |  
|                                |  | ActualRatio          |   |  | MinimumRequirement |   |  | Well-CapitalizedRequirement |  
|American Community Bank:        |  |                      |   |  |                    |   |  |                             |  
|Total risk-based capital ratio  |  | 11.42                | % |  | 8.00               | % |  | 10.00                       | %
|Tier 1 risk-based capital ratio |  | 10.17                | % |  | 4.00               | % |  | 5.00                        | %
|Leverage ratio                  |  | 8.58                 | % |  | 4.00               | % |  | 5.00                        | %
|                                |  |                      |  
|American Community Bancshares:  |  |                      |   |  |                    |   |  |                             |  
|Total risk-based capital ratio  |  | 14.24                | % |  | 8.00               | % |  | NA                          |  
|Tier 1 risk-based capital ratio |  | 12.98                | % |  | 4.00               | % |  | NA                          |  
|Leverage ratio                  |  | 11.02                | % |  | 4.00               | % |  | NA                          |  

The Board of Governors of the Federal Reserve released a final rule confirming that trust preferred securities,
such as those issued by American Community Capital Trust II, Ltd., will continue to be included in Tier 1 capital up to applicable quantitative limits until notice is given to the contrary. Accordingly, the ratios contained in the table above
reflect the inclusion of our outstanding trust preferred securities. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. In
the event of a disallowance, there would be a reduction in our consolidated capital ratios. However, we believe that the Bank would still exceed the required regulatory minimums for capital adequacy purposes.

Asset/Liability Management

Bancshares asset/liability
management, or interest rate risk management, program is focused primarily on evaluating and managing the composition of its assets and liabilities in view of various interest rate scenarios. Factors beyond Bancshares control, such as market
interest rates and competition, may also have an impact on Bancshares interest income and interest expense.

Interest Rate Gap Analysis. As a
part of its interest rate risk management policy, Bancshares calculates an interest rate gap. Interest rate gap analysis is a common, though imperfect, measure of interest rate risk, which measures the relative dollar amounts
of interest-earning assets and interest-bearing liabilities, which reprice within a specific time period, either through maturity or rate adjustment. The gap is the difference between the amounts of such assets and liabilities that are
subject to repricing. A positive gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a declining interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a decrease in the yield on its
assets greater than the decrease in the cost of its liabilities and its income should be negatively affected. Conversely, the cost of funds for an institution with a positive gap would generally be expected to increase more slowly than
the yield on its assets in a rising interest rate environment, and such institutions net interest income generally would be expected to be positively affected by rising interest rates. Changes in interest rates generally have the opposite
effect on an institution with a negative gap.



45



---

##### Table of Contents

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2007, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in
accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other
transaction accounts are assumed to pay out over a decay schedule. In making the gap computations, standard assumptions regarding prepayment rates and deposit decay rates have been used for interest-earning assets and interest-bearing
liabilities. In addition, the table reflects scheduled principal payments, which will be received throughout the lives of the loans. The interest rate sensitivity of Bancshares assets and liabilities illustrated in the following table would
vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.



|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---------------------------- | - | ------- | ----------------------------- |  | - | ------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                              |  | Terms to Repricing at December 31, 2007 |        
|                                                                                              |  | 3 Monthsor Less                         |         |   | More Than3 Monthsto 6 Months |   |         | More Than6 Monthsto 12 Months |  |   | Over12 Months |   |  | Total |        
|                                                                                              |  | (Dollars in thousands)                  |        
|INTEREST EARNING-ASSETS                                                                       |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Loans receivable:                                                                             |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Real estate mortgage loans                                                                    |  | $                                       | 170,983 |   |                              | $ | 6,166   |                               |  | $ | 9,526         |   |  | $     | 89,745  |   |  | $ | 276,420 |  
|Home equity lines of credit                                                                   |  |                                         | 34,784  |   |                              |   |        |                               |  |   |              |   |  |       |        |   |  |   | 34,784  |  
|Commercial and industrial loans                                                               |  |                                         | 42,503  |   |                              |   | 2,481   |                               |  |   | 5,111         |   |  |       | 7,863   |   |  |   | 57,958  |  
|Loans to individuals                                                                          |  |                                         | 7,031   |   |                              |   | 2,394   |                               |  |   | 2,497         |   |  |       | 8,088   |   |  |   | 20,010  |  
|Lease financing, net                                                                          |  |                                         | 717     |   |                              |   | 705     |                               |  |   | 869           |   |  |       | 1,650   |   |  |   | 3,941   |  
|Interest earning deposits with banks                                                          |  |                                         | 930     |   |                              |   |        |                               |  |   |              |   |  |       |        |   |  |   | 930     |  
|Investment securities                                                                         |  |                                         | 2,620   |   |                              |   | 5,141   |                               |  |   | 2,196         |   |  |       | 66,825  |   |  |   | 76,782  |  
|Non-marketable equity securities                                                              |  |                                         |        |   |                              |   |        |                               |  |   |              |   |  |       | 2,119   |   |  |   | 2,119   |  
|Derivative financial instruments                                                              |  |                                         | (45,000 | ) |                              |   |        |                               |  |   |              |   |  |       | 45,000  |   |  |   |        |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Total interest-earning assets                                                                 |  | $                                       | 214,568 |   |                              | $ | 16,887  |                               |  | $ | 20,199        |   |  | $     | 221,290 |   |  | $ | 472,944 |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|INTEREST-BEARING LIABILITIES                                                                  |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Deposits:                                                                                     |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Interest-bearing demand                                                                       |  | $                                       | 31,816  |   |                              | $ | 763     |                               |  | $ | 1,526         |   |  | $     | 57,953  |   |  | $ | 92,058  |  
|Time                                                                                          |  |                                         | 89,444  |   |                              |   | 48,040  |                               |  |   | 91,121        |   |  |       | 24,672  |   |  |   | 253,277 |  
|Short-term borrowings                                                                         |  |                                         | 31,509  |   |                              |   |        |                               |  |   |              |   |  |       |        |   |  |   | 31,509  |  
|Long-term debt                                                                                |  |                                         | 10,310  |   |                              |   |        |                               |  |   |              |   |  |       | 7,685   |   |  |   | 17,995  |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|Total interest-bearing liabilities                                                            |  | $                                       | 163,079 |   |                              | $ | 48,803  |                               |  | $ | 92,647        |   |  | $     | 90,310  |   |  | $ | 394,839 |  
|                                                                                              |  |                                         |         |   |                              |   |         |                               |  |   |               |   |  |       |         |   |  |   |         |  
|INTEREST SENSITIVITY GAP PER PERIOD                                                           |  | $                                       | 51,489  |   |                              | $ | (31,916 | )                             |  | $ | (72,448       | ) |  | $     | 130,980 |   |  | $ | 78,105  |  
|CUMULATIVE INTEREST SENSITIVITY GAP                                                           |  | $                                       | 51,489  |   |                              | $ | 19,573  |                               |  | $ | (52,875       | ) |  | $     | 78,105  |   |  | $ | 78,105  |  
|CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS                               |  |                                         | 10.89   | % |                              |   | 4.14    | %                             |  |   | -11.18        | % |  |       | 16.51   | % |  |   | 16.51   | %
|CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE OF CUMULATIVE INTEREST BEARING LIABILITIES |  |                                         | 131.57  | % |                              |   | 109.24  | %                             |  |   | 82.64         | % |  |       | 119.78  | % |  |   | 119.78  | %



46



---

##### Table of Contents

In order to assist in achieving a desired level of interest rate sensitivity, the Company has entered into off-balance
sheet contracts that are considered derivative financial instruments. As of December 31, 2007, the Company had cash flow hedges with a notional amount of $45.0 million. These derivative instruments consist of two interest rate floor contracts
that are used to hedge future cash flows of the first $45.0 million of certain variable rate loans against the downward effects of their repricing in the event of a decreasing rate environment for a period of three years ending in February 2009 and
June 2009. If the prime rate falls below 7.25% during the term of the contract on the first floor, the Company will receive payments based on the $30.0 million notional amount times the difference between 7.25% and the weighted average prime rate
for the quarter. No payments will be received by the Company if the weighted average prime rate is 7.25% or higher. The Company paid a premium of $228,000 on this contract. If the prime rate falls below 7.75% during the term of the contract on the
second floor, the Company will receive payments based on the $15.0 million notional amount times the difference between 7.75% and the weighted average prime rate for the quarter. No payments will be received by the Company if the weighted average
prime rate is 7.75% or higher. The Company paid a premium of $95,250 on this contract. The Company received payments of $3,229 in 2007 on the 7.75% contract and received no payments on either contract in 2006.

Critical Accounting Policies and Estimates

Bancshares
discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires Bancshares to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, Bancshares evaluates its
estimates which are based upon historical experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Bancshares significant accounting policies are described in Note 2 to the consolidated financial statements. Bancshares considers the following accounting policies
to be most critical in their potential effect on its financial position or results of operations.

Allowance for Loan Losses

The allowance for loan losses is established as probable losses are estimated to have occurred through a provision for loan losses charged to earnings. The provision for
loan losses is based upon managements best estimate of the amount needed to maintain the allowance for loan losses at an adequate level. Loan losses are charged against the allowance when management believes the uncollectibility of a loan
balance is evident. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review of the collectibility of the loans in light of the current status of the portfolio, historical experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrowers ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Management segments the loan portfolio by loan type in considering each of the aforementioned factors and their impact upon the
level of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the
evaluations. In addition, regulatory examiners may require American Community Bank to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Loans are considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired
loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan
exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses.



47



---

##### Table of Contents

Interest Income Recognition

Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is generally not accrued on loans 90 days or more past due unless the loans are adequately secured and in the process of
collection. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as payments are received when the ultimate
collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all interest previously accrued is reversed against current-period interest income.

Goodwill and Other Intangible Assets

Goodwill arose from the 2004
purchase of First National Bank of the Carolinas. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill acquired will not be amortized but will be subject to an
annual impairment test. The impairment test is a two-step process that begins with a comparison of book value and stock price. If the initial evaluation suggests that an impairment of the asset value exists, the second step would determine the
amount of the impairment, if any. If the tests conclude that goodwill is impaired, the carrying value would be adjusted, and an impairment loss would be recorded. As of December 31, 2007 goodwill was not impaired. The Company reviews other
identified intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized.

Contractual Obligations

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2007.



|                                                                     |  |                             |         |           |   |           |  |              |       |       |   |        |  |   |        
|-------------------------------------------------------------------- |  | --------------------------- | ------- | --------- | - | --------- |  | ------------ | ----- | ----- | - | ------ |  | - | -------
|                                                                     |  | Payments Due by Period     
|                                                                     |  | On Demandor Lessthan 1 Year |         | 1-3 Years |   | 4-5 Years |  | After5 Years |       | Total
|                                                                     |  | (Dollars in thousands)     
|Advances from FHLB                                                   |  | $                           |        |           | $ |          |  | $            | 1,000 |       | $ | 5,000  |  | $ | 6,000  
|Securities sold under agreement to repurchase and federal funds sold |  |                             | 31,509  |           |   |          |  |              |      |       |   |       |  |   | 31,509 
|Capital lease obligation                                             |  |                             | 10      |           |   | 33        |  |              | 50    |       |   | 1,592  |  |   | 1,685  
|Junior subordinated deferrable interest debentures                   |  |                             |        |           |   |          |  |              |      |       |   | 10,310 |  |   | 10,310 
|Operating leases                                                     |  |                             | 782     |           |   | 1,267     |  |              | 631   |       |   | 2,089  |  |   | 4,769  
|Other contractual obligations                                        |  |                             | 560     |           |   | 1,232     |  |              |      |       |   |       |  |   | 1,792  
|                                                                     |  |                             |         |           |   |           |  |              |       |       |   |        |  |   |        
|Total contractual cash obligations, excluding deposits               |  |                             | 32,861  |           |   | 2,532     |  |              | 1,681 |       |   | 18,991 |  |   | 56,065 
|Deposits                                                             |  |                             | 375,122 |           |   | 21,748    |  |              | 2,924 |       |   |       |  |   | 399,794
|                                                                     |  |                             |         |           |   |           |  |              |       |       |   |        |  |   |        
|Total contractual cash obligations, including deposits               |  | $                           | 407,983 |           | $ | 24,280    |  | $            | 4,605 |       | $ | 18,991 |  | $ | 455,859
|                                                                     |  |                             |         |           |   |           |  |              |       |       |   |        |  |   |        

It has been the experience of Bancshares that deposit withdrawals are generally replaced with new deposits, thus
not requiring any net cash outflow. Based on that assumption, management believes that it can meet its contractual cash obligations from normal operations.



48



---

##### Table of Contents

Commitments, Contingencies and Off-Balance Sheet Arrangements

Bancshares is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

Off-balance
sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:



|                                          |  |                                            |        |           |   |           |  |              |       |       |   |        |  |   |        
|----------------------------------------- |  | ------------------------------------------ | ------ | --------- | - | --------- |  | ------------ | ----- | ----- | - | ------ |  | - | -------
|                                          |  | Amount of Commitment Expiration Per Period
|                                          |  | (Dollars in thousands)                    
|                                          |  | Lessthan 1 Year                            |        | 1-3 Years |   | 4-5 Years |  | After5 Years |       | Total
|Capital South Partnership commitments     |  | $                                          | 825    |           | $ |          |  | $            |      |       | $ |       |  | $ | 825    
|Standby letters of credit                 |  |                                            | 2,908  |           |   |          |  |              |      |       |   |       |  |   | 2,908  
|Commitments to extend credit              |  |                                            | 7,488  |           |   |          |  |              |      |       |   |       |  |   | 7,488  
|Undisbursed lines of credit               |  |                                            | 30,970 |           |   | 5,056     |  |              | 3,160 |       |   | 24,019 |  |   | 63,205 
|Undisbursed portion of construction loans |  |                                            | 34,147 |           |   |          |  |              |      |       |   |       |  |   | 34,147 
|                                          |  |                                            |        |           |   |           |  |              |       |       |   |        |  |   |        
|Total off-balance sheet commitments       |  | $                                          | 76,338 |           | $ | 5,056     |  | $            | 3,160 |       | $ | 24,019 |  | $ | 108,573
|                                          |  |                                            |        |           |   |           |  |              |       |       |   |        |  |   |        

Bancshares does not have any special purpose entities or other similar forms of off-balance sheet financing
arrangements.

Commitments to originate loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments are for a term of 15 years, and commercial lines of credit are generally renewable on an annual basis. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Bancshares evaluates each customers creditworthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by Bancshares upon extension of credit, is based on managements credit evaluation of the borrower.

Related Party Transactions

Bancshares related
party transactions have been limited to 1) loans made to executive officers and directors in the ordinary course of business and 2) the lease of certain buildings at prevailing market rates. At December 31, 2007, Bancshares had loans
outstanding to executive officers and directors totaling approximately $3.5 million. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with
other non-related borrowers. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features. The $3.5 million in outstanding related party loans represents 0.9% of Bancshares
total loan portfolio. Bancshares has never charged-off a loan to a related party.



49



---

##### Table of Contents

Recent Accounting Pronouncements

FIN 48

The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), on January 1, 2007. FIN 48 applies to all tax positions within the scope of SFAS 109. This statement requires a more-likely-than-not threshold for initial recognition of a tax benefit in the
financial statements, and requires measurement of the amount of benefit to be recognized based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The Company has
analyzed its tax positions pursuant to the requirements of FIN 48 and determined that no liability for unrecognized tax benefits is needed. Therefore, the adoption of FIN 48 did not have a material effect on the Companys consolidated financial
statements.

FAS 141R

In December 2007, the FASB issued SFAS
141(R), Business Combinations. SFAS 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this
Statement include: the acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition
date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date;
adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be
recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding
subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill
rollforward.

The Company will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009.
Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax
contingencies and will require any changes in those amounts to be recorded in earnings. Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that
will be presented in the consolidated financial statements.

FAS 157

In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 157, Fair Value Measurements (FASB No. 157), which enhances existing guidance for measuring assets and liabilities
using fair value and requires additional disclosure about the use of fair value for measurement. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of 2008, and is currently evaluating the impact of the adoption of SFAS No. 157 on its financial position and results of operations, including the
valuation methods and support for the assumptions that underlie the valuation.



