UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the Quarterly Period ended ~~March 31~~June 30, 2010

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

For the Transition Period from to

Commission File No. 000-51896

COMMUNITYSOUTH FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina		20-0934786
(State or other jurisdiction		(I.R.S. Employer
of incorporation)		Identification No.)

6602 Calhoun Memorial Highway

Easley, South Carolina 29640

(Address of principal executive offices)

(864) 306-2540

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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

Large accelerated filer o		Accelerated filer o

Non-accelerated o		Smaller reporting company x
(do not check if smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,698,697 shares of common stock, $0.01 par value per share, were issued and outstanding as of ~~May 14~~July 29, 2010.

CommunitySouth Financial Corporation

Part I - Financial Information

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

	March 31, 2010			December 31, 2009
	June 30, 2010				December 31, 2009
	(Unaudited)			~~(Audited)~~	(Audited)
Assets
Cash and cash equivalents
Cash and due from bank	$	~~7,781~~	7,109	$	~~6,876~~$		6,876
Federal funds sold	1014,~~285~~965			~~31,043~~	31,043
Total cash and cash equivalents	1822,~~066~~074			~~37,919~~	37,919
Investment securities, available for sale	~~158~~191,~~481~~546			~~103,638~~	103,638
Other investments, at cost	1,599			~~1,599~~	1,599
Loans, net of allowance for loan losses of $12,941 at March 31, 2010 and $12,963 at December 31, 2009	246,798			262,141
Loans, net of allowance for loan losses of $11,601 at June 30, 2010 and $12,963 at December 31, 2009	233,175				262,141
Accrued interest receivable	1,~~129~~002			~~1,440~~	1,440
Property and equipment, net	3,~~708~~548			~~3,867~~	3,867
Other real estate owned	78,~~586~~272			~~6,703~~	6,703
Repossessed collateral	~~940~~767			~~942~~	942
Other assets	2,~~545~~109			~~3,285~~	3,285
Total assets	$	~~440,852~~	464,092	$	~~421,534~~$		421,534
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing	$	~~24,551~~	22,750	$	~~21,829~~$		21,829
Interest bearing	~~372~~398,~~274~~832			~~354,734~~	354,734
Total deposits	~~396~~421,~~825~~582			~~376,563~~	376,563
Repurchase agreements	30,000			~~30,000~~	30,000
Subordinated debt	4,325			~~4,325~~	4,325
Accrued interest payable	1,~~546~~296			~~1,307~~	1,307
Accrued expenses	~~648~~903			~~665~~	665
Other liabilities	23			3	3
Total liabilities	~~433~~458,~~346~~109			~~412,863~~	412,863
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $.01 per share 10,000,000 shares authorized, no shares issued	—			—	—
Common stock, par value $.01 per share 35,000,000 shares authorized, 4,698,697 issued and outstanding at March 31, 2010 and December 31, 2009	47			47
Common stock, par value $.01 per share 35,000,000 shares authorized, 4,698,697 issued and outstanding at June 30, 2010 and December 31, 2009	47				47
Additional paid-in capital	29,~~841~~856			~~29,824~~	29,824
Accumulated other comprehensive income (loss)	~~(211~~452		)	~~(1,134~~	(1,134	)		)
Retained deficit	(22,171		)	(20,066		)
Retained earnings	(24,372			)	(20,066			)
Total shareholders’ equity	75,~~506~~983			~~8,671~~	8,671
Total liabilities and shareholders’ equity	$	~~440,852~~	464,092	$	~~421,534~~$		421,534

The accompanying notes are an integral part of the consolidated financial statements.

~~CONSOLIDATED~~CommunitySouth Financial ~~STATEMENTS OF (LOSS)~~Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands~~, except share data~~)

	Three months ended			Three months ended
	March 31, 2010			March 31, 2009
	June 30, 2010			June 30, 2009
Interest income
Interest and fees on loans	$	3,~~543~~415		$	4,~~370~~292
Interest and dividends on investments	~~674~~683			~~563~~336
Total interest income	4,~~217~~098			4,~~933~~628
Interest expense	2,337			2,080
Interest expense — deposits and other borrowings	2,524			1,951
Net interest income	1,~~880~~574			2,~~853~~677
Provision for loan losses	1,000			1,~~305~~500
Net interest income after provision for loan losses	~~880~~574			1,~~548~~177
Non-interest income
Mortgage origination revenue	~~163~~199			62243
Gain on sale of securities	54424			~~520~~—
Other	205			232
Net gain on sale of other real estate owned and repossessed Collateral	8			—
Total non-interest income	422			814
Other	213			198
Total non-interest income	844			441
Non-interest expense
Salaries and benefits	1,~~395~~275			1,~~239~~363
Data processing	~~216~~171			~~222~~249
Occupancy	~~182~~175			~~171~~168
Depreciation	~~176~~158			~~180~~182
Equipment maintenance and rental	7774			4236
Advertising	3638			3660
Professional fees	~~354~~353			9174
Office supplies	2316			2320
Telephone	3532			3738
FDIC assessments	402			96
FDIC assessment	779			271
Loss on sale of other real estate owned and repossessed collateral	15			—
Other	548			376
Other	496			279
Total non-interest expense	3,619			2,837
Total non-interest expense	3,407			2,416
Loss before income taxes	(2,201		)	(1,219		)
Loss before income taxes	(2,105		)	(54		)
Income tax benefit	—			(414		)
Income tax benefit	—			(18		)
Net loss	$	(2,201	)	$	(805	)
Net loss	$	(2,105	)	$	(36	)
Losses per share
Loss per share
Basic	$	(0.47	)	$	(0.17	)
Basic	$	(0.45	)	$	(0.01	)
Diluted	$	(0.47	)	$	(0.17	)
Diluted	$	(0.45	)	$	(0.01	)
Weighted average shares outstanding
Basic	4,698,697			4,698,697
Diluted	4,698,697			4,698,697

The accompanying notes are an integral part of the consolidated financial statements.

CommunitySouth Financial Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands)

	Six months ended			Six months ended
	June 30, 2010			June 30, 2009
Interest income
Interest and fees on loans	$	6,958		$	8,661
Interest and dividends on investments	1,357			899
Total interest income	8,315			9,560

Interest expense — deposits and other borrowings	4,861			4,031
Net interest income	3,454			5,529

Provision for loan losses	2,000			2,805
Net interest income after provision for loan losses	1,454			2,724

Non-interest income
Mortgage origination revenue	363			305
Gain on sale of securities	478			519
Other	417			431
Total non-interest income	1,258			1,255

Non-interest expense
Salaries and benefits	2,670			2,603
Data processing	386			471
Occupancy	357			339
Depreciation	334			361
Equipment maintenance and rental	151			79
Advertising	74			97
Professional fees	707			165
Office supplies	39			42
Telephone	67			75
FDIC assessment	1,181			367
Net loss on sale of other real estate owned and repossessed collateral	8			—
Other	1,044			654
Total non-interest expense	7,018			5,253

Loss before income taxes	(4,306		)	(1,274		)

Income tax benefit	—			(433		)

Net loss	$	(4,306	)	$	(841	)

Losses per share
Basic	$	(0.92	)	$	(0.18	)
Diluted	$	(0.92	)	$	(0.18	)

Weighted average shares outstanding
Basic	4,698,697			4,698,697
Diluted	4,698,697			4,698,697

The accompanying notes are an integral part of the consolidated financial statements.

CommunitySouth Financial Corporation

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

~~For~~AND ~~the~~COMPREHENSIVE ~~three-month periods ended March 31, 2010 and March 31, 2009~~INCOME

For the six month periods ended June 30, 2010 and June 30, 2009

(UNAUDITED)

(dollars in thousands, except share amounts)

	Common Stock			Additional Paid-in			Accumulated Other Comprehensive			Retained Earnings			Total Shareholders’			Total Comprehensive
	Preferred Stock			Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained			Total Shareholders’			Total Comprehensive
	Shares	Amount		~~Capital~~Shares		Amount	~~Income (Loss)~~		Capital	~~(Deficit)~~		Income	~~Equity~~		Earnings	~~Loss~~		Equity			Income
Balance at December 31, 2009	~~4,698,697~~—	$	47—	$4,698,697	~~29,824~~	$	$47	~~(1,134~~	)$	$29,824	~~(20,066~~	)$	$(1,134	~~8,671~~)	$	(20,066	)	$	8,671
Net loss	—	—		—		—	—		—	~~(2,105~~		)—	~~(2,105~~		)(4,306	$	~~(2,105~~)	)(4,306		)	$	(4,306	)
Other comprehensive income (loss):
Other comprehensive income:
Unrealized income on securities, net of income taxes of $0	—	—		—			915			—			915			915
Unrealized gains on securities, net of income tax of $0	—	—		—		—			—			1,351			—			1,351			1,351
Reclassification of realized losses	—	—		—		—	8		—	—		235	8		—	8		235			235
Total comprehensive loss																$	~~(1,182~~	)			$	(2,720	)
Stock option compensation	—	—		17—		—	—		32	—		—	17		—			32
Balance at March 31, 2010	4,698,697	$	47	$	29,841		$	(211	)	$	(22,171	)	$	7,506
Balance at June 30, 2010	—	$	—	4,698,697		$	47		$	29,856		$	452		$	(24,372	)	$	5,983
	Preferred Stock			Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained			Total Shareholders’			Total Comprehensive
	Shares	Amount		Shares		Amount			Capital			Income			Earnings			Equity			Income
Balance at December 31, 2008	—	$	—	4,698,697		$	47		$	29,760		$	491		$	(1,770	)	$	28,528
Net loss	—	—		—		—			—			—			(841		)	(841		)	$	(841	)
Other comprehensive income (loss):
Unrealized gains on securities, net of income tax benefit of $203	—	—		—		—			—			(449		)	—			(449		)	(449		)
Total comprehensive loss																					$	(1,290	)
Stock option compensation	—	—		—		—			33			—			—			33
Balance at June 30, 2009	—	$	—	4,698,697		$	47		$	29,793		$	42		$	(2,611	)	$	27,271

	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Retained Earnings			Total Shareholders’			Total Comprehensive
	Shares	Amount		Capital		Income		(Deficit)			Equity			Loss
Balance at December 31, 2008	4,698,697	$	47	$	29,760	$	491	$	(1,770	)	$	28,528
Net loss	—	—		—		—		(36		)	(36		)	$	(36	)
Other comprehensive income(loss):
Unrealized loss on securities, net of income taxes of $63	—	—		—		(692)		—			(692)			(692)
Reclassification of realized losses	—	—		—		342		—			342			342
Total comprehensive loss														$	(386	)
Stock option compensation	—	—		17		—		—			17
Balance at March 31, 2009	4,698,697	$	47	$	29,777	$	141	$	(1,806	)	$	28,159

The accompanying notes are an integral part of the consolidated financial statements.

CommunitySouth Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(dollars in thousands)

	Three Months ended			Three Months ended
	Six months ended			Six months ended
	March 31,			March 31,
	June 30, 2010			June 30, 2009
	2010			2009
Operating activities
Net loss	$	(24,~~105~~306	)	$	(36841	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for loan losses	12,000			12,~~305~~805
Stock option compensation	1732			1733
Appreciation of bank-owned life insurance	—			(4851		)
Gain on sale of securities	(54478		)	(~~520~~519		)
Depreciation	~~176~~334			~~180~~361
Loss on sale of other real estate owned and repossessed collateral	15			—
Loss on disposal of equipment	3			—
Deferred income tax benefit	—			(10		)
Net loss on sale of other real estate owned and repossessed collateral	7			—
Income tax refund	1,027			—
Deferred income tax expense	—			17
Decrease in accrued interest receivable	311			164
Income tax refund	978			—
Increase (decrease) in accrued interest payable	239			(737		)
Decrease in accrued interest receivable	438			343
Increase (decrease) in accrued expenses	(17		)	49
Decrease in accrued interest payable	(11		)	(188		)
Increase in other assets	(288		)	(1,699		)
Increase in accrued expenses	238			313
Decrease in other liabilities	(1		)	(1		)
Decrease (increase) in other assets	197			(1,301		)
Net cash provided by (used in) operating activities	320			(1,336		)
Decrease in other liabilities	—			(149		)
Net cash provided by (used in) operating activities	(568		)	823
Investing activities
Net decrease in loans outstanding	1223,~~920~~857			49,~~298~~898
Sale of bank owned life insurance	—			45,~~576~~488
Purchase of investment securities	(80244,~~000~~951		)	(60,~~696~~153		)
Sale/call/maturity of investment securities	26159,~~134~~107			5864,~~651~~890
Purchases of FHLB stock	—			(19		)
Sale of FHLB stock	—			206
Purchase of property and equipment	(16		)	(153		)
Disposal (purchase) of property and equipment	(18		)	(201		)
Sale of other real estate owned and repossessed collateral	~~527~~1,709			—
Net cash provided by (used in) investing activities	(4060,~~435~~296		)	620,~~657~~128
Financing activities
Net increase in deposit accounts	2045,~~262~~019			2426,~~782~~845
Repayment of FHLB	—			(25,000		)
Repayments to FHLB	—			(25,000		)
Repayment of Bank of Tennessee advance	—			(1,570		)
Repayment of note payable	—			(1,570		)
Net cash provided by (used in) financing activities	20,262			(1,788		)
Net cash provided by financing activities	45,019			275
Net increase (decrease) in cash and cash equivalents	(1915,~~853~~845		)	321,~~533~~226
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	37,919			9,876
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1822,~~066~~074		$	1331,~~409~~102
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for (received from):
Interest	$	24,~~098~~873		$	14,~~343~~219
Income taxes	$	(~~1,027~~978	)	$	—419
Schedule of non-cash transactions
Unrealized gains (losses) on investment securities, net of income taxes	$	915		$	(692	)
Unrealized gains / (losses) on investment securities, net of income taxes	$	1,586		$	(449	)
Loans charged-off (recovered)	$	1,022		$	(20	)
Loans charged-off	$	3,362		$	1,205
Transfers to other real estate owned	$	(13,~~423~~110	)	$	(12,~~270~~717	)

The accompanying notes are an integral part of the consolidated financial statements.