50



---

##### Table of Contents

FAS 159

In February 2007,
the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 . This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in SFAS 159 are elective; however, the amendment to SFAS 115,Accounting for Certain Investments in Debt and Equity
Securities,applies to all entities with available-for-sale and trading securities. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company did not elect the fair
value option as of January 1, 2008 for any of its financial assets or financial liabilities and, accordingly, the adoption of the statement did not have a material impact on the Companys consolidated financial statements.

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the
status of changes to and proposed effective dates of exposure drafts.



51



---

##### Table of Contents

ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in market price an d interest rates. This risk of loss can be reflected in diminished
current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan and deposit portfolios is
such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is
monitored as part of the Banks asset/liability management functions. The following table presents information about the contractual maturities, average interest rates and estimated fair values of our financial instruments that are considered
market risk sensitive at December 31, 2007.



|                                 |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|-------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | ---- | ----- | ---- | - | ---------------- |  | ----- | ------ | -------------------- | - | ------ | ------------------- | - | ------- |  | ---- | - |  | - | -------
|                                 |  | 2008                   |         | 2009 |   | 2010    |  | 2011 |       | 2012 |   | BeyondFive Years |  | Total |        | AverageInterest Rate |   |        | EstimatedFair Value
|                                 |  | (Dollars in thousands)
|FINANCIAL ASSETS                 |  |                        |        
|                                 |  |                        |         |      |   |         |  |      |      
|Investment securities            |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|Available for sale               |  | $                      | 3,023   |      | $ |        |  | $    | 626   |      | $ | 1,004            |  | $     | 1,160  |                      | $ | 68,607 |                     | $ | 74,420  |  | 5.12 | % |  | $ | 75,012 
|Held to maturity                 |  |                        |        |      |   |        |  |      |      |      |   |                 |  |       |       |                      |   | 1,770  |                     |   | 1,770   |  | 5.78 | % |  |   | 1,804  
|Non-marketable equity            |  |                        |        |      |   |        |  |      |      |      |   |                 |  |       |       |                      |   | 2,119  |                     |   | 2,119   |  |     |   |  |   | 2,119  
|Loans                            |  |                        | 194,509 |      |   | 144,999 |  |      | 7,859 |      |   | 7,207            |  |       | 37,852 |                      |   | 687    |                     |   | 393,113 |  | 7.56 | % |  |   | 395,458
|                                 |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                      | 197,532 |      | $ | 144,999 |  | $    | 8,485 |      | $ | 8,211            |  | $     | 39,012 |                      | $ | 73,183 |                     | $ | 471,422 |  |      |   |  | $ | 474,393
|                                 |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|FINANCIAL LIABILITIES            |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|                                 |  |                        |         |      |   |         |  |      |      
|Interest-bearing demand accounts |  | $                      | 34,105  |      | $ | 3,050   |  | $    | 3,050 |      | $ | 4,575            |  | $     | 4,575  |                      | $ | 42,703 |                     | $ | 92,058  |  | 1.62 | % |  | $ | 78,643 
|Time deposits                    |  |                        | 228,605 |      |   | 16,761  |  |      | 4,987 |      |   | 914              |  |       | 2,010  |                      |   |       |                     |   | 253,277 |  | 4.88 | % |  |   | 255,971
|Borrowings                       |  |                        | 31,519  |      |   | 10      |  |      | 22    |      |   | 24               |  |       | 1,026  |                      |   | 16,903 |                     |   | 49,504  |  | 4.43 | % |  |   | 49,695 
|                                 |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                      | 294,229 |      | $ | 19,821  |  | $    | 8,059 |      | $ | 5,513            |  | $     | 7,611  |                      | $ | 59,606 |                     | $ | 394,839 |  |      |   |  | $ | 384,309
|                                 |  |                        |         |      |   |         |  |      |       |      |   |                  |  |       |        |                      |   |        |                     |   |         |  |      |   |  |   |        



52



---

##### Table of Contents

ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AMERICAN COMMUNITY BANCSHARES, INC.



TABLE OF CONTENTS



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page No.
|Report of Independent Registered Public Accounting Firm |  | 54      
|                                                        | 
|Consolidated Balance Sheets                             |  | 55      
|                                                        | 
|Consolidated Statements of Operations                   |  | 56      
|                                                        | 
|Consolidated Statements of Comprehensive Income         |  | 57      
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | 58      
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 59      
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 61      



53



---

##### Table of Contents

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

American Community Bancshares, Inc.

Charlotte, North Carolina

We have audited the accompanying consolidated balance sheets of American Community Bancshares, Inc. and subsidiary (the Company) as of December 31, 2007
and 2006 and the related consolidated statements of operations, comprehensive income, stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Community Bancshares, Inc. and subsidiary at December 31, 2007
and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 13, 2008 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

LOGO

Charlotte, North Carolina

March 13, 2008



54



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and 2006





|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                            |  | 2007                   |         |   | 2006 |  
|                                                                                                                                                            |  | (Amounts in thousands) |        
|ASSETS                                                                                                                                                      |  |                        |         |   |      |   |         |  
|Cash and due from banks                                                                                                                                     |  | $                      | 14,346  |   |      | $ | 19,950  |  
|Interest-earning deposits with banks                                                                                                                        |  |                        | 930     |   |      |   | 17,295  |  
|Investment securities available for sale, at fair value (cost of $74,420 and $63,921 at December 31, 2007 and 2006,
respectively)                           |  |                        | 75,012  |   |      |   | 63,018  |  
|Investment securities held to maturity, at cost (fair value approximates $1,804 and $2,192 at December 31, 2007 and 2006, respectively)                     |  |                        | 1,770   |   |      |   | 2,174   |  
|                                                                                                                                                            |  |                       
|Loans                                                                                                                                                       |  |                        | 392,959 |   |      |   | 370,431 |  
|Allowance for loan losses                                                                                                                                   |  |                        | (5,740  | ) |      |   | (5,628  | )
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|NET LOANS                                                                                                                                                   |  |                        | 387,219 |   |      |   | 364,803 |  
|                                                                                                                                                            |  |                       
|Accrued interest receivable                                                                                                                                 |  |                        | 2,640   |   |      |   | 2,938   |  
|Bank premises and equipment                                                                                                                                 |  |                        | 8,694   |   |      |   | 9,105   |  
|Foreclosed real estate                                                                                                                                      |  |                        |        |   |      |   | 195     |  
|Non-marketable equity securities, at cost                                                                                                                   |  |                        | 2,119   |   |      |   | 1,879   |  
|Goodwill                                                                                                                                                    |  |                        | 9,838   |   |      |   | 9,838   |  
|Other assets                                                                                                                                                |  |                        | 3,027   |   |      |   | 3,463   |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                                |  | $                      | 505,595 |   |      | $ | 494,658 |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                        |         |   |      |   |         |  
|                                                                                                                                                            |  |                       
|Deposits                                                                                                                                                    |  |                        |         |   |      |   |         |  
|Demand  non-interest bearing                                                                                                                               |  | $                      | 54,459  |   |      | $ | 61,735  |  
|Savings                                                                                                                                                     |  |                        | 24,181  |   |      |   | 15,111  |  
|Money market and NOW                                                                                                                                        |  |                        | 67,877  |   |      |   | 98,333  |  
|Time                                                                                                                                                        |  |                        | 253,277 |   |      |   | 225,958 |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL DEPOSITS                                                                                                                                              |  |                        | 399,794 |   |      |   | 401,137 |  
|Short-term borrowings                                                                                                                                       |  |                        | 31,509  |   |      |   | 15,473  |  
|Long-term debt                                                                                                                                              |  |                        | 17,995  |   |      |   | 21,612  |  
|Accrued expenses and other liabilities                                                                                                                      |  |                        | 2,273   |   |      |   | 1,368   |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL LIABILITIES                                                                                                                                           |  |                        | 451,571 |   |      |   | 439,590 |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|Stockholders Equity                                                                                                                                        |  |                        |         |   |      |   |         |  
|Preferred stock, no par value, 1,000,000 shares authorized; none issued                                                                                     |  |                        |        |   |      |   |        |  
|Common stock, $1 par value, 25,000,000 shares authorized, 6,502,288 and 7,008,081 shares issued and outstanding at December 31, 2007 and
2006, respectively |  |                        | 6,502   |   |      |   | 7,008   |  
|Additional paid-in capital                                                                                                                                  |  |                        | 32,364  |   |      |   | 37,637  |  
|Retained earnings                                                                                                                                           |  |                        | 14,744  |   |      |   | 11,072  |  
|Accumulated other comprehensive income (loss)                                                                                                               |  |                        | 414     |   |      |   | (649    | )
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                  |  |                        | 54,024  |   |      |   | 55,068  |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  | $                      | 505,595 |   |      | $ | 494,658 |  
|                                                                                                                                                            |  |                        |         |   |      |   |         |  

See accompanying notes to these consolidated financial statements.



55



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2007, 2006 and 2005





|                                                                          |  |                                                         |           |      |   |           |  |   |          
|------------------------------------------------------------------------- |  | ------------------------------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                                          |  | 2007                                                    |           | 2006 |   | 2005     
|                                                                          |  | (Amounts in thousands, except share and per share data)
|INTEREST INCOME                                                           |  |                                                         |           |      |   |           |  |   |          
|Loans, including fees                                                     |  | $                                                       | 31,374    |      | $ | 28,800    |  | $ | 23,062   
|Investment securities:                                                    |  |                                                         |           |      |   |           |  |   |          
|Taxable                                                                   |  |                                                         | 3,046     |      |   | 2,702     |  |   | 2,051    
|Tax-exempt                                                                |  |                                                         | 415       |      |   | 288       |  |   | 178      
|Interest-earning deposits with banks                                      |  |                                                         | 591       |      |   | 544       |  |   | 293      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|TOTAL INTEREST INCOME                                                     |  |                                                         | 35,426    |      |   | 32,334    |  |   | 25,584   
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|INTEREST EXPENSE                                                          |  |                                                         |           |      |   |           |  |   |          
|Money market, NOW and savings deposits                                    |  |                                                         | 2,240     |      |   | 1,637     |  |   | 1,049    
|Time deposits                                                             |  |                                                         | 11,901    |      |   | 9,620     |  |   | 6,241    
|Borrowings                                                                |  |                                                         | 214       |      |   | 452       |  |   | 484      
|Securities sold under agreement to repurchase and federal funds purchased |  |                                                         | 793       |      |   | 523       |  |   | 301      
|Capital lease obligation                                                  |  |                                                         | 139       |      |   | 140       |  |   | 140      
|Junior subordinated debentures                                            |  |                                                         | 906       |      |   | 1,149     |  |   | 965      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|TOTAL INTEREST EXPENSE                                                    |  |                                                         | 16,193    |      |   | 13,521    |  |   | 9,180    
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NET INTEREST INCOME                                                       |  |                                                         | 19,233    |      |   | 18,813    |  |   | 16,404   
|PROVISION FOR LOAN LOSSES                                                 |  |                                                         | 1,033     |      |   | 2,612     |  |   | 809      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                       |  |                                                         | 18,200    |      |   | 16,201    |  |   | 15,595   
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NON-INTEREST INCOME                                                       |  |                                                         |           |      |   |           |  |   |          
|Service charges on deposit accounts                                       |  |                                                         | 2,419     |      |   | 2,393     |  |   | 2,305    
|Mortgage banking operations                                               |  |                                                         | 326       |      |   | 352       |  |   | 385      
|Gain on sale of investment securities                                     |  |                                                         | 20        |      |   | 60        |  |   | 10       
|Gain on derivative transactions                                           |  |                                                         | 214       |      |   |          |  |   |         
|Gain on sale of assets                                                    |  |                                                         | 53        |      |   | 79        |  |   | 68       
|Other                                                                     |  |                                                         | 359       |      |   | 469       |  |   | 526      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|TOTAL NON-INTEREST INCOME                                                 |  |                                                         | 3,391     |      |   | 3,353     |  |   | 3,294    
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NON-INTEREST EXPENSE                                                      |  |                                                         |           |      |   |           |  |   |          
|Salaries and employee benefits                                            |  |                                                         | 6,893     |      |   | 6,474     |  |   | 5,739    
|Occupancy and equipment                                                   |  |                                                         | 2,194     |      |   | 2,261     |  |   | 2,150    
|Other than temporary impairment of non-marketable equity securities       |  |                                                         | 76        |      |   |          |  |   |         
|Other                                                                     |  |                                                         | 4,539     |      |   | 4,103     |  |   | 3,853    
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|TOTAL NON-INTEREST EXPENSE                                                |  |                                                         | 13,702    |      |   | 12,838    |  |   | 11,742   
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|INCOME BEFORE INCOME TAXES                                                |  |                                                         | 7,889     |      |   | 6,716     |  |   | 7,147    
|INCOME TAXES                                                              |  |                                                         | 2,869     |      |   | 2,440     |  |   | 2,639    
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NET INCOME                                                                |  | $                                                       | 5,020     |      | $ | 4,276     |  | $ | 4,508    
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|NET INCOME PER COMMON SHARE                                               |  |                                                         |           |      |   |           |  |   |          
|Basic                                                                     |  | $                                                       | .74       |      | $ | .62       |  | $ | .71      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|Diluted                                                                   |  | $                                                       | .72       |      | $ | .60       |  | $ | .66      
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                |  |                                                         |           |      |   |           |  |   |          
|Basic                                                                     |  |                                                         | 6,779,635 |      |   | 6,913,534 |  |   | 6,364,336
|                                                                          |  |                                                         |           |      |   |           |  |   |          
|Diluted                                                                   |  |                                                         | 6,938,259 |      |   | 7,171,413 |  |   | 6,819,523
|                                                                          |  |                                                         |           |      |   |           |  |   |          

See accompanying notes to these consolidated financial statements.



56



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2007, 2006 and 2005





|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                   |  | 2007                   |       |   | 2006 |   |       | 2005 | 
|                                                                   |  | (Amounts in thousands) |      
|NET INCOME                                                         |  | $                      | 5,020 |   |      | $ | 4,276 |      |  | $ | 4,508  |  
|                                                                   |  |                        |      
|Other comprehensive income (loss):                                 |  |                        |       |   |      |   |       |      |  |   |        |  
|                                                                   |  |                        |      
|Securities available for sale:                                     |  |                        |       |   |      |   |       |      |  |   |        |  
|Unrealized holding gains (losses) on available-for-sale securities |  |                        | 1,514 |   |      |   | 350   |      |  |   | (1,018 | )
|Tax effect                                                         |  |                        | (583  | ) |      |   | (133  | )    |  |   | 385    |  
|Reclassification adjustment for gains realized in income           |  |                        | (20   | ) |      |   | (60   | )    |  |   | (10    | )
|Tax effect                                                         |  |                        | 8     |   |      |   | 23    |      |  |   | 3      |  
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|Net of tax amount                                                  |  |                        | 919   |   |      |   | 180   |      |  |   | (640   | )
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|Cash flow hedging activities:                                      |  |                        |       |   |      |   |       |      |  |   |        |  
|Unrealized holding gains (losses) on cash flow hedging activities  |  |                        | 240   |   |      |   | (139  | )    |  |   |       |  
|Tax effect                                                         |  |                        | (92   | ) |      |   | 53    |      |  |   |       |  
|Reclassification adjustment for gains realized in income           |  |                        | (6    | ) |      |   |      |      |  |   |       |  
|Tax effect                                                         |  |                        | 2     |   |      |   |      |      |  |   |       |  
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|Net of tax amount                                                  |  |                        | 144   |   |      |   | (86   | )    |  |   |       |  
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|Total other comprehensive income (loss)                            |  |                        | 1,063 |   |      |   | 94    |      |  |   | (640   | )
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  
|Total comprehensive income                                         |  | $                      | 6,083 |   |      | $ | 4,370 |      |  | $ | 3,868  |  
|                                                                   |  |                        |       |   |      |   |       |      |  |   |        |  

See accompanying notes to these consolidated financial statements.



57



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years Ended December 31, 2007, 2006 and 2005





|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|-------------------------------------------------------- |  | ----------------------------------------- | - |  | ------ | ----- | - | ------------------------ | - | ------ | ---------------- |  | - | ------------------------------------------ | - |  | ------------------------ | ----- | - |  | - | ------ | -
|                                                         |  |                                           |   |  |        |       |   | Additionalpaid-incapital |   |        | Retainedearnings |  |   | Accumulatedothercomprehensiveincome (loss) |   |  | Totalstockholdersequity |      
|                                                         |  | Common stock                              |   |  |        |       |  
|                                                         |  | Shares                                    |   |  | Amount |       |   |                          |   |       
|                                                         |  | (Amounts in thousands, except share data) |  
|Balance, January 1, 2005                                 |  | 3,489,249                                 |   |  | $      | 3,489 |   |                          | $ | 29,055 |                  |  | $ | 4,531                                      |   |  | $                        | (103  | ) |  | $ | 36,972 |  
|Comprehensive income:                                    |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Net income                                               |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | 4,508                                      |   |  |                          |      |   |  |   | 4,508  |  
|Other comprehensive loss, net of tax                     |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   |                                           |   |  |                          | (640  | ) |  |   | (640   | )
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Total comprehensive income                               |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   | 3,868  |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Cash dividends of $.20 per share                         |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | (861                                       | ) |  |                          |      |   |  |   | (861   | )
|Common stock issued pursuant to:                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Exercise of stock options                                |  | 91,612                                    |   |  |        | 92    |   |                          |   | 443    |                  |  |   |                                           |   |  |                          |      |   |  |   | 535    |  
|Exercise of warrants                                     |  | 987,812                                   |   |  |        | 988   |   |                          |   | 9,384  |                  |  |   |                                           |   |  |                          |      |   |  |   | 10,372 |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Balance, December 31, 2005                               |  | 4,568,673                                 |   |  |        | 4,569 |   |                          |   | 38,882 |                  |  |   | 8,178                                      |   |  |                          | (743  | ) |  |   | 50,886 |  
|Comprehensive income:                                    |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Net income                                               |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | 4,276                                      |   |  |                          |      |   |  |   | 4,276  |  
|Other comprehensive income, net of tax                   |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   |                                           |   |  |                          | 94    |   |  |   | 94     |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Total comprehensive income                               |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   | 4,370  |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Stock split effected in the form of a 50% stock dividend |  | 2,284,567                                 |   |  |        | 2,284 |   |                          |   | (2,284 | )                |  |   |                                           |   |  |                          |      |   |  |   |       |  
|Cash dividends of $.20 per share                         |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | (1,382                                     | ) |  |                          |      |   |  |   | (1,382 | )
|Shares repurchased                                       |  | (23,700                                   | ) |  |        | (24   | ) |                          |   | (239   | )                |  |   |                                           |   |  |                          |      |   |  |   | (263   | )
|Expense recognized in connection with stock options      |  |                                          |   |  |        |      |   |                          |   | 375    |                  |  |   |                                           |   |  |                          |      |   |  |   | 375    |  
|Common stock issued pursuant to:                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Exercise of stock options                                |  | 178,541                                   |   |  |        | 179   |   |                          |   | 733    |                  |  |   |                                           |   |  |                          |      |   |  |   | 912    |  
|Tax benefit from the exercise of stock options           |  |                                          |   |  |        |      |   |                          |   | 170    |                  |  |   |                                           |   |  |                          |      |   |  |   | 170    |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Balance, December 31, 2006                               |  | 7,008,081                                 |   |  |        | 7,008 |   |                          |   | 37,637 |                  |  |   | 11,072                                     |   |  |                          | (649  | ) |  |   | 55,068 |  
|Comprehensive income:                                    |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Net income                                               |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | 5,020                                      |   |  |                          |      |   |  |   | 5,020  |  
|Other comprehensive income, net of tax                   |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   |                                           |   |  |                          | 1,063 |   |  |   | 1,063  |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Total comprehensive income                               |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   | 6,083  |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Cash dividends of $.20 per share                         |  |                                          |   |  |        |      |   |                          |   |       |                  |  |   | (1,348                                     | ) |  |                          |      |   |  |   | (1,348 | )
|Shares repurchased                                       |  | (540,791                                  | ) |  |        | (541  | ) |                          |   | (5,539 | )                |  |   |                                           |   |  |                          |      |   |  |   | (6,080 | )
|Expense recognized in connection with stock options      |  |                                          |   |  |        |      |   |                          |   | 52     |                  |  |   |                                           |   |  |                          |      |   |  |   | 52     |  
|Common stock issued pursuant to:                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Exercise of stock options                                |  | 34,998                                    |   |  |        | 35    |   |                          |   | 176    |                  |  |   |                                           |   |  |                          |      |   |  |   | 211    |  
|Tax benefit from the exercise of stock options           |  |                                          |   |  |        |      |   |                          |   | 38     |                  |  |   |                                           |   |  |                          |      |   |  |   | 38     |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  
|Balance, December 31, 2007                               |  | 6,502,288                                 |   |  | $      | 6,502 |   |                          | $ | 32,364 |                  |  | $ | 14,744                                     |   |  | $                        | 414   |   |  | $ | 54,024 |  
|                                                         |  |                                           |   |  |        |       |   |                          |   |        |                  |  |   |                                            |   |  |                          |       |   |  |   |        |  

See accompanying notes to these consolidated financial statements.



58



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2007, 2006 and 2005





|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | 2007                   |         |   | 2006 |   |         | 2005 | 
|                                                                                           |  | (Amounts in thousands) |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |  |                        |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                 |  | $                      | 5,020   |   |      | $ | 4,276   |      |  | $ | 4,508   |  
|Adjustments to reconcile net income to net cash provided by operating activities:          |  |                        |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                              |  |                        | 937     |   |      |   | 1,072   |      |  |   | 1,219   |  
|Provision for loan losses                                                                  |  |                        | 1,033   |   |      |   | 2,612   |      |  |   | 809     |  
|Deferred income taxes                                                                      |  |                        | (342    | ) |      |   | (938    | )    |  |   | 559     |  
|Gain on sale of investment securities                                                      |  |                        | (20     | ) |      |   | (60     | )    |  |   | (10     | )
|Other than temporary impairment of non-marketable equity security                          |  |                        | 76      |   |      |   |        |      |  |   |        |  
|Loss on sale of foreclosed real estate                                                     |  |                        |        |   |      |   | 144     |      |  |   | 116     |  
|(Gain) loss on disposal of fixed assets                                                    |  |                        | (8      | ) |      |   | 7       |      |  |   |        |  
|Recognition of hedge ineffectiveness                                                       |  |                        | (214    | ) |      |   | (10     | )    |  |   |        |  
|Decrease in capital lease obligation                                                       |  |                        | (9      | ) |      |   | (9      | )    |  |   | (8      | )
|Equity compensation expense                                                                |  |                        | 52      |   |      |   | 375     |      |  |   |        |  
|Change in assets and liabilities:                                                          |  |                        |         |   |      |   |         |      |  |   |         |  
|Decrease (increase) in accrued interest receivable                                         |  |                        | 298     |   |      |   | (506    | )    |  |   | (735    | )
|Decrease (increase) in other assets                                                        |  |                        | 454     |   |      |   | (97     | )    |  |   | (723    | )
|Increase (decrease) in accrued expenses and other liabilities                              |  |                        | 905     |   |      |   | (551    | )    |  |   | 268     |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                  |  |                        | 8,182   |   |      |   | 6,315   |      |  |   | 6,003   |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |  |                        |         |   |      |   |         |      |  |   |         |  
|Purchases of securities available for sale                                                 |  |                        | (29,799 | ) |      |   | (13,299 | )    |  |   | (25,574 | )
|Proceeds from sales of securities available for sale                                       |  |                        | 6,460   |   |      |   | 3,909   |      |  |   | 2,801   |  
|Proceeds from maturities, calls and principal re-payments of securities available for sale |  |                        | 12,823  |   |      |   | 8,763   |      |  |   | 11,228  |  
|Proceeds from maturities, calls and principal re-payments of securities held to maturity   |  |                        | 400     |   |      |   |        |      |  |   |        |  
|Net increase in loans from originations and repayments                                     |  |                        | (23,503 | ) |      |   | (39,375 | )    |  |   | (25,168 | )
|Purchases of bank premises and equipment                                                   |  |                        | (379    | ) |      |   | (326    | )    |  |   | (1,867  | )
|Proceeds from sale of bank premises and equipment                                          |  |                        | 8       |   |      |   | 6       |      |  |   |        |  
|Proceeds from sale of foreclosed real estate                                               |  |                        | 249     |   |      |   | 384     |      |  |   | 365     |  
|Investment in non-marketable equity securities                                             |  |                        | (316    | ) |      |   | (191    | )    |  |   | (99     | )
|Redemption of non-marketable equity securities                                             |  |                        |        |   |      |   | 308     |      |  |   | 143     |  
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  
|NET CASH USED BY INVESTING ACTIVITIES                                                      |  |                        | (34,057 | ) |      |   | (39,821 | )    |  |   | (38,171 | )
|                                                                                           |  |                        |         |   |      |   |         |      |  |   |         |  

See accompanying notes to these consolidated financial statements.



59



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years
Ended December 31, 2007, 2006 and 2005





|                                                                                                                 |  |                        |         |   |      |   |        |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                 |  | 2007                   |         |   | 2006 |   |        | 2005 | 
|                                                                                                                 |  | (Amounts in thousands) |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                             |  |                        |         |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in demand deposits                                                                       |  |                        | (28,662 | ) |      |   | 31,916 |      |  |   | 17,092  |  
|Net increase in time deposits                                                                                    |  |                        | 27,319  |   |      |   | 23,820 |      |  |   | 21,644  |  
|Proceeds from issuance of common stock                                                                           |  |                        | 211     |   |      |   | 912    |      |  |   | 10,907  |  
|Repurchase of common stock                                                                                       |  |                        | (6,080  | ) |      |   | (263   | )    |  |   |        |  
|Repayment of Federal Home Loan Bank advances                                                                     |  |                        |        |   |      |   | (5,111 | )    |  |   | (1,667  | )
|Redemption of long-term debt                                                                                     |  |                        | (3,608  | ) |      |   |       |      |  |   |        |  
|Excess tax benefits from stock options exercised                                                                 |  |                        | 38      |   |      |   | 170    |      |  |   |        |  
|Cash dividends paid on common stock                                                                              |  |                        | (1,348  | ) |      |   | (1,382 | )    |  |   | (861    | )
|Net increase (decrease) in securities sold under agreement to repurchase and federal funds purchased             |  |                        | 16,036  |   |      |   | 3,740  |      |  |   | (14,030 | )
|                                                                                                                 |  |                        |         |   |      |   |        |      |  |   |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                                        |  |                        | 3,906   |   |      |   | 53,802 |      |  |   | 33,085  |  
|                                                                                                                 |  |                        |         |   |      |   |        |      |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                             |  |                        | (21,969 | ) |      |   | 20,296 |      |  |   | 917     |  
|CASH AND CASH EQUIVALENTS, BEGINNING                                                                             |  |                        | 37,245  |   |      |   | 16,949 |      |  |   | 16,032  |  
|                                                                                                                 |  |                        |         |   |      |   |        |      |  |   |         |  
|CASH AND CASH EQUIVALENTS, ENDING                                                                                |  | $                      | 15,276  |   |      | $ | 37,245 |      |  | $ | 16,949  |  
|                                                                                                                 |  |                        |         |   |      |   |        |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                                |  |                        |         |   |      |   |        |      |  |   |         |  
|                                                                                                                 |  |                        |        
|Cash paid during the year for:                                                                                   |  |                        |         |   |      |   |        |      |  |   |         |  
|Interest                                                                                                         |  | $                      | 15,957  |   |      | $ | 13,725 |      |  | $ | 9,047   |  
|Income taxes                                                                                                     |  |                        | 2,875   |   |      |   | 3,992  |      |  |   | 1,572   |  
|                                                                                                                 |  |                        |        
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                           |  |                        |         |   |      |   |        |      |  |   |         |  
|Transfer of loans to foreclosed assets                                                                           |  | $                      | 54      |   |      | $ | 337    |      |  |   | 483     |  
|Change in unrealized gain (losses) on available-for-sale securities and cash flow hedging activities, net of tax |  |                        | 1,063   |   |      |   | 94     |      |  |   | (640    | )

See accompanying notes to these consolidated financial statements.



60



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007, 2006 and 2005



NOTE 1 - ORGANIZATION AND OPERATIONS

In April 2000, American Community Bancshares, Inc. (Bancshares) was formed as a holding company for American Community Bank. Upon formation, one share of
Bancshares $1 par value common stock was exchanged for each of the then outstanding 1,492,063 shares of American Community Banks $5 par value common stock. Bancshares currently has no material operations and conducts no business on its
own other than owning its wholly owned subsidiary, American Community Bank.

American Community Bank (American Community) was incorporated on
November 13, 1998 and began banking operations on November 16, 1998. The Bank is engaged in general commercial and retail banking in Union and Mecklenburg Counties of North Carolina and Cherokee and York Counties of South Carolina,
operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

First National Bank of the Carolinas (First National) commenced operations on October 18, 1996 and was purchased by Bancshares on
April 15, 2004. First National was merged into American Community on April 1, 2006.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated
financial statements include the accounts of American Community Bancshares, Inc. and American Community Bank, together referred to herein as the Company. All significant inter-company transactions and balances are eliminated in
consolidation.

Use of Estimates

The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance for loan losses.

Cash Equivalents

For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash
and due from banks and interest-earning deposits with banks.

Investment Securities

Investment securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to maturity. Available-for-sale securities are reported at fair value and consist of securities not classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities, net of deferred income taxes, are reported as a net amount in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the
specific-identification method.

Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are
other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings.

Premiums and discounts are recognized in interest income using the interest method over the period to maturity.



61



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal adjusted
for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is accrued on the unpaid principal balance outstanding. Loan
origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. When doubt exists as to collectability of a loan (typically 90 days delinquent or impaired), the loan is placed
on non-accrual status. When a loan is placed on non-accrual status, interest accrued prior to the judgment of uncollectability is charged to income. Loans are returned to an accruing status only as payments are received and when collection of all
principal and interest is no longer in doubt. Payments received on such non-accrual loans are applied first to outstanding loan amounts and next as a recovery of lost interest. In all cases, loans are placed on non-accrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.

Allowance for Loan Losses

The allowance for loan losses is established as probable losses are estimated to have occurred through a provision for loan losses charged to earnings. The provision for
loan losses is based upon managements best estimate of the amount needed to maintain the allowance for loan losses at an adequate level. Loan losses are charged against the allowance when management believes the uncollectibility of a loan
balance is evident. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review of the collectibility of the loans in light of the current status of the portfolio, historical experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrowers ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Management segments the loan portfolio by loan type in considering each of the aforementioned factors and their impact upon the
level of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the
evaluations. In addition, regulatory examiners may require American Community Bank to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Loans are considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired
loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan
exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses.

Foreclosed Real Estate

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the lower of cost or fair value less estimated
cost to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations
are included in other expenses.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the shorter of the estimated useful lives of the assets or, for those assets leased under capital
leases, the lease term. Estimated useful lives are 35-40 years for buildings and 3 to 7 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred, and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation
are removed from the accounts and any gains or losses are reflected in current operations.

Non-marketable equity securities

As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta (FHLB), Bankers Bank, and the Federal Reserve Bank of
Richmond. In addition, the Bank also invests in other equity investments for which the stock is not publicly traded. These investments are carried at cost.



62



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Intangible
Assets

The Companys acquisition of FNB Bancshares, Inc. generated goodwill of $9,838,173 and core deposit intangible assets of $854,329. The
Company uses a non-amortization approach to account for purchased goodwill. Intangible assets with finite useful lives are amortized over their useful lives. The carrying value of the core deposit intangible asset totaled $458,279, net of
amortization of $396,050, as of December 31, 2007. This intangible asset was determined by management to meet the criteria for recognition apart from goodwill and to have a finite life of 8 years. Amortization expense associated with the core
deposit intangible asset was $106,800 for the years ended December 31, 2007, 2006, and 2005. In accordance with the Companys estimate of approximate lives of the acquired deposit relationships, an 8 year straight-line amortization
schedule has been established for the core deposit intangible assets. Projected amortization expense for the years ending December 31, 2008, 2009, 2010 and 2011 is $106,800 per year. Projected amortization expense for the year ending
December 31, 2012 is $31,079.