CommunitySouth Financial Corporation

Notes to Unaudited Consolidated Financial Statements

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Business Activity and Organization — CommunitySouth Financial Corporation (the “Company”) is a South Carolina corporation organized for the purpose of owning and controlling all of the capital stock of CommunitySouth Bank and Trust (the “Bank”). The Bank is a state chartered bank organized under the laws of South Carolina. From inception on March 20, 2004 through January 18, 2005, the Company engaged in organizational and pre-opening activities necessary to obtain regulatory approvals and to prepare its subsidiary, the Bank, to commence business as a financial institution. The Company received approval from the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board (“FRB”) and the South Carolina State Board of Financial Institutions in January 2005.

The Bank began operations on January 18, 2005. The Bank primarily is engaged in the business of accepting deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

The Company sold 4,681,069 shares of common stock at $6.40 per share in an initial public offering that was completed on February 15, 2005 (as adjusted for all stock splits). The offering raised $29,430,810, net of offering costs. The directors and officers of the Company purchased 659,531 shares at $6.40 per share for a total of $4,221,000.

Basis of Presentation — The accompanying financial ~~statements~~ statements have been prepared in accordance with generally accepted accounting ~~principles~~ principles in the United States of America (“GAAP”) and to general practices in the banking industry for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by ~~generally~~GAAP ~~accepted accounting principles~~ for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six month ~~period~~ periods ended ~~March~~June 3130, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “SEC”).

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The consolidated financial statements include the accounts of CommunitySouth Financial Corporation, the parent company, and CommunitySouth Bank and Trust, its wholly owned subsidiary, and All Seasons Properties, LLC, a subsidiary of the Bank, which was formed in 2009 for the purpose of holding and marketing repossessed assets. All significant intercompany items have been eliminated in the consolidated financial statements.

Management’s Estimates — The preparation of ~~consolidated~~ consolidated financial statements in conformity with ~~accounting~~GAAP ~~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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Disclosure Regarding Segments — The Company reports as one operating segment, as management reviews the results of operations of the Company as a single enterprise.

Cash and Cash Equivalents — For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, short-term interest bearing deposits and federal funds sold. Cash and cash equivalents have an original maturity of three months or less.

Concentrations of Credit Risk — Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the upstate region of South Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers. The Bank does, however, have a concentration of loans classified as commercial real estate. These loans are especially susceptible to being adversely effected by the current economic downturn. The current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The commercial real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values in our market areas continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Management has determined that there is no concentration of credit risk associated with its lending policies or practices.

The Company’s investment portfolio consists of both marketable and non-marketable equity securities. Management believes credit risk associated with the equity securities is not significant. The Company places its deposits and correspondent accounts with, and sells its federal funds to, high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Investment Securities — The Company classifies investments in equity and debt securities in three categories:

1. Available for sale securities: These are securities that are not classified as either held to maturity or as trading securities. These securities are reported at fair market value. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders’ equity (accumulated other comprehensive income).

2. Held to maturity securities: These are investment securities that the Company has the ability and intent to hold until maturity. These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts.

3. Trading securities: These are securities that are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the income statement. The Company has no trading securities.

Gains or losses on dispositions of investment securities are based on the differences between the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Premiums and discounts are amortized or accrued into interest income by a method that approximates a level yield.

Other Investments — The Bank, as a member institution, is required to own stock investments in the Federal Home Loan Bank of Atlanta (the “FHLB”). Investment in the FHLB is a condition of borrowing from the FHLB, and the stock is pledged to ~~collateralize~~ collateralize such borrowings. No ready market exists for the stock and it has no quoted market value. However, redemption of ~~these~~FHLB ~~stocks~~stock has historically been at par value. At ~~March~~June 3130, 2010 and December 31, 2009, the Company’s investment in FHLB stock was $1,599,300. The dividend received on this stock is included in interest and dividends on investments.

Loans Receivable — Loans are stated at their unpaid principal balance less an allowance for loan losses and net deferred loan origination fees. Interest income is computed using the simple interest method and is recorded in the period earned. Loan origination fees collected and certain loan origination costs are deferred and the net amount is accreted as income using a method that approximates the level yield method over the life of the related loans.

Loans are considered to be impaired when, in management’s judgment and based on current information, the full collection of principal and interest becomes doubtful according to the contractual terms of the loan agreement. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. Loans are generally placed on non-accrual status when principal or interest becomes 90 days past due, or when payment in full is not anticipated. Additionally, impaired loans are typically placed in non-performing status if it is determined that the entire balance of principal and interest of the loan cannot be repaid, and future payments are applied to principal until such time as collection of the obligation is no longer doubtful. Interest accrual resumes only when loans return to performing status. To return to performing status, loans must be fully current, and continued timely payments must be a reasonable expectation. When a loan is placed on non-accrual status, interest accrued but not received is generally reversed against interest income. Cash receipts on non-accrual loans are not recorded as interest income, but are used to reduce principal.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s potential problem loan list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected. Management has determined that the Company had $4368,~~858~~124,000 and $34,158,000 in impaired loans at ~~March~~June 3130, 2010 and December 31, 2009, respectively.

Allowance for Loan Losses — The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. 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 collectability of the loans in light of historical experiences, 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is ~~doubtful~~probable that the Company will be ~~able~~unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for ~~large~~commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify ~~smaller~~individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Bank-Owned Life Insurance — As of ~~March~~June 3130, 2010, the Company has no remaining bank-owned life insurance policies. The Company made the decision to sell these policies in 2009 in order to help reduce assets, thereby improving the Bank’s risk based capital ratio. During the first quarter of 2009, the Company began the process of divesting of its key employee life insurance policies by selling policies at no gain or loss. Income from these policies and changes in the net cash surrender value were recorded in non-interest income. The final policy was sold in April 2009.

Advertising — Advertising, promotional, and other business development costs generally are expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent.

Property and Equipment — Premises, furniture and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method, based on the estimated useful lives for furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the life of the lease. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.

Mortgage Origination Revenue — The Bank offers residential loan origination services to its customers in its immediate market area. The loans are offered on terms and prices offered by the Bank’s correspondents and are closed in the name of the Bank with preapproval from the correspondents. The Bank receives fees for services it provides in conjunction with the origination services it provides. The fees are recognized at the time the loans are sold to the Bank’s correspondent.

Income Taxes — The consolidated financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences.

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions taken or expected to be taken in an its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Income taxes deferred to future years are determined utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and net operating loss carry-forwards. As of ~~March~~June 3130, 2010 and December 31, 2009, due to the Company’s recent financial results, the uncertainty involved in projecting near-term profitability, and evaluation of appropriate tax planning strategies, management has provided a 100% valuation allowance for these deferred tax assets. This valuation allowance reflects management’s estimate that the deferred tax assets are not more-~~than-~~likely-than-not to be realized.

Earnings (loss) Per Share — Basic earnings (loss) per share represents the net income (loss) allocated to shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect the impact of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to both outstanding warrants and stock options, and are determined using the treasury stock method.

Stock—based Compensation — The Company has adopted the fair value recognition provisions to account for compensation costs under its stock option plans. The Company previously utilized the intrinsic value method. Under the intrinsic value method, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equaled the market price on the date of grant.

The Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant.

Off-Balance Sheet Financial Instruments — In ~~the~~ the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

Recently Issued Accounting Standards — The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.:

In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliation. The new disclosures are effective for the Company for the current quarter and have been reflected in the Fair Value footnote.10

9Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff’s understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President. The amendment had no impact on the financial statements.

~~Guidance related~~Other toaccounting ~~subsequent~~standards ~~events~~that ~~was~~have ~~amended~~been inissued ~~February 2010~~or toproposed ~~remove~~by the ~~requirement~~FASB ~~for~~or another ~~SEC~~standards-setting ~~filer~~bodies toare ~~disclose~~not ~~the~~expected ~~date~~to ~~through~~have ~~which~~a ~~subsequent~~material ~~events were evaluated. The amendments were effective upon issuance and had no significant~~ impact on the Company’s financial ~~statements~~position, results of operations or cash flows.

~~Other~~Risks and Uncertainties — In the normal course of ~~accounting~~its ~~standards~~business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that ~~have~~its interest-bearing ~~been~~liabilities ~~issued~~mature or ~~proposed~~reprice byat ~~the~~different ~~FASB~~speeds, or ~~other~~on ~~standards-setting~~different ~~bodies~~bases, ~~are~~than ~~not~~its ~~expected~~interest-earning toassets. Credit ~~have~~risk ais ~~material~~the ~~impact~~risk of default on the Company’s ~~financial~~loan ~~position,~~portfolio that results offrom ~~operations~~the borrower’s inability or unwillingness ~~cash~~to ~~flows~~make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

~~Risks~~The ~~and~~Company ~~Uncertainties~~is —subject Into the ~~normal~~regulations ~~course~~ of ~~its~~various ~~business,~~governmental ~~the~~agencies. These ~~Company~~regulations ~~encounters~~can ~~two~~and ~~significant~~do change ~~types~~significantly offrom ~~risk:~~period ~~economic~~to ~~and regulatory~~period. ~~There~~ The ~~are~~Company ~~three~~also ~~main~~undergoes periodic examinations by the regulatory ~~components~~agencies, ofwhich ~~economic~~may ~~risk: interest~~subject ~~rate~~it to further changes with respect to asset ~~risk~~valuations, ~~credit~~amounts ~~risk~~of required loss allowances and ~~market~~operating ~~risk. The~~restrictions from ~~Company~~the isregulators’ ~~subject~~judgments tobased ~~interest~~on ~~rate~~information ~~risk~~available to them at the ~~degree~~time ~~that~~of their ~~its~~examination. On June 29, ~~interest-bearing~~2009, ~~liabilities~~the ~~mature~~Bank orentered ~~reprice~~into ata ~~different~~Memorandum ~~speeds,~~of orUnderstanding on(the “MOU”) with the ~~different~~South ~~bases,~~Carolina ~~than~~Board ~~its~~of ~~interest-earning~~Financial ~~assets~~Institutions and the FDIC. ~~Credit~~In ~~risk~~addition, ison February 23, 2010 the ~~risk~~Bank entered ofinto ~~default~~a onConsent Order (the ~~Company’s~~ ~~loan~~“Consent ~~portfolio~~Order”) ~~that~~with ~~results~~these ~~from~~same ~~the~~regulators which ~~borrower’s~~supersedes ~~inability~~the orMOU. Additionally, ~~unwillingness~~on toMarch 1, ~~make~~2010, ~~contractually~~the ~~required~~Company ~~payments. Market~~entered ~~risk~~into ~~reflects~~a ~~changes~~memorandum inof understanding with the ~~value~~Federal Reserve Bank of Richmond, which contains provisions similar to ~~collateral~~the ~~underlying~~articles ~~loans~~in ~~receivable~~the ~~and~~Bank’s Consent Order with the ~~valuation~~South Carolina Board of Financial ~~real~~Institutions ~~estate~~and ~~held~~the byFDIC. ~~the~~Please ~~Company~~see Note 3 for more details regarding these regulatory agreements.

~~The~~Reclassifications ~~Company~~- isCertain ~~subject~~captions ~~to the regulations of various governmental agencies. These regulations can~~ and do ~~change~~amounts ~~significantly~~in ~~from period to period. The Company also undergoes periodic examinations by~~ the ~~regulatory agencies,~~prior ~~which~~financial ~~may~~statements ~~subject~~were itreclassified to ~~further~~conform ~~changes~~ with ~~respect to asset valuations, amounts of required loss allowances and operating restrictions from~~ the ~~regulators’ judgments based on information available to them at the time of~~ ~~their~~2010 ~~examination~~presentation. ~~On June 29,~~Such ~~2009,~~reclassifications ~~the~~had ~~Bank~~no ~~entered~~effect ~~into a Memorandum of Understanding (the “MOU”) with the South Carolina Board of Financial Institutions and the FDIC. In addition,~~ on ~~February 23,~~previously ~~2010~~reported ~~the Bank~~net ~~entered~~income ~~into a Consent Order~~ (~~the “Consent Order”~~loss) ~~with these same~~or regulators which supersedes the MOU. Additionally, on March 1, 2010, the Company entered into a memorandum of understanding with the Federal Reserve Bank of Richmond, which contains provisions similar to the articles in the Bankshareholders’s ~~Consent Order with the South Carolina Board of Financial Institutions and the FDIC~~equity. ~~Please see Note 3 for more details regarding these regulatory agreements.~~

~~Reclassifications~~NOTE -3 ~~Certain~~— ~~captions~~REGULATORY ~~and~~ACTIONS ~~amounts~~AND inGOING ~~the prior~~CONCERN ~~financial statements were reclassified to conform with the 2010 presentation. Such reclassifications had no effect on previously reported net income or shareholders’ equity.~~CONSIDERATIONS

~~NOTE~~Memorandum 3of ~~— REGULATORY ACTIONS AND GOING CONCERN CONSIDERATIONS~~Understanding

~~Memorandum~~As a result of the issues stemming from the economic downturn, on June 29, 2009 the Bank entered into the MOU with the South Carolina Board of Financial Institutions and the FDIC. The MOU required the Bank to, among other things, (1) submit a capital plan to the supervisory authorities for returning to a “well-capitalized” designation; (2) develop specific plans and proposals for the reduction and improvement of assets which are subject to adverse classification and past due loans; (3) implement a plan to decrease the concentration of commercial real estate loans; (4) develop and implement an adequate loan review program; and (5) review overall liquidity objectives and develop plans and procedures aimed at improving liquidity and reducing reliance on volatile liabilities to fund longer-term assets. In addition, the Bank may not pay dividends without the prior written consent of each supervisory authority. Since entering into the MOU, the Bank has been actively pursuing the corrective actions required by the MOU in an effort to ensure that the requirements of the MOU are met in a timely manner. For additional information on the MOU, including actions the Bank has taken in response to the MOU, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Effect of the Current Economic Environment on our Bank — Memorandum of Understanding.”