Under generally accepted accounting principles, the Company
reviews its amortizable intangible assets for impairment when events or changes in circumstances indicated the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually as of April 15thand on an interim basis when events or circumstances change. Management completed the annual goodwill impairment tests as of April 15, 2007, which
indicated that no impairment had occurred. Management does not believe that events and circumstances subsequent to that date indicated that goodwill has been impaired.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the
temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. It is the Companys policy to recognize interest
and penalties associated with uncertain tax positions as components of income taxes. There were no interest or penalties accrued during the year. The Companys federal and state income tax returns are subject to examination for the years 2004,
2005 and 2006.

Stock Compensation Plans

Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123R) which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123 Accounting for Stock
Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of
the cost of employee services received in exchange for an award based on the grant date fair value of the award. SFAS No. 123R also amends SFAS No. 95 Statement of Cash Flows, to require that excess tax benefits be reported as financing
cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123R using the
modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus
recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.

Derivative Financial Instruments and Hedging Activities

In the normal course of business, the Company enters into derivative contracts to
manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All derivative financial instruments are recorded at fair value in the financial
statements.

On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a
trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of the
effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.



63



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



If a derivative
instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged items then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a
derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which
the hedged item affects income.

The Company formally documents all hedging relationships, including an assessment that the derivative instruments are
expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged items.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities and hedging activities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The Companys components of accumulated other comprehensive income are unrealized gains (losses) on available-for-sale securities and unrealized gains (losses) on hedging activities.

At December 31, 2007, accumulated other comprehensive income consisted of net unrealized gains on securities available for sale of $356,000 and net unrealized gains
on derivatives of $58,000. At December 31, 2006, accumulated other comprehensive loss consisted of net unrealized losses on securities available for sale of $563,000 and net unrealized losses on derivatives of $86,000.

Per Share Results

Basic and diluted net income per common share have
been computed by dividing net income for each period by the weighted average number of shares of common stock outstanding during each period after retroactively adjusting for the stock dividends.

Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate solely to outstanding stock options and warrants and are determined using the treasury stock method.

Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as
summarized below:



|                                                                                                                             |  |           |  |           |  |          
|---------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                                                                             |  | 2007      |  | 2006      |  | 2005     
|Weighted average number of common shares used in computing basic net income per share                                        |  | 6,779,635 |  | 6,913,534 |  | 6,364,336
|Effect of dilutive stock options and warrants                                                                                |  | 158,624   |  | 257,879   |  | 455,187  
|                                                                                                                             |  |           |  |           |  |          
|Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share |  | 6,938,259 |  | 7,171,413 |  | 6,819,523
|                                                                                                                             |  |           |  |           |  |          

For the year ended December 31, 2007, there were 90,329 options that were anti-dilutive since the exercise
price exceeded the average market price for the year. For the year ended December 31, 2006 there were 93,000 options that were anti-dilutive. For the year ended December 31, 2005 there were no options that were anti-dilutive for the year.
Anti-dilutive options are omitted from the calculation of diluted earnings per share.



64



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Segment
Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires management to report selected
financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments
internally identified to evaluate performance and resource allocation. In all material respects, the Companys operations are entirely within the commercial banking segment, and the consolidated financial statements presented herein reflect the
results of that segment. The Company has no foreign operations or customers.

Recent Accounting Pronouncements

FIN 48

The Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. FIN 48 applies to all tax positions within the scope of SFAS 109. This statement requires a more-likely-than-not
threshold for initial recognition of a tax benefit in the financial statements, and requires measurement of the amount of benefit to be recognized based upon the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement with the taxing authority. The Company has analyzed its tax positions pursuant to the requirements of FIN 48 and determined that no liability for unrecognized tax benefits is needed. Therefore, the adoption of FIN 48 did not have
a material effect on the Companys consolidated financial statements.

FAS 141R

In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting
how the Corporation will account for business combinations under this Statement include: the acquisition date will be date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests
in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the
definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related
restructuring costs that do not meet the criteria in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation
allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will
require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be
collected for acquired loans, and an enhanced goodwill rollforward.

The Company will be required to prospectively apply SFAS 141(R) to all business
combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting
for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition,
results of operations, liquidity, and the disclosures that will be presented in the consolidated financial statements.

FAS 157

In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 157, Fair Value Measurements (FASB No. 157),
which enhances existing guidance for measuring assets and liabilities using fair value and requires additional disclosure about the use of fair value for measurement. The Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of 2008, and is currently evaluating the impact of the adoption of SFAS No. 157 on
its financial position and results of operations, including the valuation methods and support for the assumptions that underlie the valuation.



65



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



FAS 159

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of
FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in SFAS 159 are elective;
however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007. The Company did not elect the fair value option as of January 1, 2008 for any of its financial assets or financial liabilities and, accordingly, the adoption of the statement did not
have a material impact on the Companys consolidated financial statements.

Reclassifications

Certain amounts in the 2006 and 2005 consolidated financial statements have been reclassified to conform to the 2007 presentation. The reclassifications had no effect on
net income or stockholders equity as previously reported.



66



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 3 -
INVESTMENT SECURITIES

The following is a summary of the securities portfolio by major classification at December 31, 2007 and 2006:



|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|----------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | --------- | --- |  | - | ------
|                                    |  | 2007                  
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies           |  | $                      | 13,635 |                      | $ | 341                   |  | $         | 10  |  | $ | 13,966
|Mortgage-backed securities          |  |                        | 49,116 |                      |   | 385                   |  |           | 196 |  |   | 49,305
|State and municipal bonds           |  |                        | 10,762 |                      |   | 109                   |  |           | 44  |  |   | 10,827
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        | 73,513 |                      |   | 835                   |  |           | 250 |  |   | 74,098
|Marketable equity securities        |  |                        | 907    |                      |   | 7                     |  |           |    |  |   | 914   
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities available for sale |  | $                      | 74,420 |                      | $ | 842                   |  | $         | 250 |  | $ | 75,012
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        |        |                     
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities held to maturity:        |  |                        |        |                      |   |                       |  |           |     |  |   |       
|State and municipal bonds           |  | $                      | 1,770  |                      | $ | 34                    |  | $         |    |  | $ | 1,804 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities held to maturity   |  | $                      | 1,770  |                      | $ | 34                    |  | $         |    |  | $ | 1,804 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    | 
|                                    |  | 2006                  
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities available for sale:      |  |                        |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies           |  | $                      | 20,202 |                      | $ | 44                    |  | $         | 117 |  | $ | 20,129
|Mortgage-backed securities          |  |                        | 37,047 |                      |   | 10                    |  |           | 835 |  |   | 36,222
|State and municipal bonds           |  |                        | 6,265  |                      |   | 32                    |  |           | 42  |  |   | 6,255 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        | 63,514 |                      |   | 86                    |  |           | 994 |  |   | 62,606
|Marketable equity securities        |  |                        | 407    |                      |   | 5                     |  |           |    |  |   | 412   
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities available for sale |  | $                      | 63,921 |                      | $ | 91                    |  | $         | 994 |  | $ | 63,018
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|                                    |  |                        |        |                     
|                                    |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                    |  | (Dollars in thousands)
|Securities held to maturity:        |  |                        |        |                      |   |                       |  |           |     |  |   |       
|State and municipal bonds           |  | $                      | 2,174  |                      | $ | 18                    |  | $         |    |  | $ | 2,192 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       
|Total securities held to maturity   |  | $                      | 2,174  |                      | $ | 18                    |  | $         |    |  | $ | 2,192 
|                                    |  |                        |        |                      |   |                       |  |           |     |  |   |       



67



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 3
- INVESTMENT SECURITIES (Continued)



The amortized cost and fair values of
securities (excluding marketable equity securities) at December 31, 2007 by contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay
obligations.



|                                       |  |                        |        |           |   |       
|-------------------------------------- |  | ---------------------- | ------ | --------- | - | ------
|                                       |  | At December 31, 2007  
|                                       |  | AmortizedCost          |        | FairValue
|                                       |  | (Dollars in thousands)
|Due within one year                    |  | $                      | 3,023  |           | $ | 3,023 
|Due after one year through five years  |  |                        | 2,790  |           |   | 2,794 
|Due after five years through ten years |  |                        | 21,254 |           |   | 21,612
|Due after ten years                    |  |                        | 48,216 |           |   | 48,473
|                                       |  |                        |        |           |   |       
|Total                                  |  | $                      | 75,283 |           | $ | 75,902
|                                       |  |                        |        |           |   |       

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have
been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal
prepayments.

For the year ended December 31, 2007, proceeds from sales of investment securities available for sale amounted to $6,459,570. Gross
realized gains in 2007 from these sales amounted to $19,445. For the years ended December 31, 2006 and 2005, proceeds from sales of investment securities available for sale amounted to $3,908,955 and $2,801,183 respectively. Gross realized
gains in 2006 and 2005 from these sales amounted to $60,072 and $10,200, respectively.

Available for sale securities, consisting of U. S. government
agencies, mortgage-backed securities and state and municipal bonds, with carrying values of $13,095,000 and $6,253,000 at December 31, 2007 and 2006, respectively, were pledged to secure public monies on deposit as required by law. Available
for sale securities, consisting of US government agencies and mortgage-backed securities, with carrying values of $18,535,000 and $17,272,000 were pledged to secure securities sold under agreements to repurchase at December 31, 2007 and 2006,
respectively.

The following tables show investment gross unrealized losses and fair values, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the
securities were purchased. The 2007 unrealized losses on investment securities relate to two U.S. Government agency securities, twenty-six mortgage-backed securities, and nine municipal securities. The 2006 unrealized losses on investment securities
relate to nine U.S. Government agency securities, thirty-four mortgage-backed securities, and nine municipal securities. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when
the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuers ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
The Company has the positive intent and ability to hold until recovery all investment securities with unrealized losses at December 31, 2007.



|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ---------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | 2007                  
|                                      |  | Less Than 12 Months    |       | 12 Months or More |   | Total    
|                                      |  | Fairvalue              |       | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |        | Fairvalue |   | Unrealizedlosses
|                                      |  | (Dollars in thousands)
|Securities available for sale:        |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|U.S. government agencies              |  | $                      |      |                   | $ |          |  | $                | 2,731  |           | $ | 10               |  | $ | 2,731  |  | $ | 10 
|Mortgage-backed securities            |  |                        | 2,891 |                   |   | 12        |  |                  | 21,674 |           |   | 184              |  |   | 24,565 |  |   | 196
|State and municipal bonds             |  |                        | 1,529 |                   |   | 19        |  |                  | 1,301  |           |   | 25               |  |   | 2,830  |  |   | 44 
|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities |  | $                      | 4,420 |                   | $ | 31        |  | $                | 25,706 |           | $ | 219              |  | $ | 30,126 |  | $ | 250
|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    



68



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 3
- INVESTMENT SECURITIES (Continued)



|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ---------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | 2006                  
|                                      |  | Less Than 12 Months    |       | 12 Months or More |   | Total    
|                                      |  | Fairvalue              |       | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |        | Fairvalue |   | Unrealizedlosses
|                                      |  | (Dollars in thousands)
|Securities available for sale:        |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|U.S. government agencies              |  | $                      | 5,920 |                   | $ | 27        |  | $                | 9,016  |           | $ | 90               |  | $ | 14,936 |  | $ | 117
|Mortgage-backed securities            |  |                        | 3,322 |                   |   | 3         |  |                  | 30,907 |           |   | 832              |  |   | 34,229 |  |   | 835
|State and municipal bonds             |  |                        | 394   |                   |   | 11        |  |                  | 1,853  |           |   | 31               |  |   | 2,247  |  |   | 42 
|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities |  | $                      | 9,874 |                   | $ | 41        |  | $                | 41,776 |           | $ | 953              |  | $ | 51,650 |  | $ | 994
|                                      |  |                        |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    

NOTE 4 - NON-MARKETABLE EQUITY SECURITIES CARRIED AT COST

The aggregate cost of the Companys cost method investments totaled $2,119,228 at December 31, 2007. The Company periodically evaluates these investments for
any impairment which would be deemed other than temporary. As part of its evaluation, the Company determined that the fair value of an investment in a trust company, whose primary shareholders are ten community banks located throughout North
Carolina, was less than the original cost of the investment and that the decline in fair value was not temporary in nature. As a result, the Company wrote down its original investment in the trust company of $277,738 by $75,747, to an estimated fair
value of $201,991. This write down was recorded as a charge to earnings during the year ended December 31, 2007. This trust company has two common directors with the Company.

Of the remaining $1,917,237 in equity investments, securities in the Federal Home Loan Bank and Silverton Bank, N.A. amounted to $1,158,000 and $84,237, respectively, at December 31, 2007. Because of the
redemption provisions of issuers, the Company estimated that the fair value equaled or exceeded the cost of these investments and the investments were not impaired. The Company did not identify any events or changes in circumstances that may have
had a significant adverse effect on the fair value of the remaining $675,000 cost method investments.

NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Following is a summary of loans at December 31, 2007 and 2006:



|                                |  |                        |         |   |         |        |   |        |   |         |         |  |        |  
|------------------------------- |  | ---------------------- | ------- | - | ------- | ------ | - | ------ | - | ------- | ------- |  | ------ | -
|                                |  | 2007                   |         |   | 2006    |       
|                                |  | Amount                 |         |   | Percent |        |   | Amount |   |         | Percent | 
|                                |  | (Dollars in thousands) |        
|Real estate mortgage loans:     |  |                        |         |   |         |        |   |        |   |         |         |  |        |  
|1-4 family                      |  | $                      | 35,680  |   |         | 9.08   | % |        | $ | 32,414  |         |  | 8.75   | %
|Commercial mortgage             |  |                        | 104,209 |   |         | 26.51  | % |        |   | 96,946  |         |  | 26.16  | %
|Construction/development        |  |                        | 136,531 |   |         | 34.73  | % |        |   | 93,643  |         |  | 25.27  | %
|Home equity lines of credit     |  |                        | 34,784  |   |         | 8.85   | % |        |   | 24,388  |         |  | 6.58   | %
|Commercial and industrial loans |  |                        | 57,958  |   |         | 14.74  | % |        |   | 78,086  |         |  | 21.07  | %
|Loans to individuals            |  |                        | 20,010  |   |         | 5.09   | % |        |   | 36,782  |         |  | 9.93   | %
|Lease financing, net            |  |                        | 3,941   |   |         | 1.00   | % |        |   | 8,316   |         |  | 2.24   | %
|                                |  |                        |         |   |         |        |   |        |   |         |         |  |        |  
|Subtotal                        |  |                        | 393,113 |   |         | 100.00 | % |        |   | 370,575 |         |  | 100.00 | %
|                                |  |                        |         |   |         |        |   |        |   |         |         |  |        |  
|Allowance for loan losses       |  |                        | (5,740  | ) |         |        |   |        |   | (5,628  | )       |  |        |  
|Net unamortized deferred costs  |  |                        | (154    | ) |         |        |   |        |   | (144    | )       |  |        |  
|                                |  |                        |         |   |         |        |   |        |   |         |         |  |        |  
|Total                           |  | $                      | 387,219 |   |         |        |   |        | $ | 364,803 |         |  |        |  
|                                |  |                        |         |   |         |        |   |        |   |         |         |  |        |  

Loans are primarily made in Union and Mecklenburg Counties, North Carolina and Cherokee and York Counties, South
Carolina. Real estate loans can be affected by the condition of the local real estate market. Commercial and installment loans can be affected by the local economic conditions.



69



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 5
- LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)



At December 31,
2007 and 2006, respectively, there were $-0- and $291,000 of loans past due 90 days or more which were still accruing interest. Impaired loans which aggregated $2,477,000 and $1,915,000 and had related allowances for loan losses aggregating $941,000
and $1,135,000 at December 31, 2007 and 2006, respectively, consisted primarily of non-accrual loans and leases. There were no impaired loans without an allowance at December 31, 2007 or 2006, respectively. The average recorded investment
in impaired loans during the years ended December 31, 2007 and 2006 was $1,565,000 and $1,425,000, respectively. Non-accrual loans did not materially affect interest income for the years ended December 31, 2007, 2006 and 2005.