AsIn ~~a result of the issues stemming from the economic downturn~~addition, onin ~~June~~mid-February ~~29,~~2010 ~~2009~~ the Bank ~~entered into~~received ~~the~~a ~~MOU~~supervisory letter ~~with~~from the ~~South Carolina Board of Financial Institutions and the~~ FDIC~~. The~~ ~~MOU~~dated ~~required the Bank to~~February 11, ~~among~~ ~~other things~~2010, ~~(1) submit~~which aprovided ~~capital plan to the supervisory authorities~~ for ~~returning to a “well-capitalized” designation; (2) develop~~ ~~specific~~additional ~~plans~~restrictions and ~~proposals~~mandatory ~~for~~actions ~~the reduction and improvement of assets which are subject~~ to ~~adverse~~be ~~classification~~taken ~~and~~by ~~past due loans; (3) implement a plan to decrease~~ the ~~concentration~~Bank. These ofrestrictions ~~commercial real estate loans; (4) develop~~ and ~~implement~~actions anwere ~~adequate loan review program; and (5) review overall~~all ~~liquidity~~substantially ~~objectives~~addressed and ~~develop~~superseded ~~plans~~by ~~and~~the ~~procedures~~subsequent ~~aimed~~Consent atOrder ~~improving~~discussed ~~liquidity~~in ~~and~~the ~~reducing~~subsection ~~reliance~~below. However, onin order ~~volatile~~to ~~liabilities~~comply towith ~~fund~~the ~~longer-term assets. In~~supervisory ~~addition~~letter, the Bank ~~may~~was ~~not~~required to prepare ~~pay~~and ~~dividends~~submit ~~without~~to the ~~prior~~FDIC ~~written~~a ~~consent~~capital ofrestoration ~~each~~plan ~~supervisory authority. Since~~no ~~entering~~later ~~into~~than ~~the MOU~~April 2, ~~the~~2010, ~~Bank~~which ~~has~~submission ~~been~~date ~~actively~~was ~~pursuing~~sooner ~~the~~than ~~corrective~~a ~~actions~~similar ~~required~~requirement byunder the ~~MOU~~ inConsent anOrder. The ~~effort~~Bank tosubmitted ~~ensure~~its capital ~~that~~restoration ~~the~~plan ~~requirements~~to of the ~~MOU~~FDIC ~~are~~on ~~met~~April 2, ~~in a timely manner~~2010.

~~In addition, in mid-February 2010 the Bank received a supervisory letter from the FDIC dated February~~ 11, 2010, which provided for additional restrictions and mandatory actions to be taken by the Bank. These restrictions and actions were all substantially addressed and superseded by the subsequent Consent Order discussed in the subsection below. However, in order to comply with the supervisory letter, the Bank was required to prepare and submit to the FDIC a capital restoration plan no later than April 2, 2010, which submission date was sooner than a similar requirement under the Consent Order. The Bank submitted its capital restoration plan to the FDIC on April 2, 2010.

Consent Order

Following the FDIC’s safety and soundness examination of the Bank in the fourth quarter of 2009, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions on February 23, 2010. The Consent Order, which supersedes the MOU, conveys specific actions needed to address certain findings from the FDIC’s Report of Examination and to address the Bank’s current financial condition, primarily related to capital planning, liquidity/funds management, policy and planning issues, management oversight, loan concentrations and classifications, and non-performing loans. For additional information on the Consent Order, including actions the Bank has taken in response to the Consent Order, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Effect of the Current Economic Environment on our Bank — Consent Order.”

10Additionally, on March 1, 2010, the Company entered into an informal agreement with the Federal Reserve Bank of Richmond. The informal agreement contains provisions similar to those in the Bank’s MOU with the FDIC and the South Carolina Board of Financial Institutions, including a requirement that the Company obtain the prior written approval of the Federal Reserve Bank of Richmond before (1) declaring or paying any dividends, (2) directly or indirectly accepting dividends or any other form of payment representing a reduction in capital from the Bank, (3) making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities, (4) directly or indirectly, incurring, increasing or guaranteeing any debt, and (5) directly or indirectly, purchasing or redeeming any shares of its stock. Pursuant to our plans to preserve capital and to inject more capital into the Bank, the Company has no plans to undertake any of the foregoing activities.

~~Specifically,~~Going ~~the~~Concern ~~Consent Order requires the Bank to, among other things,~~Considerations

~~· establish,~~Due ~~within~~to 30the ~~days~~conditions ~~from~~and ~~the~~events discussed ~~effective~~in ~~date~~this ofForm 10-Q, ~~the~~substantial ~~Consent~~doubt ~~Order,~~exists aas ~~plan~~ to ~~monitor~~our ~~compliance~~ability ~~with~~to ~~the~~continue ~~Consent~~as ~~Order,~~a ~~which~~going ~~shall~~concern. We behave ~~monitored~~determined that bysignificant ~~the~~additional ~~Bank’s~~sources ~~board~~ of ~~directors. A~~capital ~~plan~~will tobe ~~monitor~~required ~~compliance~~for ~~with~~us ~~the Consent~~to ~~Order~~continue ~~was~~operations ~~established~~through by2010 ~~the~~and ~~Bank’s~~beyond. ~~board~~We ofalso ~~directors~~continue atto amonitor ~~meeting~~and address ~~held~~liquidity onissues. ~~March~~As of June 1630, 2010~~. Pursuant~~, we are deemed to ~~the~~be “significantly ~~plan~~undercapitalized.” As described below, ~~the~~we ~~board created~~did ~~and~~not ~~appointed~~meet ~~four~~the ofConsent ~~its~~Order ~~members~~deadline to ~~serve~~achieve onand maintain a ~~consent~~“well-capitalized” ~~order compliance~~designation, ~~committee~~and totherefore ~~monitor~~we ~~the~~submitted ~~Bank’s~~a ~~compliance~~revised capital ~~with~~plan to the ~~Consent Order. The~~FDIC ~~committee~~and ~~has~~the ~~met~~South ~~five~~Carolina ~~times since~~Board ~~its~~of ~~creation~~Financial Institutions on ~~March~~July 1628, 2010;.

~~· ensure~~We ~~the~~have ~~Bank~~engaged ~~has~~financial ~~qualified~~advisors ~~management~~to assist the Company in ~~place~~its efforts to ~~carry~~raise ~~out~~additional ~~the~~capital, ~~policies~~sell ofassets, ~~the~~and explore ~~Bank’s~~other ~~board~~strategic ofalternatives ~~directors~~to address our current and ~~operate~~expected ~~the~~liquidity ~~Bank~~and incapital adeficiencies. To date, ~~safe~~those ~~and~~efforts ~~sound~~have ~~manner~~not yielded any significant results. ~~A management~~As ~~plan~~a result of our financial condition, ~~which~~our ~~includes~~regulators are ~~organizational~~continually ~~structure~~monitoring our liquidity and ~~management assessment~~capital adequacy. In addition, ~~was~~our ~~approved~~regulators byhave ~~the~~various enforcement ~~Bank’s~~tools ~~board~~available ofto ~~directors~~them, ~~and~~including ~~submitted~~the issuance of capital directives, orders to cease engaging in certain business activities, the ~~supervisory~~issuance ~~authorities~~of onmodified ~~April 12~~or additional orders or agreements, ~~2010;~~and the authority to close the Bank.

~~· achieve~~Notwithstanding ~~and~~the ~~maintain~~above, ~~within 120 days~~accompanying ~~from~~consolidated ~~the~~financial ~~effective~~statements ~~date~~have ofbeen ~~the~~prepared ~~Consent~~on ~~Order,~~a ~~Total~~going ~~Risk~~concern ~~Based capital at least~~basis, ~~equal~~which tocontemplates ~~10%~~the realization of ~~risk-weighted~~ assets and ~~Tier~~the 1discharge ~~capital~~of atliabilities in ~~least~~the ~~equal~~normal tocourse 8% of ~~total~~ ~~assets. At~~business ~~this~~for ~~time~~the foreseeable future, weand do not include ~~believe~~any ~~that~~adjustments ~~we will be able~~ to ~~meet~~reflect ~~these~~the ~~minimum~~possible ~~capital~~future ~~requirements~~effects ~~within 120~~on ~~days from~~ the ~~effective~~recoverability and ~~date~~classification of ~~the Consent Order. If this were to occur~~assets, ~~then~~or ~~within 30 days of such determination~~ the ~~Bank~~amounts ~~would~~and beclassification ~~required~~of ~~to submit a written plan to the~~liabilities ~~FDIC~~that ~~describing~~may ~~the~~result ~~means~~should ~~and~~we ~~timing~~be byunable ~~which the Bank will increase such ratios up~~ to orcontinue inas ~~excess~~a ofgoing ~~the established minimums;~~concern.

~~· develop,~~The ~~within~~Bank’s 45financial ~~days~~condition has suffered during 2009 and the first six months of 2010 from the extraordinary effects of what may ultimately be the ~~effective~~worst ~~date~~economic downturn since the Great Depression. The effects of the ~~Consent~~current economic ~~Order~~environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The effects of the economic downturn have been particularly severe during the last year. The Bank, with a ~~written~~loan ~~analysis~~portfolio consisting of a concentration in commercial real estate loans including residential construction and ~~assessment~~development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans to the Bank. As a result, the Bank’s ~~management~~level of nonperforming assets increased substantially during 2009 and ~~staffing~~has ~~needs~~continued to increase through the second quarter of 2010. As of June 30, 2010, our non-performing assets equaled $43.9 million, or ~~The~~9.5% of assets, as compared to $42.4 million, or 10.1% of assets, as of December 31, 2009. In addition, our level of impaired loans increased to $68.1 million at June 30, 2010 compared to $34.2 million at December 31, 2009. For the year ended December 31, 2009 and for the six months ended June 30, 2010, the Bank ~~prepared~~recorded a ~~written~~$17 ~~analysis~~million and ~~assessment~~a of$2 million ~~its~~provision, respectively, to increase the allowance for loan losses to a level which, in management’s best judgment, adequately reflected the increased ~~and~~risk ~~staffing~~inherent ~~needs~~in the loan portfolio as of the year and ~~submitted~~quarter ~~this~~end ~~analysis~~periods, respectively. Nevertheless, togiven the current ~~supervisory~~economic ~~authorities~~climate, management recognizes the possibility of further ondeterioration ~~April~~in the loan portfolio in the second half of 2010. For the six months ended June 1230, 2010;, we recorded net loan charge-offs of $3.4 million, or 1.3% of average loans, as compared to net loan charge-offs of $1.2 million, for the six months ended June 30, 2009.

~~· establish,~~The ~~within~~Company 60and ~~days~~the ~~from~~Bank ~~the~~operate in a highly ~~effective~~regulated ~~date~~industry ofand ~~the~~must ~~Consent~~plan ~~Order,~~for athe ~~comprehensive~~liquidity ~~policy~~needs ~~for~~of ~~determining~~each ~~the~~entity ~~adequacy~~separately. A variety of sources of liquidity are available to the Bank’s ~~allowance~~to ~~for~~meet its ~~loan~~short-term and ~~lease~~long-term ~~losses,~~funding ~~which~~needs. ~~must~~Although ~~provide for~~ a ~~review~~number of ~~the~~these ~~Bank’s~~sources have ~~allowance~~been ~~for~~limited ~~loan~~following ~~and~~execution ~~lease~~of ~~losses~~the atConsent ~~least~~Order ~~once each~~with ~~calendar~~the ~~quarter. The~~FDIC ~~Bank’s board~~and ofthe ~~directors~~South ~~and~~Carolina ~~consent~~Board ~~order~~of ~~compliance~~Financial ~~committee~~Institutions, ~~reviewed~~management ~~and~~has ~~approved a~~prepared ~~comprehensive~~forecasts ~~policy~~of ~~for~~these ~~determining~~sources ~~the~~of ~~adequacy~~funds ofand the Bank’s ~~allowance~~projected ~~for loan~~uses ~~and~~of ~~lease~~funds during ~~losses,~~2010 ~~and~~in ~~this~~an ~~policy~~effort ~~was~~to ~~submitted~~ensure tothat the ~~supervisory authorities~~sources ~~prior~~available are sufficient to meet the ~~April 27,~~Bank’s ~~2010~~projected ~~deadline;~~liquidity needs for this period.

~~· enhance,~~The ~~within~~Company 60relies ~~days~~on dividends from the ~~effective~~Bank ~~date~~as ofits ~~the~~primary ~~Consent~~source ~~Order,~~of ~~the~~liquidity. ~~Bank’s~~The ~~written~~Company ~~plan~~is ~~for~~a ~~the~~legal ~~reduction~~entity separate ofand ~~classified~~distinct ~~assets,~~from ~~which~~the ~~shall~~Bank. ~~include,~~Various ~~among~~legal ~~other~~limitations ~~things,~~restrict athe ~~reduction~~Bank offrom ~~the~~lending ~~Bank’s~~or ~~risk~~otherwise ~~position~~supplying infunds ~~each~~to ~~asset~~the inCompany ~~excess~~to ofmeet ~~$250~~its obligations,~~000~~ including ~~that~~paying isdividends. ~~classified as~~In ~~“Substandard”~~addition, orthe ~~“Doubtful.” A~~terms ~~plan~~of the Consent Order todescribed ~~reduce~~in ~~the~~greater ~~Bank~~detail under “Management’s ~~classified~~Discussion ~~assets~~and ~~was~~Analysis ~~reviewed~~of Financial Condition and ~~approved~~Results byof Operations — The Effect of the ~~Bank’s~~Current ~~board~~Economic ofEnvironment ~~directors~~on ~~and~~our ~~consent~~Bank ~~order~~— ~~compliance~~Consent ~~committee~~Order” onwill ~~April 20,~~further limit the Bank’s ~~2010. The~~ability ~~plan~~to ~~was~~pay ~~submitted~~dividends to the ~~supervisory~~ ~~authorities~~Company onto ~~the~~satisfy ~~April 27,~~its ~~2010~~funding ~~deadline;~~needs.