The Company has granted loans to certain directors and executive officers of the Bank and their related interests. Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in managements opinion, do not involve more than the normal risk of collectibility. All loans to directors
and executive officers or their interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their related interests follows:



|                                                                |  |                        |        |  
|--------------------------------------------------------------- |  | ---------------------- | ------ | -
|                                                                |  | (Dollars in thousands) |       
|Loans to directors and officers as a group at January 1, 2007   |  | $                      | 2,600  |  
|Disbursements during the year ended December 31, 2007           |  |                        | 4,358  |  
|Amounts collected during the year ended December 31, 2007       |  |                        | (3,433 | )
|                                                                |  |                        |        |  
|Loans to directors and officers as a group at December 31, 2007 |  | $                      | 3,525  |  
|                                                                |  |                        |        |  

At December 31, 2007, the Company had pre-approved but unused lines of credit totaling $2,036,000 to
directors, executive officers and their related interests.

An analysis of the allowance for loan losses follows:



|                                |  |                        |       |   |      |   |       |      |  |   |       |  
|------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                |  | 2007                   |       |   | 2006 |   |       | 2005 | 
|                                |  | (Dollars in thousands) |      
|Balance at beginning of year    |  | $                      | 5,628 |   |      | $ | 4,331 |      |  | $ | 3,488 |  
|                                |  |                        |       |   |      |   |       |      |  |   |       |  
|Provision charged to operations |  |                        | 1,033 |   |      |   | 2,612 |      |  |   | 809   |  
|                                |  |                        |       |   |      |   |       |      |  |   |       |  
|Charge-offs                     |  |                        | 1,035 |   |      |   | 1,350 |      |  |   | 81    |  
|Recoveries                      |  |                        | (114  | ) |      |   | (35   | )    |  |   | (115  | )
|                                |  |                        |       |   |      |   |       |      |  |   |       |  
|Net charge-offs (recoveries)    |  |                        | 921   |   |      |   | 1,315 |      |  |   | (34   | )
|                                |  |                        |       |   |      |   |       |      |  |   |       |  
|Balance at end of year          |  | $                      | 5,740 |   |      | $ | 5,628 |      |  | $ | 4,331 |  
|                                |  |                        |       |   |      |   |       |      |  |   |       |  

NOTE 6 - BANK PREMISES AND EQUIPMENT

Following is a summary of bank premises and equipment at December 31, 2007 and 2006:



|                                          |  |                        |        |   |      |   |        |  
|----------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | 2007                   |        |   | 2006 |  
|                                          |  | (Dollars in thousands) |       
|Land                                      |  | $                      | 1,668  |   |      | $ | 1,668  |  
|Buildings and leasehold improvements      |  |                        | 7,192  |   |      |   | 7,129  |  
|Furniture and equipment                   |  |                        | 4,095  |   |      |   | 3,895  |  
|                                          |  |                        |        |   |      |   |        |  
|                                          |  |                        | 12,955 |   |      |   | 12,692 |  
|Accumulated depreciation and amortization |  |                        | (4,261 | ) |      |   | (3,587 | )
|                                          |  |                        |        |   |      |   |        |  
|Total                                     |  | $                      | 8,694  |   |      | $ | 9,105  |  
|                                          |  |                        |        |   |      |   |        |  

Depreciation and amortization expense amounting to $791,000, $868,000 and $874,000 for the years ended
December 31, 2007, 2006 and 2005, respectively, is included in occupancy and equipment expense.



70



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 7
- DEPOSITS

Time deposits in denominations of $100,000 or more were $143,732,000 and $121,901,000 at December 31, 2007 and 2006, respectively.
Brokered deposits totaled $12,001,000 and $8,628,000 at December 31, 2007 and 2006, respectively.

At December 31, 2007, the scheduled maturities
of certificates of deposit were as follows:



|           |  |                        |         |                  |   |         |  |   |        
|---------- |  | ---------------------- | ------- | ---------------- | - | ------- |  | - | -------
|           |  | Less than$ 100,000     |         | $ 100,000or more |   | Total  
|           |  | (Dollars in thousands)
|2008       |  | $                      | 100,139 |                  | $ | 128,466 |  | $ | 228,605
|2009       |  |                        | 6,629   |                  |   | 10,132  |  |   | 16,761 
|2010       |  |                        | 1,554   |                  |   | 3,433   |  |   | 4,987  
|2011       |  |                        | 476     |                  |   | 438     |  |   | 914    
|2012       |  |                        | 747     |                  |   | 1,263   |  |   | 2,010  
|Thereafter |  |                        |        |                  |   |        |  |   |       
|           |  |                        |         |                  |   |         |  |   |        
|Total      |  | $                      | 109,545 |                  | $ | 143,732 |  | $ | 253,277
|           |  |                        |         |                  |   |         |  |   |        

NOTE 8 - BORROWINGS

Borrowings consist of advances from the Federal Home Loan Bank of Atlanta, securities sold under agreements to repurchase, federal funds purchased, junior subordinated debt and obligations under a capitalized lease for the Banks main
office facility.

The following table provides a summary of our borrowings:



|                               |  |                        |        |      |   |       
|------------------------------ |  | ---------------------- | ------ | ---- | - | ------
|                               |  | 2007                   |        | 2006
|                               |  | (Dollars in thousands)
|Short-term borrowings          |  |                        |        |      |   |       
|Repurchase agreements          |  | $                      | 18,193 |      | $ | 15,473
|Federal funds sold             |  |                        | 13,316 |      |   |      
|                               |  |                        |        |      |   |       
|                               |  | $                      | 31,509 |      | $ | 15,473
|                               |  |                        |        |      |   |       
|Long-term debt                 |  |                        |        |      |   |       
|FHLB advances                  |  | $                      | 6,000  |      | $ | 6,000 
|Capitalized lease obligation   |  |                        | 1,685  |      |   | 1,694 
|Junior subordinated debentures |  |                        | 10,310 |      |   | 13,918
|                               |  |                        |        |      |   |       
|                               |  | $                      | 17,995 |      | $ | 21,612
|                               |  |                        |        |      |   |       

At December 31, 2007 and 2006, Federal Home Loan Bank advances were as follows:



|                                             |  |                    |  |                        |       |      |            
|-------------------------------------------- |  | ------------------ |  | ---------------------- | ----- | ---- | -----------
|                                             |  | Call Feature       |  | Amount                 |       | Rate
|                                             |  |                    |  | (Dollars in thousands) |       |     
|Due on July 16, 2012                         |  | Callable quarterly |  | $                      | 1,000 |      | 3.90% Fixed
|Due on February 25, 2013                     |  | Callable quarterly |  |                        | 5,000 |      | 3.45% Fixed
|                                             |  |                    |  |                        |       |      |            
|Total FHLB borrowings/ weighted average rate |  |                    |  | $                      | 6,000 |      | 3.53%      
|                                             |  |                    |  |                        |       |      |            

Pursuant to a collateral agreement with the FHLB, advances are collateralized by all the Companys FHLB stock
of $1,158,000, qualifying first mortgage loans and qualifying commercial real estate. The balance of qualifying first mortgage loans and qualifying commercial real estate as of December 31, 2007 was approximately $13,459,000. This agreement
with the FHLB provides for a line of credit up to 15% of the Banks assets.

The Company also had unused lines of credit totaling $16.2 million from
correspondent banks at December 31, 2007 and 2006.



71



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 8
- BORROWINGS (Continued)



Federal funds purchased and securities sold under
agreements to repurchase, which generally mature 1 to 4 days from the transaction date, at December 31, 2007 and 2006 are summarized below:



|                                                     |  |                        |        |   |      |   |        |  
|---------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2007                   |        |   | 2006 |  
|                                                     |  | (Dollars in thousands) |       
|Outstanding balance at December 31                   |  | $                      | 31,509 |   |      | $ | 15,473 |  
|Year-end weighted average rate                       |  |                        | 3.61   | % |      |   | 3.69   | %
|Average outstanding during the year                  |  |                        | 21,317 |   |      |   | 14,667 |  
|Average rate for the year                            |  |                        | 3.71   | % |      |   | 3.51   | %
|Maximum outstanding at any month-end during the year |  |                        | 31,509 |   |      |   | 19,430 |  

Available for sale securities, consisting of US government agencies and mortgage-backed securities, with carrying
values of $18,535,000 and $17,272,000 were pledged to secure securities sold under agreements to repurchase at December 31, 2007 and 2006, respectively and are held at an independent correspondent bank.

NOTE 9 - LEASES

Operating Leases

The Company has entered into non-cancelable operating leases for the land on which its main office is located and for other branch facilities and equipment. These leases
have terms from five to thirty years. In 2002, the Company entered into a sale-leaseback arrangement. Under the arrangement, the Company sold its Marshville branch property and leased it back for a period of ten years with two renewal options for
five years each. The leaseback has been accounted for as an operating lease. The gain of $147,156 realized in this transaction has been deferred and is being amortized to income in proportion to rental expense over the term of the lease. Future
rentals under these leases are as follows:



|                  |  |                        |      
|----------------- |  | ---------------------- | -----
|                  |  | (Dollars in thousands)
|2008              |  | $                      | 782  
|2009              |  |                        | 770  
|2010              |  |                        | 497  
|2011              |  |                        | 352  
|2012              |  |                        | 279  
|2013 - thereafter |  |                        | 2,089
|                  |  |                        |      
|Total             |  | $                      | 4,769
|                  |  |                        |      

Total rent expense under operating leases was approximately $790,000, $783,000 and $721,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.

Capital Lease Obligation

The Company leases its main office facility under a capital lease. Leases that meet the criteria for capitalization are recorded as assets and the related obligations are reflected as capital lease obligations on the
accompanying balance sheets. Amortization of property under capital lease is included in depreciation expense. Included in premises and equipment at December 31, 2007 and 2006 is $1.7 million as the capitalized cost of the Companys main
office and accumulated amortization of $349,000 and $305,000 at December 31, 2007 and 2006, respectively.



72



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 9
- LEASES (Continued)



At December 31, 2007, aggregate future minimum
lease payments due under this capital lease obligation are as follows:



|                                            |  |                        |        |  
|------------------------------------------- |  | ---------------------- | ------ | -
|                                            |  | (Dollars in thousands) |       
|2008                                        |  | $                      | 148    |  
|2009                                        |  |                        | 148    |  
|2010                                        |  |                        | 158    |  
|2011                                        |  |                        | 158    |  
|2012                                        |  |                        | 158    |  
|2013 - 2029                                 |  |                        | 3,043  |  
|                                            |  |                        |        |  
|Total minimum lease payments                |  |                        | 3,813  |  
|Less amount representing interest           |  |                        | (2,128 | )
|                                            |  |                        |        |  
|Present value of net minimum lease payments |  | $                      | 1,685  |  
|                                            |  |                        |        |  

Both the land lease and capital leases for the Companys main office discussed above are leased from a former
director. Prior to the main facility being completed in November 2000, the Company leased land for its temporary banking facility from that same director. In addition, the Marshville facility is leased from another former director. In January 2003,
the Company signed an operating lease for a new branch facility in Mint Hill, North Carolina, with a former director. The lease has an initial term of ten years with two renewal options for five years each. Total lease payments of $476,000,
$495,000, and $457,000 were paid to these former directors under these leases during 2007, 2006 and 2005, respectively.

NOTE 10 - JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES

On December 31, 2001 and March 1, 2002, $2.0 million and $1.5 million, respectively, of trust preferred
securities were placed through American Community Capital Trust I (Capital Trust I). The preferred securities paid cumulative cash distributions quarterly at an annual rate of 9%. The dividends paid to holders of the capital trust
preferred securities, which were recorded as interest expense, were deductible for income tax purposes. The quarterly distributions could, at the option of the Company, be deferred up to five years. The preferred securities issued in 2001 and 2002
were redeemable on March 1, 2007 or afterwards at the par of $1,000 per share. These shares were redeemed on March 9, 2007.

On December 15,
2003, $10.0 million of trust preferred securities were placed through American Community Capital Trust II, Ltd. (Capital Trust II). The preferred securities pay cumulative cash distributions quarterly at a rate priced off 90-day LIBOR
plus 280 basis points. The dividends paid to holders of the capital trust preferred securities, which will be recorded as interest expense, are deductible for income tax purposes. The preferred securities issued in 2003 are redeemable on
December 15, 2008 or afterwards at par. Redemption is mandatory at December 15, 2033. The proceeds of the preferred securities were invested by Capital Trust II in $10.0 million principal amount of junior subordinated debentures of the
Company due December 15, 2033.

The Company fully and unconditionally guarantees the preferred securities through the combined operation of the
debentures and other related documents. The Companys obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. A portion of the preferred securities qualify as Tier 1 capital for
regulatory capital purposes.

A description of the Junior Subordinated Debentures outstanding is as follows:



|                                          |  |                 |  |              |      |              |      |  |              |  |                        |        |  |   |       
|----------------------------------------- |  | --------------- |  | ------------ | ---- | ------------ | ---- |  | ------------ |  | ---------------------- | ------ |  | - | ------
|Issuing Entity                            |  | Date ofIssuance |  | SharesIssued |      | InterestRate |      |  | MaturityDate |  | Principal Amount      
|                                          |  |                 |  |              | 2007 |              | 2006
|                                          |  |                 |  |              |      |              |      |  |              |  | (Dollars in thousands)
|American Community Capital Trust I        |  | 12/31/2001      |  | 2,000        |      | 9.00         | %    |  | 03/01/2032   |  | $                      |       |  | $ | 2,062 
|American Community Capital Trust I        |  | 03/01/2002      |  | 1,500        |      | 9.00         | %    |  | 03/01/2032   |  |                        |       |  |   | 1,546 
|American Community Capital Trust II, Ltd. |  | 12/15/2003      |  | 10,000       |      | 6.82         | %    |  | 12/15/2033   |  |                        | 10,310 |  |   | 10,310
|                                          |  |                 |  |              |      |              |      |  |              |  |                        |        |  |   |       
|Total                                     |  |                 |  |              |      |              |      |  |              |  | $                      | 10,310 |  | $ | 13,918
|                                          |  |                 |  |              |      |              |      |  |              |  |                        |        |  |   |       



73



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 11
- OTHER CONTRACTS

The Company entered into non-cancelable contracts with third parties for data processing services. The future minimum payments
required under these contracts for the years ending December 31, 2010 are as follows:



|      |  |                        |      
|----- |  | ---------------------- | -----
|      |  | (Dollars in thousands)
|2008  |  | $                      | 560  
|2009  |  |                        | 597  
|2010  |  |                        | 635  
|      |  |                        |      
|Total |  | $                      | 1,792
|      |  |                        |      

The above future payments are based upon the anticipated future growth of the Company and can therefore vary from
the above estimates in any year.