· not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or in part, “substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. The Bank has not knowingly extended, directly or indirectly, any additional credit to, or for the benefit of, any borrower who was a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected;12

~~· perform,~~The ~~within~~Company 45will ~~days~~also ~~from~~need ~~the~~to raise ~~effective~~additional ~~date~~capital ofto ~~the~~increase ~~Consent~~capital ~~Order,~~levels ato ~~risk~~meet ~~segmentation~~the ~~analysis~~standards ~~with~~set ~~respect~~forth toby the ~~Bank~~FDIC as described in greater detail under “Management’s ~~Concentrations~~Discussion and Analysis of ~~Credit~~Financial Condition and aResults of ~~written~~Operations ~~plan~~— toThe ~~systematically~~Effect of the Current Economic Environment on our Bank — ~~reduce~~Consent ~~any~~Order”. ~~segment~~As a result of the ~~portfolio~~recent ~~that~~downturn isin anthe ~~undue~~financial ~~concentration~~markets, the availability of ~~credit. The~~ ~~Bank~~many ~~performed~~sources aof ~~risk~~capital (principally to financial services ~~segmentation~~companies) ~~analysis~~has ~~with~~become ~~respect~~significantly restricted or has become increasingly costly as compared to ~~its~~the ~~concentrations~~prevailing ofmarket ~~credit,~~rates ~~and~~prior ~~this~~to the volatility. ~~analysis~~Management ~~was~~cannot ~~reviewed~~predict ~~and~~when ~~approved~~or byif the ~~consent~~capital ~~order~~markets ~~compliance~~will ~~committee~~return onto more ~~April 6,~~favorable ~~2010~~conditions ~~and~~or bywhether the ~~Bank’s~~Company ~~board~~will be able to raise a sufficient amount of ~~directors~~capital onto ~~April 8,~~continue ~~2010~~operations. Management is actively evaluating a ~~This~~number ~~analysis~~of ~~was~~capital ~~submitted~~sources, asset reductions and other balance sheet management strategies in an effort to ensure that the ~~supervisory~~Bank’s ~~authorities~~projected bylevel ~~the~~of ~~April 12,~~regulatory ~~2010~~capital ~~deadline;~~can support its balance sheet.

~~· revise,~~There ~~within~~can 60be ~~days~~no ~~from~~assurances that the ~~effective~~Company ~~date~~will ofbe ~~the~~successful ~~Consent~~in ~~Order,~~its efforts to raise additional capital. An equity financing transaction would result in substantial dilution to the ~~Bank~~Company’s current ~~internal~~shareholders ~~loan~~and ~~review~~could ~~and~~adversely ~~grading~~affect ~~system~~the market price of the Company’s common stock. It is difficult to ~~provide~~predict ~~for~~if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to the ~~periodic~~regulatory ~~review~~restrictions ofwhich exist that restrict cash payments between the Bank’s ~~loan~~and ~~portfolio~~the inCompany, ~~order~~the Company may be unable to realize ~~identify~~its assets and ~~categorize~~discharge its liabilities in the normal course of business.

11As a result of management’s assessment of the Company’s ability to continue as a going concern, the accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets.

~~Bank’s loans,~~NOTE ~~and~~4 ~~other~~— ~~extensions~~INVESTMENT of credit which are carried on the Bank’s books as loans, on the basis of credit quality. The Bank revised and updated its internal loan review plan, which was reviewed and approved by the Bank’s board of directors and the consent order compliance committee on April 20, 2010. The plan was submitted to the supervisory authorities prior to the April 27, 2010 deadline;SECURITIES

· formulate and implement, within 60 days from the effective date of the Consent Order, a profit plan and comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank, the major areas in and means by which the Bank will seek to improve the Bank’s operating performance, and the operating assumptions that form the basis for and adequately support major projected income and expense components of the plan. The ~~Bank~~amortized ~~created~~costs ~~a profit plan~~ and ~~budget~~fair ~~for~~values ~~all categories~~ of ~~income~~investment ~~and~~securities ~~expense,~~are ~~which~~as ~~includes~~follows ~~adjustments where the Bank either exceeded budget or had budget shortfalls~~ (in order to provide realistic projections going forward. The profit plan and budget were reviewed and approved by the Bank’s board of directors on April 20, 2010 and were submitted to the supervisory authorities prior to the April 27, 2010 deadline;thousands):

· enhance, within 60 days from the effective date of the Consent Order, the Bank’s written funds management plan addressing liquidity, contingent funding, and asset liability management. The Bank’s funds management plan, which addresses liquidity, contingent funding, and asset liability management, was reviewed and approved by the Bank’s board of directors and the consent order compliance committee on April 20, 2010 and was submitted to the supervisory authorities prior to the April 27, 2010 deadline;

	Amortized		Gross Unrealized				Fair
As of June 30, 2010	Cost		Gains		Losses		Value
Available for sale
US Treasury	$	149,971	$	4	$	—	$	149,975
Mortgage-backed	41,023		448		—		41,471
Marketable securities	100		—		—		100
Total available for sale	$	191,094	$	452	$	—	$	191,546

· not accept, renew, or rollover any brokered deposits. The Bank must develop and submit to the FDIC, within 30 days from the effective date of the Consent Order, a plan for eliminating its reliance on brokered deposits. A plan was approved by the Bank’s board of directors and consent order compliance committee on March 24, 2010 and was submitted to the FDIC on March 25, 2010. Since entering into the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits;

	Amortized		Gross Unrealized					Fair
As of December 31, 2009	Cost		Gains		Losses			Value
Available for sale
Mortgage-backed	104,672		77		(1,211		)	103,538
Marketable securities	100		—		—			100
Total available for sale	$	104,772	$	77	$	(1,211	)	$	103,638

~~· not~~NOTE ~~offer~~5 an— ~~effective~~LOANS yield in excess of 75 basis points over interest paid on deposits (including brokered deposits, if approval is granted for the Bank to accept them) of comparable size and maturity in either the Bank’s normal market area or in the market area in which such deposits would otherwise be accepted. However, on April 1, 2010, we applied for and received a determination from the FDIC that our market areas were all high interest rate areas. As a result, we have permission to pay deposit rates of up to 75 basis points over the local rates (assuming the local rates exceed the applicable non-local rates) and on non-local deposits gathered in our normal market area even if these rates exceed non-local rates by more than 75 basis points;RECEIVABLE

~~· not~~Major ~~declare~~classifications ~~or pay any dividends or bonuses or make any distributions~~ of ~~interest,~~loans ~~principal,~~receivable orare ~~other~~summarized ~~sums~~as on subordinated debentures without the prior approval of the supervisory authorities. Since entering into the Consent Order, the Bank has not declared or paid any dividends or bonuses or made any distributions of interest, principal, or other sums on subordinated debentures; andfollows:

· furnish, within 45 days from the effective date of the Consent Order and within 45 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order. The Bank has furnished written progress reports to the supervisory authorities as required by the Consent Order.

(dollar amounts in thousands)	June 30, 2010			December 31, 2009
Real estate - construction	$	68,514		$	81,128
Real estate - mortgage	154,414			167,296
Commercial and industrial	20,665			25,028
Consumer and other	1,183			1,652
Total loans, gross	244,776			275,104
Less allowance for loan losses	(11,601		)	(12,963		)
Total loans, net	$	233,175		$	262,141

~~Additionally,~~Loans onare ~~March 1, 2010,~~stated ~~the~~net ~~Company entered into an informal agreement with the Federal Reserve Bank~~ of ~~Richmond. The~~deferred ~~informal~~fees ~~agreement contains provisions similar to those in the Bank’s MOU with the FDIC~~ and the South Carolina Board of Financial Institutions, including a requirement that the Company obtain the prior written approval of the Federal Reserve Bank of Richmond before (1) declaring or paying any dividends, (2) directly or indirectly accepting dividends or any other form of payment representing a reduction in capital from the Bank, (3) making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities, (4) directly or indirectly, incurring, increasing or guaranteeing any debt, and (5) directly or indirectly, purchasing or redeeming any shares of its stockcosts. ~~Pursuant to our plans to preserve capital and to inject more capital into the Bank, the Company has no plans to undertake any of the foregoing activities.~~

~~Going Concern Considerations~~13

The ~~going~~Bank ~~concern assumption~~had is$30.1 amillion ~~fundamental~~and ~~principle~~$29.4 inmillion ~~the~~of ~~preparation~~loans classified as non-accrual status as of ~~financial~~June 30, 2010 and December 31, 2009, ~~statements~~respectively. At ItJune 30, is2010 ~~the~~and December 31, ~~responsibility~~2009, ofloans ~~management~~past todue ~~assess~~30 ~~the~~days ~~Company’s ability~~or tomore, ~~continue~~excluding asnon-accrual loans aamounted ~~going~~to ~~concern~~$6.8 Inmillion ~~assessing~~and ~~this~~$4.8 ~~assumption~~million, respectively. Changes in the allowance for loan losses for ~~Company~~were ~~has~~as follows (dollars in thousands):

	Six-months ended June 30, 2010			Six-months ended June 30, 2009
Balance, beginning of period	$	12,963		$	8,088
Provision charged to operations	2,000			2,805
Net collections (charge-offs)	(3,362		)	(1,205		)
Balance, end of period	$	11,601		$	9,688

taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of March 31, 2010. The Company has a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank’s financial condition has suffered during 2009 and the first quarter of 2010 from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression.

	Six-months ended June 30,
Impaired Loans:	2010		2009
No valuation allowance required	$	36,860	$	10,569
Valuation allowance required	31,264		12,528
Total impaired loans	$	68,124	$	23,097

Allowance for loan losses on impaired loans at period end	$	6,366	$	2,681

~~The~~NOTE ~~effects~~6 of— the current economic environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The effects of the economic downturn have been particularly severe during the last 150 days. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans to the Bank. As a result, the Bank’s level of nonperforming assets has increased substantially during 2009 and in the first quarter of 2010. For the year ended December 31, 2009 and for the quarter ended March 31, 2010, the Bank recorded a $17 million and $1 million provision, respectively, to increase the allowance for loan losses to a level which, in managements’ best judgment, adequately reflected the increased risk inherent in the loan portfolio as of the year end and quarter end periods, respectively.LEASES

The Company ~~and~~leases ~~the~~branch ~~Bank operate~~locations in aSpartanburg, ~~highly-regulated~~Mauldin, ~~industry~~Anderson, Greer and ~~must~~Greenville, ~~plan~~South ~~for~~Carolina ~~the~~as ~~liquidity~~well ~~needs~~as ~~of each~~the ~~entity~~loan ~~separately.~~operations Acenter ~~variety of sources of liquidity are available to the~~in ~~Bank~~Easley, toSouth ~~meet~~Carolina. ~~its~~The ~~short-term~~initial ~~and~~lease ~~long-term~~terms ~~funding~~range ~~needs.~~from ~~Although~~three ato ~~number~~ten ofyears ~~these~~with ~~sources~~various ~~have~~renewal ~~been~~options. ~~limited~~The ~~following~~minimum ~~execution~~future ofrental ~~the~~payments ~~Consent Order with~~under ~~the~~non-cancelable ~~FDIC~~operating ~~and~~leases ~~the~~having ~~South~~remaining ~~Carolina~~terms ~~Board~~in excess of ~~Financial~~one ~~Institutions~~year, ~~management has~~ ~~prepared~~for ~~forecasts~~each of ~~these~~the ~~sources~~next offive ~~funds~~years and ~~the Bank’s projected uses of funds during 2010~~ in ~~an effort to ensure that~~ the ~~sources~~aggregate ~~available~~ are ~~sufficient~~ to(in ~~meet the Bank’s projected liquidity needs for this period.~~thousands):

The Company relies on dividends from the Bank as its primary source of liquidity. The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, the terms of the Consent Order described above will further limit the Bank’s ability to pay dividends to the Company to satisfy its funding needs.

Remaining six months of 2010	$	182
2011	365
2012	343
2013	348
2014	353
Thereafter	606
Total minimum future rental payments	$	2,197

The ~~Company will also~~ ~~need~~loan tooperations ~~raise~~center ~~additional~~in ~~capital~~Easley tois ~~increase~~leased ~~capital~~from ~~levels to meet the standards set forth by the FDIC. As~~ a ~~result~~partnership ~~of the recent downturn~~ in ~~the financial~~which ~~markets, the availability of many sources of capital (principally to~~a ~~financial~~Company ~~services~~director ~~companies)~~ has become significantly restricted or has become increasingly costly as compared to the prevailing market rates prior to the volatility. Management cannot predict when or if the capital markets will return to more favorable conditions. Management is actively evaluating a ~~number of~~partnership ~~capital sources, asset reductions and other balance sheet management strategies to ensure that the Bank’s projected level of regulatory capital can support its balance sheet~~interest.

~~There~~NOTE ~~can~~7 be— ~~no assurances~~RELATED ~~that~~PARTY the Company will be successful in its efforts to raise additional capital during 2010. An equity financing transaction would result in substantial dilution to the Company’s current shareholders and could adversely affect the market price of the Company’s common stock. It is difficult to predict if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to the regulatory restrictions which exist that restrict cash payments between the Bank and the Company, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.TRANSACTIONS

AsCertain aparties ~~result~~(principally ofcertain ~~management’s assessment~~directors and executive officers of the Company’s, ~~ability~~their toimmediate ~~continue~~families asand abusiness ~~going~~interests) ~~concern, the~~(“affiliates”) ~~accompanying~~are ~~consolidated~~loan ~~financial~~customers ~~statements~~in ~~for~~ the ~~Company~~normal ~~have~~course ~~been prepared~~of onbusiness awith ~~going~~the ~~concern~~Bank. These ~~basis,~~loans ~~which~~are ~~contemplates~~made ~~the~~on ~~realization~~substantially ~~of assets~~the ~~and~~same ~~the~~terms, ~~discharge~~including ofinterest ~~liabilities~~rates inand ~~the~~collateral, ~~normal~~as ~~course~~those ofprevailing ~~business~~at ~~for~~ the ~~foreseeable~~time ~~future,~~for ~~and~~comparable ~~does~~transactions ~~not~~with ~~include~~unrelated ~~any~~persons ~~adjustments~~and todo ~~reflect~~not ~~the~~involve more ~~possible~~than ~~future effects on~~ the ~~recoverability~~normal orrisk ~~classification~~ of ~~assets~~collectability.