NOTE 12 - INCOME TAXES

The significant components of the provision for income taxes for the periods ended December 31, 2007, 2006 and 2005 are as follows:



|                                  |  |                        |       |   |      |   |       |      |  |   |      
|--------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | -----
|                                  |  | 2007                   |       |   | 2006 |   |       | 2005
|                                  |  | (Dollars in thousands)
|Current tax provision:            |  |                        |       |   |      |   |       |      |  |   |      
|Federal                           |  | $                      | 2,712 |   |      | $ | 2,899 |      |  | $ | 1,657
|State                             |  |                        | 499   |   |      |   | 479   |      |  |   | 423  
|                                  |  |                        |       |   |      |   |       |      |  |   |      
|                                  |  |                        | 3,211 |   |      |   | 3,378 |      |  |   | 2,080
|                                  |  |                        |       |   |      |   |       |      |  |   |      
|Deferred tax provision (benefit): |  |                        |       |   |      |   |       |      |  |   |      
|Federal                           |  |                        | (314  | ) |      |   | (848  | )    |  |   | 557  
|State                             |  |                        | (28   | ) |      |   | (90   | )    |  |   | 2    
|                                  |  |                        |       |   |      |   |       |      |  |   |      
|                                  |  |                        | (342  | ) |      |   | (938  | )    |  |   | 559  
|                                  |  |                        |       |   |      |   |       |      |  |   |      
|Provision for income taxes        |  | $                      | 2,869 |   |      | $ | 2,440 |      |  | $ | 2,639
|                                  |  |                        |       |   |      |   |       |      |  |   |      

The difference between the provision for income taxes and the amounts determined by applying the statutory federal
income tax rate of 34% to income before income taxes is summarized below:



|                                                     |  |                        |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2007                   |       |   | 2006 |   |       | 2005 | 
|                                                     |  | (Dollars in thousands) |      
|Income tax expense computed at statutory rate of 34% |  | $                      | 2,682 |   |      | $ | 2,283 |      |  | $ | 2,430 |  
|Effect of state income taxes                         |  |                        | 311   |   |      |   | 257   |      |  |   | 280   |  
|Tax exempt interest                                  |  |                        | (142  | ) |      |   | (102  | )    |  |   | (75   | )
|Other                                                |  |                        | 18    |   |      |   | 2     |      |  |   | 4     |  
|                                                     |  |                        |       |   |      |   |       |      |  |   |       |  
|Net provision for income taxes                       |  | $                      | 2,869 |   |      | $ | 2,440 |      |  | $ | 2,639 |  
|                                                     |  |                        |       |   |      |   |       |      |  |   |       |  



74



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 12
- INCOME TAXES (Continued)



Significant components of deferred taxes at
December 31, 2007 and 2006 are as follows:



|                                                       |  |                        |        |   |      |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                       |  | 2007                   |        |   | 2006 |  
|                                                       |  | (Dollars in thousands) |       
|Deferred tax assets:                                   |  |                        |        |   |      |   |        |  
|Allowance for loan losses                              |  | $                      | 1,921  |   |      | $ | 1,920  |  
|Capital lease                                          |  |                        | 129    |   |      |   | 115    |  
|Deferred gain on sale-leaseback                        |  |                        | 22     |   |      |   | 27     |  
|Income from deferred data processing payment           |  |                        | 43     |   |      |   | 57     |  
|Nondeductible accrued expenses                         |  |                        | 18     |   |      |   | 6      |  
|Stock compensation expense                             |  |                        | 143    |   |      |   | 123    |  
|Interest rate hedges                                   |  |                        |       |   |      |   | 54     |  
|Net unrealized losses on available-for-sale securities |  |                        |       |   |      |   | 339    |  
|Other                                                  |  |                        | 44     |   |      |   | 43     |  
|                                                       |  |                        |        |   |      |   |        |  
|Total deferred tax assets                              |  |                        | 2,320  |   |      |   | 2,684  |  
|                                                       |  |                        |        |   |      |   |        |  
|Deferred tax liabilities:                              |  |                        |        |   |      |   |        |  
|Premises and equipment                                 |  |                        | (144   | ) |      |   | (95    | )
|Leased property                                        |  |                        | (368   | ) |      |   | (631   | )
|Core deposit intangible                                |  |                        | (177   | ) |      |   | (218   | )
|Prepaid expenses                                       |  |                        | (57    | ) |      |   | (111   | )
|Interest rate hedges                                   |  |                        | (36    | ) |      |   |       |  
|Net unrealized gains on available-for-sale securities  |  |                        | (236   | ) |      |   |       |  
|Other                                                  |  |                        | (2     | ) |      |   | (6     | )
|                                                       |  |                        |        |   |      |   |        |  
|Total deferred tax liabilities                         |  |                        | (1,020 | ) |      |   | (1,061 | )
|                                                       |  |                        |        |   |      |   |        |  
|Net deferred tax assets                                |  | $                      | 1,300  |   |      | $ | 1,623  |  
|                                                       |  |                        |        |   |      |   |        |  

NOTE 13 - OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December 31, 2007, 2006 and 2005 are as follows:



|                                          |  |                        |       |      |   |       |  |   |      
|----------------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | - | -----
|                                          |  | 2007                   |       | 2006 |   | 2005 
|                                          |  | (Dollars in thousands)
|Postage, printing and office supplies     |  | $                      | 280   |      | $ | 340   |  | $ | 429  
|Advertising and promotion                 |  |                        | 195   |      |   | 189   |  |   | 274  
|Travel, meals, dues and subscriptions     |  |                        | 265   |      |   | 225   |  |   | 200  
|Telephone                                 |  |                        | 235   |      |   | 150   |  |   | 171  
|Data processing and technology            |  |                        | 953   |      |   | 835   |  |   | 537  
|Professional fees and contracted services |  |                        | 1,280 |      |   | 1,027 |  |   | 965  
|Other                                     |  |                        | 1,323 |      |   | 1,337 |  |   | 1,277
|                                          |  |                        |       |      |   |       |  |   |      
|Total                                     |  | $                      | 4,531 |      | $ | 4,103 |  | $ | 3,853
|                                          |  |                        |       |      |   |       |  |   |      

NOTE 14 - REGULATORY MATTERS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and Banks financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



75



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 14
- REGULATORY MATTERS (Continued)



The primary sources of funds for the
payment of dividends by American Community Bancshares, Inc. are interest and dividends received from its subsidiary, American Community Bank, combined with the proceeds from stock sold by the Company. American Community, as a North Carolina banking
corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such
limitation is in the public interest and is necessary to ensure a banks financial soundness.

Quantitative measures established by regulation to
ensure capital adequacy require the Company and its bank subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of
Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007 and 2006, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized American Community Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no
conditions or events since the notification that management believes have changed the Banks category. Prompt corrective action provisions are not applicable to bank holding companies.

The Companys and the Banks actual capital amounts and ratios as of December 31, 2007 and 2006 are presented in the following table.



|                        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|----------------------- |  | ---------------------- | ------ | ----- | ----------------------------- | - | ------ | --------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                        |  | Actual                 |        |       | MinimumFor CapitalRequirement |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                        |  | Amount                 |        | Ratio |                               |   | Amount |                                                                       | Ratio  |  |      | Amount |  | Ratio |       
|                        |  | (Dollars in thousands) |       
|December 31, 2007:      |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total Capital to Risk   |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Weighted Assets:        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  | $                      | 58,798 |       | 14.24                         | % |        | $                                                                     | 33,040 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|American Community Bank |  |                        | 47,012 |       | 11.42                         | % |        |                                                                       | 32,940 |  | 8.00 | %      |  |       | 41,175 |  | 10.00 | %
|Tier 1 Capital to Risk  |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Weighted Assets:        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  |                        | 53,625 |       | 12.98                         | % |        |                                                                       | 16,520 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank |  |                        | 41,862 |       | 10.17                         | % |        |                                                                       | 16,470 |  | 4.00 | %      |  |       | 20,587 |  | 5.00  | %
|Tier 1 Capital to       |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Average Assets:         |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  |                        | 53,625 |       | 11.02                         | % |        |                                                                       | 19,461 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank |  |                        | 41,862 |       | 8.58                          | % |        |                                                                       | 19,515 |  | 4.00 | %      |  |       | 24,394 |  | 5.00  | %



|                        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|----------------------- |  | ---------------------- | ------ | ----- | ----------------------------- | - | ------ | --------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                        |  | Actual                 |        |       | MinimumFor CapitalRequirement |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                        |  | Amount                 |        | Ratio |                               |   | Amount |                                                                       | Ratio  |  |      | Amount |  | Ratio |       
|                        |  | (Dollars in thousands) |       
|December 31, 2006:      |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total Capital to Risk   |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Weighted Assets:        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  | $                      | 64,194 |       | 16.18                         | % |        | $                                                                     | 31,748 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|American Community Bank |  |                        | 46,279 |       | 11.74                         | % |        |                                                                       | 31,524 |  | 8.00 | %      |  |       | 39,405 |  | 10.00 | %
|                        |  |                        |        |       |                               |  
|Tier 1 Capital to Risk  |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Weighted Assets:        |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  |                        | 59,231 |       | 14.93                         | % |        |                                                                       | 15,874 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank |  |                        | 41,345 |       | 10.49                         | % |        |                                                                       | 15,762 |  | 4.00 | %      |  |       | 19,702 |  | 5.00  | %
|                        |  |                        |        |       |                               |  
|Tier 1 Capital to       |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Average Assets:         |  |                        |        |       |                               |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated            |  |                        | 59,231 |       | 12.88                         | % |        |                                                                       | 18,401 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|American Community Bank |  |                        | 41,345 |       | 9.04                          | % |        |                                                                       | 18,289 |  | 4.00 | %      |  |       | 22,861 |  | 5.00  | %



76



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 15
- COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet credit risk in the
normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company, upon extension of credit is based on managements credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amounts of the Companys exposure to off-balance sheet credit risk as of December 31, 2007 is as follows:

Financial instruments whose contract amounts represent credit risk:



|                                                   |  |                        |       
|-------------------------------------------------- |  | ---------------------- | ------
|                                                   |  | (Dollars in thousands)
|Capital South II Partnership investment commitment |  | $                      | 125   
|Capital South II Partnership investment commitment |  |                        | 700   
|Standby letters of credit                          |  |                        | 2,908 
|Commitments to extend credit                       |  |                        | 7,488 
|Undisbursed lines of credit                        |  |                        | 63,205
|Undisbursed portion of construction loans          |  |                        | 34,147

In the normal course of business, the Company is involved in various legal proceedings. The amount of any
liability that may result from those proceedings in which the Company is currently involved is expected to be immaterial to the consolidated financial position.

NOTE 16 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial instruments for which fair value disclosures are required
include cash and due from banks, interest-earning deposits with banks, investment securities, loans, Federal Home Loan Bank and Bankers Bank stock, accrued interest, deposits, borrowings, securities sold under agreements to repurchase, and junior
subordinated debentures. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Companys entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Companys financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and
assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and
Due from Banks and Interest-earning Deposits with Banks

The carrying amounts for cash and due from banks and interest-earning deposits with banks
approximate fair value because of the short maturities of those instruments.

Investment Securities

Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.



77



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 16
- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)



Loans

The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Non-marketable Equity Securities

The carrying value of non-marketable equity securities approximates fair value.

Accrued Interest Receivable and Payable

The carrying amount is a reasonable estimate of fair value.

Deposits

The fair value of demand deposits, savings, money market,
and NOW accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Borrowings, Securities Sold Under Agreements to Repurchase, Federal Funds Purchased and Junior Subordinated Debentures

The fair values of borrowings and fixed rate junior subordinated debentures are based on discounting expected cash flows at the interest rate for debt with the same or
similar remaining maturities and collateral requirements. Short-term borrowings, including securities sold under agreements to repurchase and federal funds purchased, are carried at approximate fair value because of the short maturities of those
instruments.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk discussed in Note 15, it is not practicable to estimate the fair value of future financing commitments. The large majority of commitments to extend credit and standby letters
of credit are at variable rates and/or have relatively short terms to maturity. Therefore, the fair value for these financial instruments is considered to be immaterial.

The carrying amounts and estimated fair values of the Companys financial instruments, none of which are held for trading purposes, are as follows at December 31, 2007 and 2006:



|                                     |  |                        |         |                     |   |                |  |                     |         |  |   |        
|------------------------------------ |  | ---------------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                     |  | 2007                   |         | 2006               
|                                     |  | Carryingamount         |         | Estimatedfair value |   | Carryingamount |  | Estimatedfair value
|                                     |  | (Dollars in thousands)
|Financial assets:                    |  |                        |         |                     |   |                |  |                     |         |  |   |        
|Cash and due from banks              |  | $                      | 14,346  |                     | $ | 14,346         |  | $                   | 19,950  |  | $ | 19,950 
|Interest-earning deposits with banks |  |                        | 930     |                     |   | 930            |  |                     | 17,295  |  |   | 17,295 
|Securities available for sale        |  |                        | 75,012  |                     |   | 75,012         |  |                     | 63,018  |  |   | 63,018 
|Securities held to maturity          |  |                        | 1,770   |                     |   | 1,804          |  |                     | 2,174   |  |   | 2,192  
|Loans                                |  |                        | 387,219 |                     |   | 395,458        |  |                     | 364,803 |  |   | 371,296
|Accrued interest receivable          |  |                        | 2,640   |                     |   | 2,640          |  |                     | 2,938   |  |   | 2,938  
|Non-marketable equity securities     |  |                        | 2,119   |                     |   | 2,119          |  |                     | 1,879   |  |   | 1,879  
|                                     |  |                        |         |                    
|Financial liabilities:               |  |                        |         |                     |   |                |  |                     |         |  |   |        
|Deposits                             |  |                        | 399,794 |                     |   | 377,164        |  |                     | 401,137 |  |   | 398,483
|Short-term borrowings                |  |                        | 31,509  |                     |   | 31,509         |  |                     | 15,473  |  |   | 15,473 
|Long-term debt                       |  |                        | 17,995  |                     |   | 18,186         |  |                     | 21,612  |  |   | 21,392 
|Accrued interest payable             |  |                        | 898     |                     |   | 898            |  |                     | 661     |  |   | 661    



78



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 17
- EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) Retirement Plan

The Company has adopted a 401(k) retirement plan that covers all eligible employees. The Company matches contributions of up to 3.0% of each employees salary. Expenses totaled $105,000, $99,000 and $87,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.

Employment Agreement

The Company has entered into employment agreements with certain officers to ensure a stable and competent management base. These agreements provide for terms ranging from
three to five years, with automatic extension for an additional year at the end of the initial term and annually thereafter. The agreements provide for benefits as provided in the contract and cannot be terminated by the Board of Directors, except
for cause, without prejudicing the officers right to receive certain vested rights, including compensation. In the event of a change in control of the Company and in certain other events, as defined in the agreements, the Company or any
successor to the Company will be bound to the terms of the contracts.

Supplemental Executive Retirement Plan

In July 2007, the Bank established a Supplemental Executive Retirement Plan, which is a nonqualified plan that provides additional retirement benefits to the Banks
chief executive officer. The accrued liability related to this plan was approximately $53,000 at December 31, 2007. The Plan was funded in February, 2008.

NOTE 18 - STOCK COMPENSATION PLANS

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R (revised 2004), Share-Based Payment, (SFAS No. 123R) which was issued by the Financial Accounting Standards Board (FASB) in December 2004. SFAS No. 123R revises SFAS No. 123
Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and its related interpretations. SFAS No.123R requires recognition of the cost of employee
services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also
requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 Statement of Cash Flows, to require that excess tax
benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company
adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for
all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as
prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.

The Company has five share-based compensation plans in effect at December 31, 2007. The compensation cost that has been charged against income for those plans was
approximately $52,000 and $375,000 for the years ended December 31, 2007 and 2006, respectively. The Company recorded a deferred tax benefit in the amount of $20,000 and $123,000 related to share-based compensation during the years ended
December 31, 2007 and 2006, respectively.

In 1999, the Company implemented the 1999 Incentive Stock Option Plan which authorized the Board of
Directors to grant up to 246,191 of stock options (as adjusted for stock dividends) to employees and officers of the Company and the 1999 Non-statutory Stock Option Plan which authorized the Board of Directors to grant up to 246,191 of non-qualified
stock options to directors. Options granted under the 1999 Stock Option Plans have a term of up to ten years from the date of grant. Vesting of options is determined at the time of grant and ranges from immediate to five years. Options under these
plans must be granted at a price not less than the fair market value at the date of grant.

In 2001, the Company implemented the 2001 Incentive Stock
Option Plan which authorized the Board of Directors to grant up to 210,300 of stock options (as adjusted for stock dividends) to employees and officers of the company. Options granted under the 2001 Stock Option Plan have a term of up to ten years
from the date of grant. These options have a five year vesting period. Options under this plan must be granted at a price not less than the fair market value at the date of grant.

In 2002, the Company implemented the 2002 Non-statutory Stock Option Plan which authorized the Board of Directors to grant up to 37,500 stock options (as adjusted for stock dividends) to directors of the Company.
Options granted under the 2002 Non-Statutory



79



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 18
 STOCK COMPENSATION PLANS (Continued)



Stock Option Plans have a term
of up to ten years from the date of grant. Vesting of options is three years. Options under this plan must be granted at a price not less than the fair market value at the date of grant.

In 2004, the Company acquired FNB Bancshares, Inc. (First National). First National had two stock option plans, the 1997 Incentive Stock Option Plan and the 1997 Non-statutory Stock Option Plan. At the
acquisition date the plans had 133,162 and 160,577 options outstanding, respectively, which vested immediately.

Stock Options

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The Company granted 15,000 stock options for
the year ended December 31, 2007 with a weighted average fair value of $3.98 per option and 98,000 stock options for the year ended December 31, 2006 with a weighted average fair value of $4.52 per option. No options were granted for the
year ended December 31, 2005.