NOTE 48 — ~~INVESTMENT~~COMMITMENTS ~~SECURITIES~~AND CONTINGENCIES

The ~~amortized~~Company ~~costs~~is subject to claims and ~~fair~~lawsuits ~~values~~which arise primarily in the ordinary course of ~~investment~~business. Management ~~securities~~is ~~are~~not asaware ~~follows~~of ~~(in~~any ~~thousands):~~legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.

	Amortized		Gross Unrealized				Fair
As of March 31, 2010	Cost		Gains		Losses		Value
Available for sale
US treasuries	$	80,000	$	—	$	—	$	80,000
Mortgage-backed	78,592		118		329		78,381
Marketable securities	100		—		—		100
Total available for sale	$	158,692	$	118	$	329	$	158,481

13NOTE 9 — STOCK-BASED COMPENSATION

	Amortized		Gross Unrealized					Fair
As of December 31, 2009	Cost		Gains		Losses			Value
Available for sale
Mortgage-backed	104,672		77		(1,211		)	103,538
Marketable securities	100		—		—			100
Total available for sale	$	104,772	$	77	$	—		$	103,638

Upon completion of its initial public offering in 2005, the Company agreed to issue warrants to the organizing directors for the purchase of one share of common stock at $6.40 per share for every two shares purchased in the stock offering, up to a maximum of 15,625 warrants per director. The warrants were fully vested 120 days after January 18, 2005 and will expire on January 18, 2015. Warrants held by directors of the Company will expire 90 days after the director ceases to be a director or officer of the Company (365 days if due to death or disability). The Company issued a total of 171,404 warrants. As of June 30, 2010 the Company has 155,799 outstanding warrants to directors and officers. In addition, the Company has adopted a stock option plan. As of June 30, 2010 the Company has 728,635 outstanding options to employees and directors. On January 16, 2006 the Company adopted a resolution that terminated the “evergreen” provision of the Company 2005 Stock Incentive Plan. As a result, the number of shares of common stock issuable under the plan shall not be further increased in connection with any future share issuances by the Company. The exercise price of each option is equal to the market price of the Company’s stock on the date of grant. The maximum term is ten years, and they typically vest in no greater than five years. When necessary, the Company may purchase shares on the open market to satisfy share option exercises. During the ensuing year, the Company is expected to acquire no shares.

The table set forth below summarizes ~~gross~~stock ~~unrealized~~option ~~losses~~activity onfor ~~investment~~the ~~securities~~Company’s ~~and~~stock ~~the~~compensation ~~fair~~plans ~~market~~for ~~value of~~ the ~~related~~period ~~securities~~ended June 30, ~~aggregated~~2010 byas ~~investment~~adjusted ~~category~~for ~~and~~all ~~length~~stock ~~of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010 (in thousands)~~splits.

	Less than 12 months						12 months or longer					Total
	Stock Options					Warrants
	Fair			Unrealized			Fair			Unrealized		Fair		Unrealized
			Weighted-					Weighted-
As of March 31, 2010	Value			Loss			Value			Loss		Value		Loss
			Average					Average
Available for sale
			Exercise					Exercise
Mortgage-backed	$	58,275		$	329		$	—		$	—	$	58,275	$	329
	Number		Price			Number		Price
Total available for sale	$	58,275		$	329		$	—		$	—	$	58,275	$	329
Outstanding at December 31, 2009	756,033		$	6.99		171,404		$	6.40
Granted	1,350		0.97			—		—
Forfeited	28,748		8.40			15,625		6.40
Exercised	—		—			—		—
Outstanding at June 30, 2010	728,635		6.92			155,779		6.40

~~NOTE~~The 5table —set ~~LEASES~~forth below summarizes non-vested stock options as of June 30, 2010.

The Company leases branch locations in Spartanburg, Mauldin, Anderson, Greer and Greenville as well as the loan operations center in Easley. The initial lease terms range from three to ten years with various renewal options. The minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year, for each of the next five years and in the aggregate are (dollars in thousands):

		Fair
	Number	Value
Outstanding at December 31, 2009	48,423	$	4.32
Granted	1,350	0.68
Vested	10,292	5.11
Forfeited	2,551	2.37
Outstanding at June 30, 2010	36,930	4.10

2010	$	240
2011	329
2012	343
2013	348
2014	353
Thereafter	606
Total minimum future rental payments	$	2,219

As of June 30, 2010, there was $123,038 in total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted average period of 26 months. As of December 31, 2009, there was $159,989 in total unrecognized compensation cost related to non-vested share-based compensation arrangements, which was expected to be recognized over a weighted average period of 32 months.

The ~~loan~~ ~~operations~~fair ~~center~~value inof ~~Easley~~each option granted is ~~leased~~estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for 2010: dividend yield of 0%, expected term of 10 years, risk-free interest rate equal to the 10-year treasury rate on the respective grant date, expected life of 10 years, and expected volatility ranging from a53% ~~partnership~~to in57%. The ~~which~~following assumptions awere used for the 2009 estimates: ~~Company~~dividend ~~director~~yield ~~has~~of a0%, ~~partnership~~expected term of 10 years, risk-free interest rate equal to the 10-year treasury rate on the respective grant date, and expected life of 10 years. Volatility assumed for options granted during 2009 ranged from 38% to 51%.

~~NOTE 6 — RELATED PARTY TRANSACTIONS~~15

~~Certain~~The ~~parties~~following ~~(principally~~table ~~certain~~summarizes ~~directors~~information ~~and~~about ~~executive~~stock ~~officers~~options ofoutstanding under the Company,’s ~~their~~plans ~~immediate~~at ~~families and business interests) (“affiliates”) are loan customers in the normal course of business with the Bank. These loans are made on substantially the same terms~~June 30, ~~including~~2010 ~~interest rates~~ and ~~collateral~~December 31, ~~as those prevailing at the~~ ~~time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability~~2009.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

June 30, 2010	Outstanding		Exercisable
Number of options	728,635		691,705
Weighted average remaining life	4.97 years		4.82 years
Weighted average exercise price	$	6.92	$	6.82
High exercise price	$	16.80	$	16.80
Low exercise price	$	0.56	$	2.50

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.

December 31, 2009	Outstanding		Exercisable
Number of options	756,033		707,610
Weighted average remaining life	5.47 years		5.29 years
Weighted average exercise price	$	6.99	$	6.83
High exercise price	$	16.80	$	16.80
Low exercise price	$	1.75	$	4.55

14There were no options exercised during the quarter and thus no cash was received related to this type of transaction. There was no intrinsic value of options exercised during 2010 or 2009.

~~NOTE~~At 8June 30, —2010, ~~STOCK-BASED~~all ~~COMPENSATION~~of the 155,779 warrants were exercisable and had an average remaining life of 4.55 years. At December 31, 2009, all of the 171,404 warrants were exercisable and had an average remaining life of 5.05 years.

~~Upon~~NOTE ~~completion~~10 of— ~~the offering,~~FAIR ~~the~~VALUE ~~Company~~OF ~~agreed~~FINANCIAL to issue warrants to the organizing directors for the purchase of one share of common stock at $6.40 per share for every two shares purchased in the stock offering, up to a maximum of 15,625 warrants per director. The warrants were fully vested 120 days after January 18, 2005 and will expire on January 18, 2015. Warrants held by directors of the Company will expire 90 days after the director ceases to be a director or officer of the Company (365 days if due to death or disability). The Company issued a total of 171,404 warrants. In addition, the Company has adopted a stock option plan. As of March 31, 2010 the Company has 755,646 outstanding options to employees and directors. On January 16, 2006 the Company adopted a resolution that terminated the “evergreen” provision of the Company 2005 Stock Incentive Plan. As a result, the number of shares of common stock issuable under the plan shall not be further increased in connection with any future share issuances by the Company. The exercise price of each option is equal to the market price of the Company’s stock on the date of grant. The maximum term is ten years, and they typically vest in no greater than five years. When necessary, the Company may purchase shares on the open market to satisfy share option exercises. During the ensuing year, the Company is expected to acquire no shares.INSTRUMENTS

~~The~~GAAP ~~table~~requires ~~set~~disclosure ~~forth~~of ~~below~~fair value information, whether or not ~~summarizes~~recognized ~~stock~~in ~~option~~the ~~activity~~consolidated ~~for~~balance sheets, when it is practical to estimate the ~~Company’s~~fair ~~stock~~value. GAAP ~~compensation~~defines ~~plans~~a ~~for~~financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations, which require the ~~quarter~~exchange ~~ended~~of ~~March 31~~cash, ~~2010~~or asother ~~adjusted~~financial instruments. Certain ~~for~~items ~~all~~are specifically excluded from the disclosure requirements, including the Company’s common stock, ~~splits~~premises and equipment, accrued interest receivable and payable, and other assets and liabilities.

	Stock Options			Warrants
		Weighted-			Weighted-
		Average			Average
		Exercise			Exercise
	Number	Price		Number	Price
Outstanding at December 31, 2009	756,033	$	6.99	171,404	$	6.40
Granted	100	0.56		—	—
Forfeited	487	8.80		—	—
Exercised	—	—		—	—
Outstanding at March 31, 2010	755,646	6.98		171,404	6.40

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the 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.

The ~~table~~Company ~~set~~has ~~forth~~used ~~below~~management’s best estimate of fair value based on ~~summarizes~~the ~~non-vested~~above ~~stock~~assumptions. Thus, ~~options~~the asfair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of ~~March 31~~the instrument. In addition, ~~2010~~any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.

		Fair
	Number	Value
Outstanding at December 31, 2009	48,423	$	4.32
Granted	100	0.37
Vested	2,097	6.07
Forfeited	383	3.55
Outstanding at March 31, 2010	46,043	4.23

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

AsCash ofand ~~March 31, 2010,~~Due ~~there~~from ~~was~~Banks ~~$142,358~~- inThe ~~total unrecognized compensation cost related to~~carrying ~~non-vested~~amount ~~share-based compensation arrangements, which~~ is ~~expected to be recognized over~~ a ~~weighted~~reasonable ~~average~~estimate ~~period~~ of 29fair ~~months~~value. As of December 31, 2009, there was $159,989 in total unrecognized compensation cost related to non-vested share-based compensation arrangements, which was expected to be recognized over a weighted average period of 32 months.

~~The~~Federal ~~fair~~Funds ~~value~~Sold ~~of each option granted is estimated on the grant date using the Black~~-~~Scholes option-pricing~~ ~~model~~Federal ~~with~~funds ~~the~~sold ~~following assumptions~~ are for ~~2010: dividend~~a ~~yield of 0%, expected~~ term of ~~10 years,~~one ~~risk-free interest rate equal to the 10-year treasury rate on the respective grant date~~day, ~~expected life of 10 years,~~ and ~~expected volatility of 51%. The following assumptions were used for~~ the ~~2009~~carrying ~~estimates: dividend~~amount ~~yield of~~approximates ~~0%, expected term of 10 years, risk-free interest rate equal to~~ the ~~10-year treasury~~fair ~~rate on the respective grant date, and expected life of 10 years~~value. ~~Volatility assumed for options granted during 2009 ranged from 38% to 51%.~~

~~The~~Investment ~~following~~Securities ~~table summarizes~~- ~~information~~The ~~about~~fair values ~~stock~~of ~~options~~marketable ~~outstanding~~equity ~~under~~securities ~~the~~are ~~Company’s plans~~valued atusing ~~March 31,~~quoted ~~2010~~fair ~~and December 31, 2009~~market prices.

March 31, 2010	Outstanding		Exercisable
Number of options	755,646		709,603
Weighted average remaining life	5.22 years		5.05 years
Weighted average exercise price	$	6.98	$	6.85
High exercise price	$	16.80	$	16.80
Low exercise price	$	0.56	$	2.50

Other Investments - The carrying value of non-marketable equity securities approximates the fair value since no ready market exists for the stocks.

15Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. 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. In order to capture the change in credit risk, the current allowance for loan losses is also considered when determining fair value of loans receivable.

December 31, 2009	Outstanding		Exercisable
Number of options	756,033		707,610
Weighted average remaining life	5.47 years		5.29 years
Weighted average exercise price	$	6.99	$	6.83
High exercise price	$	16.80	$	16.80
Low exercise price	$	1.75	$	4.55

~~There~~Deposits - ~~were~~The ~~no options~~fair ~~exercised~~value ~~during~~of ~~the~~demand ~~quarter~~deposits, savings, and ~~thus~~money nomarket ~~cash~~accounts ~~was~~is ~~received~~the ~~related~~amount payable toon ~~this~~demand ~~type~~at the reporting date. The fair values of ~~transaction.~~certificates ~~There~~of ~~was~~deposit noare ~~intrinsic~~estimated ~~value~~using ofa discounted ~~options~~cash ~~exercised~~flow ~~during~~calculation ~~2010~~that applies current interest rates to a ~~and~~schedule ~~2009~~of aggregated expected maturities.

AtRepurchase ~~March 31,~~Agreements ~~2010, all~~- ofThe ~~the 171,404 warrants were exercisable and had an average remaining life~~fair value of ~~4.80~~repurchase ~~years.~~agreements Atis ~~December 31,~~estimated ~~2009,~~using ~~all~~a ofdiscounted ~~the~~cash ~~171,404 warrants were~~flow ~~exercisable~~calculation ~~and~~that ~~had~~applies anprevailing ~~average~~market ~~remaining~~rates ~~life~~for ofcomparable 5debt instruments.~~05 years.~~

~~NOTE~~Subordinated 9Debt — ~~FAIR~~The ~~VALUE~~fair value OFof ~~FINANCIAL~~subordinated debt is estimated using a discounted cash flow ~~INSTRUMENTS~~calculation that applies prevailing market rates for comparable instruments. Due to diminishing cash available at the holding company level, we only paid the June 2010 interest payments to subordinated debt holders that were not officers or directors of the Company. If we are unable to raise additional capital, we may have to discontinue paying interest on the subordinated debentures to all holders due to lack of funds, and our fair value calculation reflects this.

~~GAAP~~The ~~requires~~carrying ~~disclosure~~values and ofestimated fair ~~value~~values ~~information,~~of ~~whether or not recognized in~~ the ~~consolidated balance~~Company’s ~~sheets, when it is practical to estimate the fair value. GAAP defines a~~ financial ~~instrument~~instruments asat ~~cash~~June 30, ~~evidence~~2010 ofand ~~an ownership interest in an entity or contractual obligations~~December 31, ~~which~~ ~~require~~2009 ~~the exchange of cash, or other financial instruments. Certain items~~ are ~~specifically~~shown ~~excluded~~in ~~from~~ the ~~disclosure~~following ~~requirements,~~table ~~including~~(dollars ~~the Company’s common stock, premises and~~in ~~equipment, accrued interest receivable and payable, and other assets and liabilities~~thousands).

	Carrying		Estimated
	Amount		Fair Value
June 30, 2010
Financial Assets
Cash and due from banks	$	7,109	$	7,109
Federal funds sold	14,965		14,965
Investment securities, available for sale	191,546		191,546
Other investments	1,599		1,599
Loans, gross	244,776		237,464

Financial Liabilities
Demand deposit, interest-bearing transaction, and savings accounts	$	104,856	$	104,856
Certificates of deposit and other time deposits	316,726		318,690
Repurchase agreements	30,000		32,703
Subordinated debt	4,325		1,915

December 31, 2009
Financial Assets
Cash and due from banks	$	6,876	$	6,876
Federal funds sold	31,043		31,043
Investment securities, available for sale	103,638		103,638
Other investments	1,599		1,599
Loans, gross	275,104		260,894

Financial Liabilities
Demand deposit, interest-bearing transaction, and savings accounts	$	122,712	$	122,712
Certificates of deposit and other time deposits	253,851		254,930
Repurchase agreements	30,000		31,558
Subordinated debt	4,325		2,062

The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.

	June 30, 2010				December 31, 2009
(Dollars in thousands)	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value

Off-Balance Sheet Financial Instruments:

Commitments to extend credit	$	10,864	$	—	$	15,451	$	—
Standby Letters of Credit	$	1,413	$	—	$	1,525	$	—

~~The~~GAAP ~~following~~requires ~~methods~~new disclosure that establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This disclosure enables the reader of the ~~assumptions~~financial ~~were~~statements to assess the inputs used to ~~estimate~~develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value ofwill ~~significant~~be ~~financial~~classified and ~~instruments~~disclosed in one of the following three categories:

~~Cash and Due from Banks - The carrying amount is a reasonable estimate of fair value.~~17

~~Federal~~· Level ~~Funds~~1: ~~Sold~~Quoted ~~- Federal~~market ~~funds~~prices ~~sold~~in ~~are~~active markets for aidentical ~~term~~assets ~~of one day, and the carrying amount~~or ~~approximates the fair value~~liabilities.

~~Investment Securities~~· Level -2: ~~The~~Observable ~~fair~~market ~~values~~based ofinputs ~~marketable~~or ~~equity~~unobservable ~~securities~~inputs that are corroborated ~~valued~~by ~~using quoted fair~~ market ~~prices~~data.

~~Other Investments~~· Level -3: ~~The~~Unobservable ~~carrying~~inputs ~~value~~that ofare ~~non-marketable~~not ~~equity~~corroborated ~~securities~~by ~~approximates the fair value since no ready~~ market ~~exists for the stocks~~data.

~~Loans~~In ~~Receivable~~determining -appropriate ~~For certain categories of loans~~levels, ~~such~~the asCompany ~~variable~~performs ~~rate~~a ~~loans~~detailed analysis ~~which~~of ~~are~~the ~~repriced~~assets ~~frequently~~ and ~~have~~liabilities nothat ~~significant change in credit risk, fair values~~ are ~~based~~subject onto ~~the carrying amounts. The~~ fair value measurement. At ofeach ~~other~~reporting ~~types~~period, all ofassets ~~loans~~and isliabilities ~~estimated~~for ~~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~~fair ~~remaining~~value ~~maturities.~~measurement ~~In order to capture the change in credit risk, the current allowance for loan losses~~ is ~~also~~based ~~considered~~on significant ~~when~~unobservable ~~determining~~inputs ~~fair~~are ~~value~~classified ofas ~~loans~~Level ~~receivable~~3.

~~Deposits -~~ The ~~fair~~tables ~~value~~below ofpresent ~~demand deposits, savings, and money market accounts is~~ the ~~amount~~balances ~~payable~~of onassets ~~demand~~and ~~at the~~liabilities ~~reporting~~measured ~~date. The~~at fair ~~values~~value ~~of certificates~~on ofa ~~deposit~~recurring ~~are~~basis ~~estimated~~by ~~using~~level awithin ~~discounted~~the ~~cash~~valuation ~~flow calculation~~hierarchy ~~that~~(as ~~applies~~described ~~current~~above) ~~interest~~as ~~rates to a schedule~~ of ~~aggregated~~June 30, ~~expected maturities~~2010.

Repurchase Agreements - The fair value of repurchase agreements is estimated using a discounted cash flow calculation that applies prevailing market rates for comparable debt instruments.

	June 30, 2010
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities, available for sale	$	191,546	$	—	$	191,546	$	—

~~Subordinated Debt~~Certain —assets ~~The~~ and liabilities are measured at fair value ofon ~~subordinated~~a nonrecurring ~~debt~~basis; that is, ~~estimated~~the ~~using~~instruments aare ~~discounted~~not ~~cash~~measured ~~flow calculation~~at ~~that~~fair ~~applies~~value ~~prevailing~~on an ~~market~~ongoing ~~rates~~basis ~~for~~but ~~comparable instruments. Due~~are subject to ~~diminishing~~fair ~~cash available~~value atadjustments ~~the~~in ~~holding~~certain circumstances ~~company~~(for ~~level~~example, ifwhen wethere ~~are~~is ~~unable~~evidence toof ~~raise~~impairment). The ~~additional capital,~~following wetables ~~may~~present ~~have~~the toassets ~~discontinue~~and liabilities ~~paying~~carried ~~interest~~ on the ~~subordinated debentures~~balance ~~after~~sheet by caption and by level within the valuation ~~March 2010~~hierarchy ~~payments~~(as ~~due~~described toabove) ~~lack~~as of ~~funds~~June 30, ~~and~~2010 ~~our~~for which a nonrecurring change in fair value ~~calculation~~has ~~reflects~~been ~~this~~recorded during the six months ended June 30, 2010.

	Carrying Value at June 30, 2010
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net of allowance for loan losses	$	61,758	$	—	$	—	$	61,758
Other real estate owned	8,272		—		—		8,272
Repossessed collateral	767		—		—		767

The carrying values and estimated fair values of the Company’s financial instruments at March 31, 2010 and 2009 are shown in the following tables (dollars in thousands).

	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
(Dollars in thousands)	Impaired Loans		Other Real Estate Owned			Repossessed Collateral			Total
Beginning balance	$	34,158	$	6,703		$	942		$	41,803
Gains/(losses) included in earnings	—		(7		)	(1		)	(8		)
Net additions	27,600		1,576			(174		)	29,002
Transfers in/(out) of level 3	—		—			—			—
Ending balance	$	61,758	$	8,272		$	767		$	70,797

	Carrying		Estimated
	Amount		Fair Value
March 31, 2010
Financial Assets
Cash and due from banks	$	7,781	$	7,781
Federal funds sold	10,285		10,285
Investment securities, available for sale	158,481		158,481
Other investments	1,599		1,599
Loans, gross	259,739		245,929
Financial Liabilities
Demand deposit, interest-bearing transaction, and savings accounts	$	110,021	$	110,021
Certificates of deposit and other time deposits	286,804		288,645
Repurchase agreements	30,000		31,606
Subordinated debt	4,325		1,868
December 31, 2009
Financial Assets
Cash and due from banks	$	6,876	$	6,876
Federal funds sold	31,043		31,043
Investment securities, available for sale	103,638		103,638
Other investments	1,599		1,599
Loans, gross	275,104		260,894
Financial Liabilities
Demand deposit, interest-bearing transaction, and savings accounts	$	122,712	$	122,712
Certificates of deposit and other time deposits	253,851		254,930
Repurchase agreements	30,000		31,558
Subordinated debt	4,325		2,062

NOTE 11 — SUBSEQUENT EVENTS

	March 31, 2010				December 31, 2009
(Dollars in thousands)	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	11,855	$	—	$	15,451	$	—
Standby Letters of Credit	$	1,468	$	—	$	1,525	$	—

The Bank has evaluated events and transactions through our filing date for potential recognition or disclosure in the consolidated financial statements, and has determined there are no subsequent events to disclose.

GAAP requires new disclosure that establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This disclosure enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:18

~~· Level~~Item ~~1: Quoted market~~2. ~~prices~~Management’s inDiscussion ~~active~~and ~~markets~~Analysis ~~for~~of ~~identical~~Financial ~~assets~~Condition orand ~~liabilities~~Results of Operations.

~~· Level~~The following 2: discussion reviews our results of operations and assesses our ~~Observable~~financial ~~market~~condition. You ~~based~~should ~~inputs~~read orthe following ~~unobservable~~discussion ~~inputs~~and ~~that~~analysis ~~are~~in conjunction with the accompanying ~~corroborated~~consolidated byfinancial ~~market~~statements. The commentary ~~data~~should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report. For further information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended December 31, 2009.

~~· Level 3:~~ DISCUSSION ~~Unobservable~~OF ~~inputs~~FORWARD-LOOKING ~~that are not corroborated by market data.~~STATEMENTS

InThis ~~determining~~Report, ~~appropriate~~including information included or incorporated by ~~levels~~reference in this document, ~~the~~contains ~~Company~~statements ~~performs~~which aconstitute forward-looking ~~detailed~~statements ~~analysis~~within the meaning of Section 27A of the Securities ~~assets~~Act of 1933 and ~~liabilities~~Section 21E of the Securities Exchange Act of ~~that~~1934. ~~are~~Forward-looking ~~subject~~statements relate to ~~fair~~the ~~value~~financial ~~measurement. At~~condition, ~~each~~results ~~reporting~~of operations, ~~period~~plans, ~~all~~objectives, ~~assets~~future performance, and ~~liabilities~~business ~~for~~of ~~which~~ the ~~fair~~Company. ~~value~~Forward-looking ~~measurement~~statements isare based on ~~significant~~many ~~unobservable~~assumptions ~~inputs~~and estimates and are not ~~classified~~guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend ~~Level~~on 3many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC and the following:

~~The~~· ~~tables~~our ~~below~~efforts ~~present~~ to raise capital or otherwise increase our regulatory capital ratios; · the ~~balances~~effects of ~~assets~~our efforts to raise capital on our balance sheet, liquidity, capital, and ~~liabilities~~profitability; ~~measured~~· atour ~~fair~~ability ~~value~~to onretain aour ~~recurring basis~~existing bycustomers, ~~level~~including our deposit relationships; · our ability to comply with the terms of the enforcement actions between our Company, Bank, and our regulatory authorities within the ~~valuation~~time ~~hierarchy~~frames (specified; · the rate of delinquencies and amounts of loans charged-off; · our ability to maintain sufficient liquidity to repay our brokered deposits as ~~described~~they ~~above)~~become due; · our rapid growth through 2008 and short operating history; · reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, decreasing interest rates, increasing unemployment, or changes in payment behavior or other factors; · reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral; · the amount of our real estate based loans, and the weakness in the commercial real estate market; · our reliance on available secondary funding sources such as Federal Reserve Discount Window borrowings, sales of ~~March 31~~securities and loans, ~~2010.~~ and secured federal funds lines of credit from correspondent banks, to meet our liquidity needs; · significant increases in competitive pressure in the banking and financial services industries; · changes in the interest rate environment which could reduce anticipated or actual margins; · changes in political conditions or the legislative or regulatory environment, including the effect of recent financial reform legislation on the banking industry; · general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality; · changes occurring in business conditions and inflation; · changes in technology; · changes in deposits flows; · changes in monetary and tax policies; · the lack of seasoning of our loan portfolio, especially given our rapid loan growth through 2008; · adequacy of the level of our allowance for loan losses; · increased funding costs due to market illiquidity, increased competition for funding, and/or regulatory requirements; · the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions; · adverse changes in asset quality and resulting credit risk-related losses and expenses, including the risk of further impairment to the value of our collateral on loans for which we have already taken specific reserves; · loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;

1719

	March 31, 2010
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities, available for sale	$	158,481	$	—	$	158,481	$	—

·	changes in the securities markets; and
·	other risks and uncertainties detailed from time to time in our filings with the SEC.

~~Certain~~We ~~assets~~have ~~and liabilities~~based ~~are~~our ~~measured~~forward-looking atstatements ~~fair value~~ on aour ~~nonrecurring basis; that is, the~~current ~~instruments~~expectations ~~are~~about ~~not~~future ~~measured~~events. atAlthough ~~fair~~we ~~value~~believe onthat anthe ~~ongoing basis but are subject~~expectations toreflected ~~fair value adjustments~~ in ~~certain~~our ~~circumstances~~forward-looking ~~(for~~statements ~~example~~are reasonable, ~~when~~we ~~there~~cannot isguarantee ~~evidence~~you ofthat ~~impairment). The~~these ~~following~~expectations ~~tables present~~will ~~the~~be ~~assets~~achieved. ~~and~~We ~~liabilities~~undertake ~~carried~~no onobligation ~~the balance sheet by caption and~~to bypublicly ~~level~~update ~~within~~or ~~the~~otherwise ~~valuation~~revise ~~hierarchy~~any ~~(as~~forward-looking ~~described~~statements, ~~above)~~whether as ~~of March 31,~~ ~~2010 for which~~ a ~~nonrecurring~~result ~~change~~of innew ~~fair~~information, ~~value~~future ~~has been recorded during the three months ended March 31~~events, ~~2010~~or otherwise.