Assumptions in estimating option values:



|                        |  |         |   |  |         |   |  |     
|----------------------- |  | ------- | - |  | ------- | - |  | ----
|                        |  | 2007    |   |  | 2006    |   |  | 2005
|Risk-free interest rate |  | 4.08    | % |  | 4.83    | % |  |    
|Dividend yield          |  | 1.77    | % |  | 1.54    | % |  |    
|Volatility              |  | 21.04   | % |  | 30.24   | % |  |    
|Expected life           |  | 7 years |   |  | 7 years |   |  |    

The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected
life of the option grant. Expected volatility is based upon the historical volatility of the Company based upon the previous seven years trading history. The expected term of the options is based upon the average life of previously issued stock
options. The expected dividend yield is based upon current yield on date of grant. No post-vesting restrictions exist for these options.

At
December 31, 2007, there were 471,466 exercisable options with a weighted average exercise price of $6.62. At December 31, 2006, there were 487,893 exercisable options with a weighted average exercise price of $6.52. Of the total options
outstanding at December 31, 2007 and 2006, the remaining average contractual lives were 3.44 and 4.28 years, respectively.

A summary of option
activity under the stock option plans as of December 31, 2007 and 2006, and changes during the year ended December 31, 2007 and 2006 is presented below:



|                                 |  |          |   |  |                              |       |                                          |            |                         |   |          
|-------------------------------- |  | -------- | - |  | ---------------------------- | ----- | ---------------------------------------- | ---------- | ----------------------- | - | ---------
|                                 |  | Shares   |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractual Term |            | AggregateIntrinsicValue
|Outstanding at December 31, 2005 |  | 643,131  |   |  | $                            | 5.57  |                                          |            |                         |   |          
|Exercised                        |  | (178,541 | ) |  |                              | 5.11  |                                          |            |                         |   |          
|Authorized                       |  |         |   |  |                              |      |                                          |            |                         |   |          
|Forfeited                        |  | (1,506   | ) |  |                              | 8.81  |                                          |            |                         |   |          
|Granted                          |  | 98,000   |   |  |                              | 12.92 |                                          |            |                         |   |          
|                                 |  |          |   |  |                              |       |                                          |            |                         |   |          
|Outstanding at December 31, 2006 |  | 561,084  |   |  | $                            | 7.00  |                                          | 4.28 years |                         | $ | 2,268,658
|Exercised                        |  | (34,998  | ) |  |                              | 6.03  |                                          |            |                         |   |          
|Authorized                       |  |         |   |  |                              |      |                                          |            |                         |   |          
|Forfeited                        |  | (11,000  | ) |  |                              | 10.77 |                                          |            |                         |   |          
|Granted                          |  | 15,000   |   |  |                              | 11.73 |                                          |            |                         |   |          
|                                 |  |          |   |  |                              |       |                                          |            |                         |   |          
|Outstanding at December 31, 2007 |  | 530,086  |   |  | $                            | 7.12  |                                          | 3.44 years |                         | $ | 1,636,043
|                                 |  |          |   |  |                              |       |                                          |            |                         |   |          
|Exercisable at December 31, 2007 |  | 471,466  |   |  | $                            | 6.62  |                                          | 2.88 years |                         | $ | 1,618,617
|                                 |  |          |   |  |                              |       |                                          |            |                         |   |          



80



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 18
- STOCK COMPENSATION PLANS (Continued)



For the years ended
December 31, 2007, 2006 and 2005 the intrinsic value of options exercised was approximately $191,000, $1,163,000, and $974,000, respectively.

The
fair value of stock options vested over the years ended December 31, 2007, 2006 and 2005 was $52,000, $375,000, and $51,000, respectively.

As of
December 31, 2007, there was $163,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Companys stock benefit plans. That cost is expected to be recognized over a
weighted-average period of 1.56 years.

The Company funds the option shares from authorized but unissued shares. Company policy does allow option holders
to exercise options with seasoned shares.

The actual tax benefit in stockholders equity realized for the tax deductions from option exercise of the
share-based payment arrangements totaled $38,000 and $170,000 for the years ended December 31, 2007 and 2006, respectively.

The adoption of SFAS 123R
and its fair value compensation cost recognition provisions are different from the non-recognition provisions under SFAS 123 and the intrinsic value method for compensation cost allowed by APB 25. The effect (increase/(decrease)) of the adoption of
SFAS 123R for the year ended December 31, 2007 is as follows:



|                                           |  |                                     |       |   |      |   |       |  
|------------------------------------------ |  | ----------------------------------- | ----- | - | ---- | - | ----- | -
|                                           |  | 2007                                |       |   | 2006 |  
|                                           |  | (In thousands exceptper share data) |      
|Income before income tax expense           |  | $                                   | (52   | ) |      | $ | (375  | )
|Net income                                 |  |                                     | (52   | ) |      |   | (260  | )
|                                           |  |                                    
|Cash flow from operating activities        |  |                                     | (38   | ) |      |   | (170  | )
|Cash flow provided by financing activities |  |                                     | 38    |   |      |   | 170   |  
|                                           |  |                                    
|Basic earnings per share                   |  |                                     | (0.01 | ) |      |   | (0.04 | )
|Diluted earnings per share                 |  |                                     | (0.01 | ) |      |   | (0.04 | )

The following illustrates the effect on net income available to common stockholders if the Company had applied the
fair value recognition provisions of SFAS No. 123 to the prior years ended December 31, 2005:



|                                                                                                                                    |  |                                     |       |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | -
|                                                                                                                                    |  | 2005                                |      
|                                                                                                                                    |  | (In thousands exceptper share data) |      
|Net income, as reported                                                                                                             |  | $                                   | 4,508 |  
|Add: Stock-based employee compensation expense included in the reported net income, net of related income taxes                     |  |                                     |      |  
|Less: Stock-based employee compensation expense determined under fair value based method of all awards, net of related income
taxes |  |                                     | (51   | )
|                                                                                                                                    |  |                                     |       |  
|Proforma net income                                                                                                                 |  | $                                   | 4,457 |  
|                                                                                                                                    |  |                                     |       |  
|Earnings per share - basic, as reported                                                                                             |  | $                                   | 0.71  |  
|Earnings per share - basic, pro forma                                                                                               |  |                                     | 0.70  |  
|Earnings per share - diluted, as reported                                                                                           |  |                                     | 0.66  |  
|Earnings per share - diluted, pro forma                                                                                             |  |                                     | 0.65  |  



81



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 19
- DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, the Company enters into derivative contracts to manage
interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All derivative financial instruments are recorded at fair value in the consolidated
financial statements.

On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge,
or a trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of
the effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.

If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged items
then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in
other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.

As of
December 31, 2007, the Company had two derivative instruments with notional amounts of $30.0 million and $15.0 million, respectively. Both derivative instruments consist of an interest rate floor contract that is used to protect certain
designated variable rate loans from the downward effects of their repricing in the event of a decreasing rate environment for a period of three years ending in February 2009 and June 2009, respectively. If the prime rate falls below 7.25% during the
term of the first contract, the Company will receive payments based on the $30.0 million notional amount times the difference between 7.25% and the daily weighted average prime rate for the quarter. No payments will be received by the Company if the
weighted average prime rate is 7.25% or higher. The Company paid a premium of $228,000 on this contact, which is being amortized over the three-year term of the contract. On the second floor, if the prime rate falls below 7.75% during the term of
this contract, the Company will receive payments based on the $15.0 million notional amount times the difference between 7.75% and the weighted average prime rate for the quarter. No payments will be received by the Company if the weighted average
prime rate is 7.75% or higher. The Company paid a premium of $95,250 on this contract. Total payments received on the 7.75% floor were $3,229 during 2007. The interest rate floors are carried at a fair market value of $532,319 and are included in
other assets as of December 31, 2007.

As of March 31, 2007 the $15.0 million, 7.75% interest rate floor contract no longer qualified as a cash
flow hedge and the hedge designation was removed. As a result, amounts accumulated in the other accumulated comprehensive income of approximately $6,000 at the beginning of the year were reclassified into earnings during the first quarter of 2007.
Changes in fair value of the 7.75% interest rate floor are now accounted for in earnings for the period of the change. Changes in fair value of the remaining hedged instrument on the 7.25% floor that are deemed effective are still offset in other
comprehensive income net of tax while the ineffective portion of the hedge is recorded to other income. For the year ended December 31, 2007, the Company recorded a $144,000 gain, net of tax in other comprehensive income for the effective
portion of the 7.25% floor. The Company recorded a $205,000 gain in other income during the year ended December 31, 2007 for the change in fair value of the 7.75% interest rate floor, and a $9,250 gain in other income for the ineffective
portion of the 7.25% hedged instrument. For the year ended December 31, 2006 the Company recorded a $10,000 gain in other income for the ineffective portions of the 7.25% and 7.75% hedged instruments., and a $86,000 loss, net of tax in other
comprehensive income for the effective portion of the floors.

NOTE 20 - SALE OF COMMON STOCK AND EXERCISE OF WARRANTS

The Company completed the sale of 1,000,500 units, which consisted of one share of common stock and one warrant to buy one share of common stock, at $9.00 per share on
April 29, 2002. Expenses associated with the sale amounted to $1,016,001 resulting in net proceeds from the offering of $7,988,499. The warrants entitled the holder to purchase one share of common stock at $10.50 per share and expired on
April 30, 2005. As a result of warrants exercised in 2005 and 2004, 999,012 common shares were issued and total capital received was $10,489,626.



82



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 21
- PARENT COMPANY FINANCIAL DATA

Following are condensed financial statements of American Community Bancshares, Inc. as of December 31, 2007 and
2006 and for the years ended December 31, 2007, 2006 and 2005:

Condensed Statements of Financial Condition

December 31, 2007 and 2006



|                                                        |  |                        |        |      |   |        |  
|------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | -
|                                                        |  | 2007                   |        | 2006 |  
|                                                        |  | (Dollars in thousands) |       
|Assets:                                                 |  |                        |        |      |   |        |  
|Cash and due from banks                                 |  | $                      | 16     |      | $ | 56     |  
|Interest earning deposits with banks                    |  |                        | 8,757  |      |   | 14,143 |  
|Investment in securities available for sale             |  |                        | 904    |      |   | 403    |  
|Investment in American Community Bank                   |  |                        | 52,571 |      |   | 51,101 |  
|Investment in American Community Capital Trust I        |  |                        |       |      |   | 108    |  
|Investment in American Community Capital Trust II, Ltd. |  |                        | 310    |      |   | 310    |  
|Other assets                                            |  |                        | 1,981  |      |   | 2,865  |  
|                                                        |  |                        |        |      |   |        |  
|Total Assets                                            |  | $                      | 64,539 |      | $ | 68,986 |  
|                                                        |  |                        |        |      |   |        |  
|Liabilities and Stockholders Equity:                   |  |                        |        |      |   |        |  
|Liabilities:                                            |  |                        |        |      |   |        |  
|Due to American Community Capital Trust I               |  | $                      |       |      | $ | 3,608  |  
|Due to American Community Capital Trust II, Ltd.        |  |                        | 10,310 |      |   | 10,310 |  
|Other liabilities                                       |  |                        | 205    |      |   |       |  
|                                                        |  |                        |        |      |   |        |  
|Total Liabilities                                       |  |                        | 10,515 |      |   | 13,918 |  
|                                                        |  |                        |        |      |   |        |  
|Stockholders Equity:                                   |  |                        |        |      |   |        |  
|Common stock                                            |  |                        | 6,502  |      |   | 7,008  |  
|Additional paid-in capital                              |  |                        | 32,364 |      |   | 39,921 |  
|Retained earnings                                       |  |                        | 14,744 |      |   | 8,787  |  
|Accumulated other comprehensive income (loss)           |  |                        | 414    |      |   | (648   | )
|                                                        |  |                        |        |      |   |        |  
|Total stockholders equity                              |  |                        | 54,024 |      |   | 55,068 |  
|                                                        |  |                        |        |      |   |        |  
|Total Liabilities and Stockholders Equity              |  | $                      | 64,539 |      | $ | 68,986 |  
|                                                        |  |                        |        |      |   |        |  

Condensed Statements of Operations

Years Ended December 31, 2007, 2006 and 2005



|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                   |  | 2007                   |       |   | 2006 |   |       | 2005 | 
|                                                                                   |  | (Dollars in thousands) |      
|Interest income:                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Dividends from subsidiaries                                                        |  | $                      | 4,999 |   |      | $ |      |      |  | $ |      |  
|Interest-earning deposits with banks                                               |  |                        | 571   |   |      |   | 944   |      |  |   | 811   |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Total interest income                                                              |  |                        | 5,570 |   |      |   | 944   |      |  |   | 811   |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Interest expense:                                                                  |  |                        |       |   |      |   |       |      |  |   |       |  
|Junior subordinated debentures issued to American Community Capital Trust I and II |  |                        | 906   |   |      |   | 1,149 |      |  |   | 965   |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Non-interest income:                                                               |  |                        |       |   |      |   |       |      |  |   |       |  
|Equity in undistributed earnings of American Community Bank                        |  |                        | 317   |   |      |   | 4,424 |      |  |   | 4,645 |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Non-interest expense:                                                              |  |                        |       |   |      |   |       |      |  |   |       |  
|Professional fees                                                                  |  |                        | 34    |   |      |   | 14    |      |  |   | 42    |  
|Other                                                                              |  |                        | 80    |   |      |   | 22    |      |  |   | 27    |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Total non-interest expense                                                         |  |                        | 114   |   |      |   | 36    |      |  |   | 69    |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Income before taxes                                                                |  |                        | 4,867 |   |      |   | 4,183 |      |  |   | 4,422 |  
|Income tax benefit                                                                 |  |                        | (153  | ) |      |   | (93   | )    |  |   | (86   | )
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  
|Net income                                                                         |  | $                      | 5,020 |   |      | $ | 4,276 |      |  | $ | 4,508 |  
|                                                                                   |  |                        |       |   |      |   |       |      |  |   |       |  



83



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 21
- PARENT COMPANY FINANCIAL DATA (Continued)



Condensed
Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005



|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                 |  | 2007                   |         |   | 2006 |   |        | 2005 | 
|                                                                 |  | (Dollars in thousands) |        
|Cash flows from operating activities:                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Net income                                                       |  | $                      | 5,020   |   |      | $ | 4,276  |      |  | $ | 4,508  |  
|Equity in undistributed earnings of subsidiaries                 |  |                        | (317    | ) |      |   | (4,424 | )    |  |   | (4,645 | )
|Decrease (increase) in other assets                              |  |                        | 884     |   |      |   | (1,321 | )    |  |   | (1,288 | )
|Increase in other liabilities                                    |  |                        | 205     |   |      |   |       |      |  |   |       |  
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Net cash provided (used) by operating activities                 |  |                        | 5,792   |   |      |   | (1,469 | )    |  |   | (1,425 | )
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Redemption of Capital Trust I stock                              |  |                        | 108     |   |      |   |       |      |  |   |       |  
|Investment in securities available for sale                      |  |                        | (501    | ) |      |   |       |      |  |   |       |  
|Investment in American Community Bank                            |  |                        |        |   |      |   |       |      |  |   | (500   | )
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Net cash used by investing activities                            |  |                        | (393    | ) |      |   |       |      |  |   | (500   | )
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                            |  |                        |         |   |      |   |        |      |  |   |        |  
|Repayment of advances from subsidiaries                          |  |                        |        |   |      |   |       |      |  |   | 440    |  
|Redemption of junior subordinated deferrable interest debentures |  |                        | (3,608  | ) |      |   |       |      |  |   |       |  
|Repurchase of common stock                                       |  |                        | (6,080  | ) |      |   | (263   | )    |  |   |       |  
|Proceeds from issuance of common stock                           |  |                        | 211     |   |      |   | 912    |      |  |   | 10,907 |  
|Cash dividends paid on common stock                              |  |                        | (1,348  | ) |      |   | (1,382 | )    |  |   | (861   | )
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Net cash provided (used) by financing activities                 |  |                        | (10,825 | ) |      |   | (733   | )    |  |   | 10,486 |  
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Increase (decrease) in cash and cash equivalents                 |  |                        | (5,426  | ) |      |   | (2,202 | )    |  |   | 8,561  |  
|Cash and cash equivalents, beginning                             |  |                        | 14,199  |   |      |   | 16,401 |      |  |   | 7,840  |  
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents, ending                                |  | $                      | 8,773   |   |      | $ | 14,199 |      |  | $ | 16,401 |  
|                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  

NOTE 22 - STOCK SPLIT

On January 25, 2006, the Company declared a three-for-two stock split in the form of a 50% stock dividend to shareholders of record on February 7, 2006 and payable on February 21, 2006. All references to net income per share
and weighted average shares outstanding have been adjusted for the effect of this stock split.