	Carrying Value at March 31, 2010
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net of allowance for loan losses	$	41,168	$	—	$	—	$	41,168
Other real estate owned	7,586		—		—		7,586
Repossessed collateral	940		—		—		940

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what impact these uncertain market conditions will have on us. During 2008 and 2009 and thus far in 2010, the capital and credit markets continued to experience extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not continue to materially and adversely impact our business, financial condition, and results of operations, as well as our ability to raise capital or other funding for liquidity and business purposes.

	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
(Dollars in thousands)	Impaired Loans		Other Real Estate Owned			Repossessed Collateral			Total
Beginning balance	$	34,158	$	6,703		$	942		$	41,803
Gains/(losses) included in earnings	—		(14		)	(1		)	(15		)
Net additions	7,010		897			(1		)	7,906
Transfers in/(out) of level 3	—		—			—			—
Ending balance	$	41,168	$	7,586		$	940		$	49,694

Overview

~~NOTE~~The following 10discussion —describes ~~SUBSEQUENT~~our ~~EVENTS~~results of operations for the six months ended June 30, 2010 and also analyzes our financial condition as of June 30, 2010. We received approvals from the FDIC, the FRB, and the South Carolina Board of Financial Institutions during January 2005, and commenced business on January 18, 2005.

The Company is a bank holding company headquartered in Easley, South Carolina. Our subsidiary, the Bank, opened ~~has~~for ~~evaluated~~business on January 18, 2005. ~~events~~All Seasons Properties, LLC, a subsidiary of the Bank, was formed in 2009 for the purpose of holding and ~~transactions~~marketing ~~through~~repossessed assets. In addition to the main office in Easley, the Bank has five branch locations in the upstate region of South Carolina. We opened our ~~filing~~Mauldin ~~date~~branch ~~for~~in ~~potential~~the ~~recognition~~fourth quarter orof 2005, our Spartanburg branch in the first quarter of 2006, our ~~disclosure~~Anderson branch in the ~~consolidated~~third ~~financial~~quarter ~~statements~~of ~~and~~2006, ~~has~~our ~~determined~~Greer ~~there~~branch in the fourth ~~are~~quarter noof ~~subsequent~~2006 ~~events~~and our Greenville branch in the third quarter of 2007. The Bank provides banking services to domestic ~~disclose~~markets, principally in the Upstate of South Carolina. The deposits of the Bank are insured by the FDIC.

18Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

~~Item~~Current 2.Economic ~~Management’s Discussion and Analysis or Plan of Operation.~~Environment

~~The~~Markets ~~following~~in ~~discussion~~the ~~reviews~~ United States, including our ~~results~~market ofareas, ~~operations~~have experienced extreme volatility and ~~assesses~~disruption ~~our~~for ~~financial~~more ~~condition~~than the past 24 months. ~~You~~According ~~should~~to ~~read~~ the ~~following~~National ~~discussion and~~Bureau ~~analysis~~of inEconomic ~~conjunction~~Research, ~~with~~ the ~~accompanying~~United ~~consolidated~~States ~~financial~~entered ~~statements. The~~into ~~commentary~~an ~~should~~economic berecession ~~read~~ in December 2007. Dramatic ~~conjunction~~slowdowns ~~with~~in the ~~discussion~~residential ofhousing ~~forward-looking~~industry ~~statements,~~with ~~the~~falling ~~financial~~home ~~statements~~prices, increasing foreclosures, and ~~the~~rising ~~related~~unemployment ~~notes~~levels ~~and~~have ~~the~~created ~~other~~strains ~~statistical~~on ~~information~~the ~~included~~loan portfolios inof ~~this report~~many financial institutions. ~~For~~ Median ~~further~~home ~~information,~~sales ~~refer~~ continued to ~~Management’s~~decline ~~Discussion~~during 2009 and ~~Analysis~~in ofthe ~~Financial~~first ~~Condition~~six months ~~and~~of ~~Results~~2010 ~~of Operations~~nationally ~~appearing~~and in ~~the~~our ~~Annual~~primary ~~Report~~market onarea, ~~Form 10-K~~South ~~for~~Carolina. As a result, the ~~year~~level ~~ended~~of ~~December 31,~~foreclosures on ~~2009~~homebuilders and homeowners continued to increase.

~~DISCUSSION~~As OFa ~~FORWARD-LOOKING~~result ~~STATEMENTS~~of the current economic recession, many borrowers are unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance with the drop in real estate values, making it difficult for financial institutions to fully recover the principal and interest owed. In addition, the rapidly deteriorating economic conditions in our country have evolved into a crisis of confidence in the safety and soundness of larger financial institutions, brokerage firms, and insurance companies, resulting in extreme liquidity pressure throughout the United States financial system for all financial companies including community financial institutions such as ours. This pressure has caused many banks to tighten lending standards, which has constrained the ability of businesses and consumers to obtain credit. Anxiety over liquidity and credit risk has grown in recent months and banks have curbed lending to each other, further limiting liquidity sources available to financial institutions.

This Report, including information included or incorporated by reference in this document, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to the financial condition, results of operations, plans, objectives, future performance, and business of the Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC and the following:20

·The ~~our~~Effect ~~efforts to raise capital or otherwise increase our regulatory capital ratios; · the effects~~ of our efforts to raise capital on our balance sheet, liquidity, capital, and profitability; · our ability to retain our existing customers, including our deposit relationships; · our ability to comply with the ~~terms~~Current ofEconomic ~~the~~Environment Consent Order between the Bank and its supervisory authorities within the time frames specified; · the rate of delinquencies and amounts of loans charged-off; · our rapid growth through 2008 and short operating history; · reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, decreasing interest rates, increasing unemployment, or changes in payment behavior or other factors; · reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral; · the amount of our real estate based loans, and the weakness in the commercial real estate market; · our reliance on ~~available secondary funding sources such as Federal Reserve Discount Window borrowings, sales of securities and loans, and secured federal funds lines of credit from correspondent banks, to meet~~ our liquidity needs; · significant increases in competitive pressure in the banking and financial services industries; · changes in the interest rate environment which could reduce anticipated or actual margins; · changes in political conditions or the legislative or regulatory environment; · general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality; · changes occurring in business conditions and inflation; · changes in technology; · changes in deposits flows; · changes in monetary and tax policies; · the lack of seasoning of our loan portfolio, especially given our rapid loan growth through 2008; · adequacy of the level of our allowance for loan losses; · increased funding costs due to market illiquidity, increased competition for funding, and/or regulatory requirements; · the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions; · adverse changes in asset quality and resulting credit risk-related losses and expenses, including the risk of further impairment to the value of our collateral on loans for which we have already taken specific reserves; · loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions; · changes in the securities markets; andBank

19Like many financial institutions across the United States and in South Carolina, our operations have been adversely affected by the current economic crisis. Beginning in 2008 and continuing through the first six months of 2010, we recognized that construction, acquisition, and development real estate projects were slowing, guarantors were becoming financially stressed, and increasing credit losses were surfacing. During the first six months of 2010, delinquencies over 90 days continued to increase, resulting in an increase in non-accrual loans indicating significant credit quality deterioration and probable losses. In particular, loans secured by real estate, including acquisition, construction, and development projects, demonstrated stress given reduced cash flows of individual borrowers, limited bank financing and credit availability, and slow property sales. This deterioration manifested itself in our borrowers in the following ways: (i) the cash flows from underlying properties supporting the loans decreased (e.g., slower property sales for development type projects or lower occupancy rates or rental rates for operating properties); (ii) cash flows from the borrowers themselves and guarantors were under pressure given illiquid personal balance sheets and drainage by investing additional personal capital in the projects; and (iii) fair values of real estate related assets declined, resulting in lower cash proceeds from sales or fair values declining to the point that borrowers were no longer willing to sell the assets at such deep discounts.

·As ~~other~~of ~~risks~~June 30, 2010, approximately 91.1% of our loans had real estate as a primary or secondary component of collateral. The Bank had approximately 90.3% of such loans at December 31, 2009. Included in our loans secured by real estate, we have approximately $31.7 million of acquisition and ~~uncertainties~~development ~~detailed~~(“A&D”) loans as of June 30, 2010, most of which are on properties located in the Upstate of South Carolina and Western North Carolina. A&D loans are typically comprised of loans to borrowers for real estate to be developed (into properties such as sub-divisions or spec houses). Normally, these loans are repaid with the proceeds from ~~time~~the sale of the developed property. The greater degree of strain on these types of loans and the significance to ~~time~~our overall loan portfolio has caused us to apply a greater degree of scrutiny in ~~our~~analyzing ~~filings~~the ~~with~~ultimate collectability of amounts due. The majority of these borrowers are having financial difficulties. Our analysis has resulted in a significant provision expense in order to meet the ~~SEC~~estimated allowance for loan loss reserve requirement.

WeIncluded in our loans secured by real estate, we have ~~based~~approximately $35.7 ~~our~~million of acreage and finished or buildable lot loans as of June 30, ~~forward-looking~~2010. The ~~statements~~Bank onhad ~~our~~approximately ~~current~~$40.6 million ~~expectations~~of ~~about~~such ~~future~~loans ~~events~~at December 31, 2009. These loans are comprised of ~~Although~~loans weto ~~believe~~borrowers for raw land and lots in subdivisions that have utilities and are ready to be built on individually but not as part of an entire development project. These loans are generally repaid with the ~~expectations~~proceeds ~~reflected~~from inthe sale of the property. As with our ~~forward-looking~~A&D loans, many of these ~~statements~~borrowers are ~~reasonable,~~also weexperiencing ~~cannot~~financial ~~guarantee~~difficulties ~~you~~and ~~that~~the greater degree of strain on these ~~expectations~~types ~~will be~~of ~~achieved.~~loans Weand ~~undertake~~the nosignificance ~~obligation~~to our overall loan portfolio has caused us to ~~publicly~~apply ~~update~~a orgreater ~~otherwise~~degree ~~revise~~of scrutiny in analyzing the ~~any~~ultimate ~~forward-looking~~collectability ~~statements,~~of ~~whether~~amounts asdue. Our analysis has resulted in a ~~result~~significant ofprovision ~~new~~expense ~~information,~~in ~~future~~order to ~~events,~~meet orthe ~~otherwise~~estimated allowance for loan loss reserve requirement.

~~These~~The ~~risks~~result ~~are~~of ~~exacerbated by~~ the ~~recent~~above ~~developments~~has inbeen ~~national~~an ~~and~~increase ~~international~~in ~~financial~~the ~~markets,~~level ~~and~~of our wenon-performing ~~are~~assets ~~unable~~over tothe ~~predict~~past ~~what~~two ~~impact~~years, ~~these~~although ~~uncertain~~the ~~market~~amount ~~conditions~~of ~~will~~the ~~have~~increase onslowed usduring the first six months of 2010. ~~During~~As ~~2008~~of ~~and~~June 30, ~~2009~~2010, ~~and~~our non-performing ~~thus~~assets ~~far~~equaled in$43.9 ~~2010~~million, ~~the~~or ~~capital~~9.5% ~~and~~of ~~credit~~assets, ~~markets~~as ~~continued~~compared to ~~experience~~$42.4 million, ~~extended~~or ~~volatility~~10.1% ~~and~~of ~~disruption~~assets, as of December 31, 2009. For the six months ended June 30, 2010, ~~There~~we ~~can~~recorded bea noprovision ~~assurance~~for ~~that~~loan ~~these~~losses ~~unprecedented~~of ~~recent~~$2 ~~developments~~million and net loan charge-offs ~~will~~of ~~not~~$3.4 ~~continue~~million, or 1.3% of average loans, as compared to ~~materially~~a $2.8 million provision for loan losses and ~~adversely~~net ~~impact~~loan ~~our~~losses ~~business~~of $1.2 million, ~~financial~~for the six ~~condition~~months ended June 30, ~~and~~2009. In addition, ~~results~~our ofnet ~~operations~~interest margin decreased to 1.61% for the six months ended June 30, 2010 asfrom ~~well~~2.96% asfor the six months ended June 30, 2009. In total, the above reduced our ~~ability~~earnings for the six months ended June 30, 2010 by $3.5 million compared to ~~raise~~the ~~capital~~same orperiod ~~other~~in ~~funding~~2009. As ~~for~~a ~~liquidity~~result, ~~and~~as ~~business~~of ~~purposes~~June 30, 2010, we are deemed to be “significantly undercapitalized.”