84



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 23
- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth, for the periods indicated selected information from our consolidated
quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the
results for such periods.



|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|------------------------------------------------- |  | ------------------------------------ | ----- | ------------ | - | ------------- |  | ------------ | ----- |  | - | -----
|                                                  |  | Year Ended December 31, 2007        
|                                                  |  | FourthQuarter                        |       | ThirdQuarter |   | SecondQuarter |  | FirstQuarter
|                                                  |  | (In thousands except per share data)
|Interest income                                   |  | $                                    | 8,737 |              | $ | 9,070         |  | $            | 8,921 |  | $ | 8,698
|Interest expense                                  |  |                                      | 4,068 |              |   | 4,225         |  |              | 4,001 |  |   | 3,899
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net interest income                               |  |                                      | 4,669 |              |   | 4,845         |  |              | 4,920 |  |   | 4,799
|Provision for loan losses                         |  |                                      | 471   |              |   | 156           |  |              | 231   |  |   | 183  
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net interest income after provision for loan loss |  |                                      | 4,198 |              |   | 4,689         |  |              | 4,689 |  |   | 4,616
|Gain on sale of securities                        |  |                                      |      |              |   | 2             |  |              |      |  |   | 17   
|Non-interest income                               |  |                                      | 901   |              |   | 959           |  |              | 722   |  |   | 714  
|Total non-interest expense                        |  |                                      | 3,361 |              |   | 3,449         |  |              | 3,482 |  |   | 3,326
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Income before income taxes                        |  |                                      | 1,738 |              |   | 2,201         |  |              | 1,929 |  |   | 2,021
|Provision for income taxes                        |  |                                      | 626   |              |   | 801           |  |              | 707   |  |   | 735  
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net income                                        |  | $                                    | 1,112 |              | $ | 1,400         |  | $            | 1,222 |  | $ | 1,286
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net income per share                              |  |                                      |       |              |   |               |  |              |       |  |   |      
|Basic                                             |  | $                                    | 0.17  |              | $ | 0.21          |  | $            | 0.18  |  | $ | 0.18 
|Diluted                                           |  |                                      | 0.17  |              |   | 0.20          |  |              | 0.17  |  |   | 0.18 
|Common stock price                                |  |                                      |       |              |   |               |  |              |       |  |   |      
|High                                              |  | $                                    | 12.84 |              | $ | 12.50         |  | $            | 12.30 |  | $ | 12.69
|Low                                               |  |                                      | 9.19  |              |   | 10.15         |  |              | 10.87 |  |   | 10.60



85



---

##### Table of Contents

AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended
December 31, 2007, 2006 and 2005



NOTE 23
- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)



|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|------------------------------------------------- |  | ------------------------------------ | ----- | ------------ | - | ------------- |  | ------------ | ----- |  | - | -----
|                                                  |  | Year Ended December 31, 2006        
|                                                  |  | FourthQuarter                        |       | ThirdQuarter |   | SecondQuarter |  | FirstQuarter
|                                                  |  | (In thousands except per share data)
|Interest income                                   |  | $                                    | 8,754 |              | $ | 8,320         |  | $            | 7,932 |  | $ | 7,328
|Interest expense                                  |  |                                      | 3,898 |              |   | 3,646         |  |              | 3,180 |  |   | 2,797
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net interest income                               |  |                                      | 4,856 |              |   | 4,674         |  |              | 4,752 |  |   | 4,531
|Provision for loan losses                         |  |                                      | 143   |              |   | 1,529         |  |              | 668   |  |   | 272  
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net interest income after provision for loan loss |  |                                      | 4,713 |              |   | 3,145         |  |              | 4,084 |  |   | 4,259
|Gain on sale of securities                        |  |                                      |      |              |   | 35            |  |              |      |  |   | 25   
|Non-interest income                               |  |                                      | 795   |              |   | 827           |  |              | 869   |  |   | 802  
|Total non-interest expense                        |  |                                      | 3,261 |              |   | 3,105         |  |              | 3,449 |  |   | 3,023
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Income before income taxes                        |  |                                      | 2,247 |              |   | 902           |  |              | 1,504 |  |   | 2,063
|Provision for income taxes                        |  |                                      | 822   |              |   | 290           |  |              | 572   |  |   | 756  
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net income                                        |  | $                                    | 1,425 |              | $ | 612           |  | $            | 932   |  | $ | 1,307
|                                                  |  |                                      |       |              |   |               |  |              |       |  |   |      
|Net income per share                              |  |                                      |       |              |   |               |  |              |       |  |   |      
|Basic                                             |  | $                                    | 0.20  |              | $ | 0.09          |  | $            | 0.14  |  | $ | 0.19 
|Diluted                                           |  |                                      | 0.20  |              |   | 0.09          |  |              | 0.13  |  |   | 0.18 
|Common stock price                                |  |                                      |       |              |   |               |  |              |       |  |   |      
|High                                              |  | $                                    | 11.71 |              | $ | 12.23         |  | $            | 13.49 |  | $ | 13.73
|Low                                               |  |                                      | 11.00 |              |   | 11.18         |  |              | 12.04 |  |   | 12.14



86



---

##### Table of Contents

ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective (1) to provide reasonable assurance that
information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and
(2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.

Managements Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Companys internal
control over financial reporting is a process designed under the supervision of the Companys Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Companys financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the Companys
internal control over financial reporting as of December 31, 2007. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal ControlIntegrated Framework. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:



| |  |  | Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys management assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2007. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on that assessment, we believe that, as of December 31, 2007,
the companys internal control over financial reporting is effective based on those criteria.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys registered public
accounting firm that audited the Companys consolidated financial statements included in this annual report has issued an attestation report on the effectiveness of the Companys internal control over financial reporting.



87



---

##### Table of Contents

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, changes in the Companys internal controls over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2007. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the
fourth quarter that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.



|                                    |  |  |  |                        
|----------------------------------- |  |  |  | -----------------------
|Randy P Helton                      |  |  |  | Dan R. Ellis, Jr.      
|President & Chief Executive Officer |  |  |  | Chief Financial Officer



88



---

##### Table of Contents

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

American Community Bancshares,
Inc.

Charlotte, North Carolina

We have audited the
internal control over financial reporting of American Community Bancshares, Inc. and subsidiary (the Company) as of December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included, performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, American Community Bancshares, Inc. and subsidiary
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements of American Community Bancshares, Inc. and subsidiary as of December 31, 2007 and 2006 and for each of the years in the three-year period ended December 31, 2007, and our report dated
March 13, 2008, expressed an unqualified opinion on those consolidated financial statements.

LOGO

Charlotte, North Carolina

March 13, 2008



89



---

##### Table of Contents

ITEM 9B  OTHER INFORMATION

None

PART III

ITEM 10  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information contained in the sections captioned
Proposal 2: Election of Directors, Executive Officers, and Required Reports of Beneficial Ownership in the 2008 Annual Meeting Proxy Statement is incorporated herein by reference.

The Company has adopted a code of ethics that applies, among others, to its principal executive officer and principal financial officer. The Companys code of
ethics is available at http://www.americancommunitybank.com.

ITEM 11  EXECUTIVE COMPENSATION

The information contained in the sections captioned Director Compensation and Executive Compensation in the 2008 Annual Meeting Proxy Statement is
incorporated herein by reference.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS

The information contained in the sections captioned Ownership of Voting Securities in the 2008 Annual Meeting Proxy Statement is
incorporated herein by reference.

Set forth below is certain information regarding the Registrants various stock option plans.



|                                                           |                     |                                                                                                  |   |                                                                              |      |                                                                                                                                          |       
|---------------------------------------------------------- | ------------------- | ------------------------------------------------------------------------------------------------ | - | ---------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |                     | Number of securities to be issued upon exercise of outstanding
options, warrants, and rights (a) |   | Weighted-average exerciseprice of outstandingoptions, warrants, andrights(b) |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))(c)
|Equity compensation plans approved by security holders     |                     | 1999 Incentive:                                                                                  |   |                                                                              |      |                                                                                                                                          |       
|                                                           | 180,100             |                                                                                                  | $ | 5.98                                                                         |      | 4,513                                                                                                                                   
|                                                           | 1999 Non-statutory: |                                                                                                  |   |                                                                              |      |                                                                                                                                         
|                                                           | 174,516             |                                                                                                  | $ | 8.06                                                                         |      | 5,080                                                                                                                                   
|                                                           | 2001 Incentive:     |                                                                                                  |   |                                                                              |      |                                                                                                                                         
|                                                           | 87,401              |                                                                                                  | $ | 9.91                                                                         |      | 61,185                                                                                                                                  
|                                                           | 2002 Non-statutory: |                                                                                                  |   |                                                                              |      |                                                                                                                                         
|                                                           | 34,000              |                                                                                                  | $ | 6.50                                                                         |      | 1,500                                                                                                                                   
|                                                           | 1997 FNB Plan:      |                                                                                                  |   |                                                                              |      |                                                                                                                                         
|                                                           | 54,069              |                                                                                                  | $ | 3.70                                                                         |      | -0-                                                                                                                                     
|Equity compensation plans not approved by security holders |                     | None                                                                                             |   |                                                                              | None |                                                                                                                                          | None  
|Total                                                      |                     | 530,086                                                                                          |   | $                                                                            | 7.12 |                                                                                                                                          | 72,278



90



---

##### Table of Contents

ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information contained in the sections captioned Director Relationships and Indebtedness of and Transactions with Management in the 2008 Annual
Meeting Proxy Statement is incorporated herein by reference.

ITEM 14  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained in the sections captioned Report of the Audit Committee and Proposal 3: Ratification of Independent Public Accountants
in the 2008 Annual Meeting Proxy Statement are incorporated herewith by reference.



91



---

##### Table of Contents

PART IV

ITEM 15  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:



|1. | Financial statements required to be filed by Item 8 of this Form:
|-- | -----------------------------------------------------------------

a) Report of independent registered public accounting firm

b) Consolidated Balance Sheets as of
December 31, 2007 and 2006

c) Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005

d) Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005

e) Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005

f) Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005

g) Notes to Consolidated Financial Statements



|2. | Financial statement schedules required to be filed by Item 8 of this Form:
|-- | --------------------------------------------------------------------------

None



|3. | Exhibits
|-- | --------

(a) Index to Exhibits



|               |  |                                                                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                    
|3.1            |  | Registrants Articles of Incorporation*                                                                                                                   
|               | 
|3.2            |  | Registrants Bylaws*                                                                                                                                      
|               | 
|4.1            |  | Specimen Stock Certificate*                                                                                                                               
|               | 
|10.1           |  | Employment Agreement of Randy P. Helton*, a management contract                                                                                           
|               | 
|10.2           |  | 1999 Incentive Stock Option Plan, a compensatory plan*                                                                                                    
|               | 
|10.3           |  | 1999 Nonstatutory Stock Option Plan, a compensatory plan*                                                                                                 
|               | 
|10.4           |  | 401(k) Plan, a compensatory plan*                                                                                                                         
|               | 
|10.5(i)        |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Amended and Restated Declaration of Trust, dated December 15, 2003***
|               | 
|10.5(ii)       |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Indenture, dated December 15, 2003***                                
|               | 
|10.5(iii)      |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Guarantee Agreement, dated December 31, 2003***                      



92



---

##### Table of Contents

|         |  |                                                                                                                                                                                                                                                 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5(iv) |  | Issuance of Trust Preferred Securities by American Community Capital Trust II, Ltd.: Form of Floating Rate Junior Subordinated Debenture of American Community Bancshares, Inc. (incorporated
by reference to Exhibit A of Exhibit 10.5(ix)) ***
|         | 
|10.6     |  | 2001 Incentive Stock Option Plan, a compensatory plan****                                                                                                                                                                                       
|         | 
|10.7     |  | 2002 Nonstatutory Stock Option Plan, a compensatory plan*****                                                                                                                                                                                   
|         | 
|10.8     |  | Dividend Reinvestment and Common Stock Purchase Plan*******                                                                                                                                                                                     
|         | 
|21       |  | Subsidiaries of Registrant (Filed herewith)                                                                                                                                                                                                     
|         | 
|23       |  | Consent of Dixon Hughes, PLLC                                                                                                                                                                                                                   
|         | 
|31(i)    |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)                                                                                                                                 
|         | 
|31(ii)   |  | Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)                                                                                                                                
|         | 
|32(i)    |  | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)                                                                                                                                 
|         | 
|32(ii)   |  | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)                                                                                                                                 
|         | 
|99       |  | Registrants Definitive Proxy Statement******                                                                                                                                                                                                   



|        |  |                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------
|*       |  | Incorporated by reference from exhibits to Registrants Registration Statement on Form S-4 (File No. 333-31148)             
|**      |  | Incorporated by reference from exhibits to Registrants Registration Statement on Form SB-2 (File No. 333-84484)            
|***     |  | Incorporated by reference from Registrants Current Report on Form 8-K dated December 18, 2003 (File No. 000-30517)         
|****    |  | Incorporated by reference from Exhibit 10.5 to Registrants Annual Report on Form 10-K for the year ended December 31, 2000.
|*****   |  | Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 333-101208)                        
|******  |  | Filed with the Commission pursuant to Rule 14a-6.                                                                           
|******* |  | Incorporated by reference from Exhibit 99.1 to Registrants Statement on Form S-3D (File No. 333-129991)                    



93



---

##### Table of Contents

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |                                      
|-------------- |  | -------------------------------------
|March 13, 2008 |  | /s/ Randy P. Helton                  
|               |  | Randy P. Helton                      
|               |  | President and Chief Executive Officer



94



---

##### Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                           |  |  |  |               
|------------------------------------------ |  |  |  | --------------
|/s/ Randy P. Helton                        |  |  |  | March 13, 2008
|Randy P. Helton, President,                |  |  |  |               
|Chief Executive Officer and Director       |  |  |  |               
|                                           |  | 
|/s/ Dan R. Ellis, Jr.                      |  |  |  | March 13, 2008
|Dan R. Ellis, Jr., Chief Financial Officer |  |  |  |               
|                                           |  | 
|/s/ Robert D. Dinsmore                     |  |  |  | March 13, 2008
|Robert D. Dinsmore, Director               |  |  |  |               
|                                           |  | 
|/s/ Frank L. Gentry                        |  |  |  | March 13, 2008
|Frank L. Gentry, Director                  |  |  |  |               
|                                           |  | 
|/s/ Thomas J. Hall                         |  |  |  | March 13, 2008
|Thomas J. Hall, Director                   |  |  |  |               
|                                           |  | 
|/s/ Larry S. Helms                         |  |  |  | March 13, 2008
|Larry S. Helms, Director                   |  |  |  |               
|                                           |  | 
|/s/ V. Stephen Moss                        |  |  |  | March 13, 2008
|V. Stephen Moss, Director                  |  |  |  |               
|                                           |  | 
|/s/ Peter A. Pappas                        |  |  |  | March 13, 2008
|Peter A. Pappas, Director                  |  |  |  |               
|                                           |  | 
|/s/ L. Steven Phillips                     |  |  |  | March 13, 2008
|L. Steven Phillips, Director               |  |  |  |               
|                                           |  | 
|/s/ Alison J. Smith                        |  |  |  | March 13, 2008
|Alison J. Smith, Director                  |  |  |  |               
|                                           |  | 
|/s/ David D. Whitley                       |  |  |  | March 13, 2008
|David D. Whitley, Director                 |  |  |  |               
|                                           |  | 
|/s/ Gregory N. Wylie                       |  |  |  | March 13, 2008
|Gregory N. Wylie, Director                 |  |  |  |               
|                                           |  | 
|/s/ Philip R. Gilboy                       |  |  |  | March 13, 2008
|Philip R. Gilboy, Director                 |  |  |  |               



95