~~Overview~~The adverse economic environment has also placed greater pressure on our deposits, as we have been taking steps to decrease our reliance on brokered deposits, while at the same time the competition for local deposits among banks in our market has been increasing in the past years. Prior to the third quarter of 2009, we generally obtained out-of-market time deposits of $100,000 or more through brokers with whom we maintain ongoing relationships. As of June 30, 2010, we had brokered deposits of $174.6 million, representing 41.41% of our total deposits, of which $79.7 million are scheduled to mature in the third quarter of 2010 and $94.9 million are scheduled to mature in the fourth quarter of 2010. As a result of the limitations on brokered deposits imposed by the Consent Order and our “significantly undercapitalized” designation, we must find other sources of liquidity to replace these deposits as they mature. At the end of the fourth quarter of 2009, the Bank started using an internet based certificate of deposit gathering service. This product has provided a source of funds to replace our brokered deposits. The Bank’s internet based deposits have increased from $1.8 million at December 31, 2009 to $70.0 million as of June 30, 2010. Secondary sources of liquidity may include proceeds from FHLB advances and federal funds lines of credit from correspondent banks. However, the FHLB has informed us that due to our financial condition we are not currently permitted to receive any more advances. At June 30, 2010, we had federal funds lines of credit with unrelated banks totaling $5.0

The following discussion describes our results of operations for the three months ended March 31, 2010 and also analyzes our financial condition as of March 31, 2010. We received approvals from the FDIC, the FRB, and the South Carolina Board of Financial Institutions during January 2005, and commenced business on January 18, 2005.21

~~The~~million. These ~~Company~~lines isare available afor ~~bank~~general corporate purposes but may be terminated at any time ~~holding~~based ~~company~~on ~~headquartered~~our infinancial ~~Easley~~condition. Thus, we ~~South~~can ~~Carolina~~make no assurances that this funding source will continue to be available to us. ~~Our~~As ~~subsidiary~~a result, ~~the~~we ~~Bank~~must limit our growth, ~~opened~~raise ~~for~~additional ~~business on~~capital, ~~January 18~~or sell assets, ~~2005~~which could materially and adversely affect our financial condition and results of operations. ~~All~~Additionally, ~~Seasons~~deposit levels ~~Properties,~~may ~~LLC,~~be affected by a ~~subsidiary~~number of ~~the Bank~~factors, ~~was~~including ~~formed~~rates inpaid ~~2009~~by ~~for~~competitors, general ~~the~~interest ~~purpose of~~rate ~~holding~~levels, ~~and~~regulatory ~~marketing~~capital ~~repossessed~~requirements, ~~assets.~~ returns Inavailable ~~addition~~ to ~~the~~customers ~~main~~on ~~office~~alternative ininvestments ~~Easley,~~and general economic conditions. Because the Bank ~~has~~is ~~five~~not ~~branch~~well ~~locations~~capitalized, init ~~the~~would ~~upstate~~normally ~~region~~be restricted from offering an effective yield on deposits of ~~South~~more ~~Carolina. We~~than ~~opened~~75 ~~our~~basis ~~Mauldin~~points ~~branch~~over inthe national rates published by the ~~fourth~~FDIC weekly on its website. However, ~~quarter~~on ofApril 1, ~~2005~~2010, ~~our~~we ~~Spartanburg~~applied ~~branch~~for inand received a determination from the FDIC ~~first~~that ~~quarter~~our ofmarket ~~2006~~areas were all high interest rate areas. As a result, ~~our Anderson~~we ~~branch~~have inpermission ~~the~~to ~~third~~pay deposit ~~quarter~~rates of ~~2006,~~up ~~our~~to ~~Greer~~75 ~~branch~~basis inpoints over the ~~fourth~~local ~~quarter~~rates (assuming the local ofrates ~~2006~~exceed the applicable non-local rates) and ~~our~~on ~~Greenville~~non-local ~~branch~~deposits gathered in ~~the~~our ~~third~~normal ~~quarter~~market ofarea ~~2007. The~~even ~~Bank~~if ~~provides~~these ~~banking~~rates ~~services~~exceed tonon-local rates by more ~~domestic~~than ~~markets,~~75 ~~principally~~basis inpoints. Nevertheless, ~~the~~if we ~~Upstate~~are ofunable ~~South~~to ~~Carolina. The~~attract sufficient deposits ofto meet our liquidity needs, then the Bank ~~are~~may ~~insured~~be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed as conservator or receiver.

~~Like~~Memorandum ~~most community banks, we derive most~~ of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.Understanding

~~Current~~As ~~Economic~~a ~~Environment~~result of the issues stemming from the economic downturn, on June 29, 2009 the Bank entered into the MOU with the Commissioner of Banking of the South Carolina Board of Financial Institutions and the Regional Director of the FDIC’s Atlanta Regional Office. The MOU required the Bank to, among other things, (1) submit a capital plan to the supervisory authorities for returning to a “well-capitalized” designation; (2) develop specific plans and proposals for the reduction and improvement of assets which are subject to adverse classification and past due loans; (3) implement a plan to decrease the concentration of commercial real estate loans; (4) develop and implement an adequate loan review program; and (5) review overall liquidity objectives and develop plans and procedures aimed at improving liquidity and reducing reliance on volatile liabilities to fund longer-term assets. In addition, the Bank may not pay dividends without the prior written consent of each supervisory authority.

~~Markets~~In addition, in mid-February 2010 the ~~United~~Bank received a supervisory ~~States,~~letter ~~including~~from ~~our~~the ~~market~~FDIC ~~areas~~dated February 11, ~~have~~2010, ~~experienced~~which ~~extreme~~provided ~~volatility and~~for ~~disruption~~additional ~~for~~restrictions ~~more~~and ~~than~~mandatory 12actions ~~months. According~~ to ~~the~~be ~~National~~taken ~~Bureau~~by ofthe ~~Economic~~Bank. These ~~Research,~~restrictions ~~the~~and ~~United~~actions ~~States~~were all ~~entered~~substantially ~~into~~addressed anand ~~economic~~superseded ~~recession~~by inthe ~~December 2007. Dramatic~~subsequent ~~slowdowns~~Consent Order discussed in the ~~residential~~subsection ~~housing~~below. ~~industry~~However, ~~with~~in ~~falling~~order ~~home~~to ~~prices,~~comply ~~increasing~~with ~~foreclosures~~the supervisory letter, ~~and~~the ~~rising~~Bank was ~~unemployment~~required ~~levels~~to ~~have~~prepare ~~created~~and ~~strains~~submit onto the ~~loan~~FDIC ~~portfolios~~a ofcapital ~~many financial~~restoration ~~institutions. Median~~plan ~~home~~no later ~~sales~~than ~~continued~~April 2, to2010, ~~decline~~which ~~during~~submission ~~2009~~date ~~and~~was insooner ~~the~~than ~~first~~a ~~quarter~~similar requirement ofunder ~~2010~~the Consent Order. The ~~nationally~~Bank ~~and~~submitted inits ~~our~~capital ~~primary~~restoration ~~market~~plan ~~area,~~to ~~South~~the ~~Carolina~~FDIC on April 2, 2010. As adiscussed ~~result~~above, the ~~level~~plan ofwas ~~foreclosures~~rejected bydue to the Bank’s inability to meet ~~homebuilders~~the June 23, 2010 deadline to achieve and ~~homeowners~~maintain ~~continued~~a “well-capitalized” designation. The Bank submitted a revised capital plan to ~~increase~~the FDIC on July 28, 2010.

AsConsent a result of the current economic recession, many borrowers are unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance with the drop in real estate values, making it difficult for financial institutions to fully recover the principal and interest owed. In addition, the rapidly deteriorating economic conditions in our country have evolved into a crisis of confidence in the safety and soundness of larger financial institutions, brokerage firms, and insurance companies, resulting in extreme liquidity pressure throughout the United States financial system for all financial companies including community financial institutions such as ours. This pressure has caused many banks to tighten lending standards, which has constrained the ability of businesses and consumers to obtain credit. Anxiety over liquidity and credit risk has grown in recent months and banks have curbed lending to each other, further limiting liquidity sources available to financial institutions.Order

20Following the FDIC’s safety and soundness examination of the Bank in the fourth quarter of 2009, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions on February 23, 2010. The Consent Order, which supersedes the MOU, conveys specific actions needed to address certain findings from the FDIC’s Report of Examination and to address the Bank’s current financial condition, primarily related to capital planning, liquidity/funds management, policy and planning issues, management oversight, loan concentrations and classifications, and non-performing loans. A summary of the requirements of the Consent Order and the Bank’s status on complying with the Consent Order is as follows:

~~The Effect of the Current Economic Environment on our Bank~~22

Like many financial institutions across the United States and in South Carolina, our operations have been adversely affected by the current economic crisis. Beginning in 2008 and continuing through the first quarter of 2010, we recognized that construction, acquisition, and development real estate projects were slowing, guarantors were becoming financially stressed, and increasing credit losses were surfacing. During the first quarter of 2010, delinquencies over 90 days continued to increase, resulting in an increase in non-accrual loans indicating significant credit quality deterioration and probable losses. In particular, loans secured by real estate, including acquisition, construction, and development projects, demonstrated stress given reduced cash flows of individual borrowers, limited bank financing and credit availability, and slow property sales. This deterioration manifested itself in our borrowers in the following ways: (i) the cash flows from underlying properties supporting the loans decreased (e.g., slower property sales for development type projects or lower occupancy rates or rental rates for operating properties); (ii) cash flows from the borrowers themselves and guarantors were under pressure given illiquid personal balance sheets and drainage by investing additional personal capital in the projects; and (iii) fair values of real estate related assets declined, resulting in lower cash proceeds from sales or fair values declining to the point that borrowers were no longer willing to sell the assets at such deep discounts.

Requirements of the Consent Order		Bank’s Compliance Status

Establish, within 30 days from the effective date of the Consent Order, a plan to monitor compliance with the Consent Order, which shall be monitored by the Bank’s board of directors.		A plan to monitor compliance with the Consent Order was established by the Bank’s board of directors at a meeting held on March 16, 2010. Pursuant to the plan, the board created and appointed four of its members to serve on a consent order compliance committee to monitor the Bank’s compliance with the Consent Order. The committee has met four times since its creation on March 16, 2010.

Ensure the Bank has qualified management in place to carry out the policies of the Bank’s board of directors and operate the Bank in a safe and sound manner.		A management plan, which includes organizational structure and management assessment, was approved by the Bank’s board of directors and submitted to the supervisory authorities on April 12, 2010. The Bank has also taken steps to implement this management plan.

Achieve and maintain, within 120 days from the effective date of the Consent Order, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets.		The Bank did not meet this deadline. The Bank submitted a revised written plan to the FDIC on July 28, 2010 describing the means and timing by which the Bank will seek to increase such ratios up to or in excess of the established minimums.

As of March 31, 2010, approximately 90.9% of our loans had real estate as a primary or secondary component of collateral. Included in our loans secured by real estate, we have approximately $36.2 million of acquisition and development (“A&D”) loans as of March 31, 2010, most of which are on properties located in the Upstate of South Carolina and Western North Carolina. A&D loans are typically comprised of loans to borrowers for real estate to be developed (into properties such as sub-divisions or spec houses). Normally, these loans are repaid with the proceeds from the sale of the developed property. The greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. The majority of these borrowers are having financial difficulties. Our analysis has resulted in a significant provision expense in order to meet the estimated allowance for loan loss reserve requirement.23

Included in our loans secured by real estate, we have approximately $37.2 million of acreage and finished or buildable lot loans as of March 31, 2010. These loans are comprised of loans to borrowers for raw land and lots in subdivisions that have utilities and are ready to be built on individually but not as part of an entire development project. These loans are generally repaid with the proceeds from the sale of the property. As with our A&D loans, many of these borrowers are also experiencing financial difficulties and the greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. Our analysis has resulted in a significant provision expense in order to meet the estimated allowance for loan loss reserve requirement.

Develop, within 45 days from the effective date of the Consent Order, a written analysis and assessment of the Bank’s management and staffing needs.		The Bank prepared a written analysis and assessment of its management and staffing needs and submitted this analysis to the supervisory authorities on April 12, 2010.

Establish, within 60 days from the effective date of the Consent Order, a comprehensive policy for determining the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter.		The Bank’s board of directors and consent order compliance committee reviewed and approved a comprehensive policy for determining the adequacy of the Bank’s allowance for loan and lease losses, and this policy was submitted to the supervisory authorities prior to the April 27, 2010 deadline.

Enhance, within 60 days from the effective date of the Consent Order, the Bank’s written plan for the reduction of classified assets, which shall include, among other things, a reduction of the Bank’s risk position in each asset in excess of $250,000 that is classified as “Substandard” or “Doubtful.”		A plan to reduce the Bank’s classified assets was reviewed and approved by the Bank’s board of directors and consent order compliance committee on April 20, 2010. The plan was submitted to the supervisory authorities on the April 27, 2010 deadline.

Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or in part, “substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.		The Bank has not knowingly extended, directly or indirectly, any additional credit to, or for the benefit of, any borrower who was a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected.

Perform, within 45 days from the effective date of the Consent Order, a risk segmentation analysis with respect to the Bank’s Concentrations of Credit and a written plan to systematically reduce any segment of the portfolio that is an undue concentration of credit.		The Bank performed a risk segmentation analysis with respect to its concentrations of credit, and this analysis was reviewed and approved by the consent order compliance committee on April 6, 2010 and by the Bank’s board of directors on April 8, 2010. This analysis was submitted to the supervisory authorities by the April 12, 2010 deadline.

Revise, within 60 days from the effective date of the Consent Order, the Bank’s internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality.		The Bank revised and updated its internal loan review plan, which was reviewed and approved by the Bank’s board of directors and the consent order compliance committee on April 20, 2010. The plan was submitted to the supervisory authorities prior to the April 27, 2010 deadline.

The result of the above was an increase in the level of our non-performing assets during the first quarter of 2010. As of March 31, 2010, our non-performing assets equaled $45.0 million, or 10.2% of assets, as compared to $42.4 million, or 10.1% of assets, as of December 31, 2009. For the three months ended March 31, 2010, we recorded a provision for loan losses of $1,000,000 and net loan charge-offs of $1.0 million, or 0.4% of average loans, as compared to a $1.3 million provision for loan losses and net loan recoveries of $20,000, for the three months ended March 31, 2009. In addition, our net interest margin decreased to 1.83% for the three months ended March 31, 2010 from 3.05% for the three months ended March 31, 2010. In total, the above reduced our first quarter 2010 earnings by more than $1.6 million compared to first quarter 2009. As a result, as of March 31, 2010, we are deemed to be “significantly undercapitalized.”24

The adverse economic environment has also placed greater pressure on our deposits, as we have been taking steps to decrease our reliance on brokered deposits, while at the same time the competition for local deposits among banks in our market has been increasing in the past years. We generally obtained out-of-market time deposits of $100,000 or more through brokers with whom we maintain ongoing relationships. As of March 31, 2010, we had brokered deposits of $195.9 million, representing 49.36% of our total deposits, of which $79.7 million are scheduled to mature in the third quarter of 2010 and $94.9 million are scheduled to mature in the fourth quarter of 2010. As a result of the limitations on brokered deposits imposed by the Consent Order and our “significantly undercapitalized” designation, we must find other sources of liquidity to replace these deposits as they mature. At the end of the fourth quarter of 2009 the Bank started using an internet based certificate of deposit gathering service. We believe this will aid in our sources of funds to replace our brokered deposits. The Bank’s internet based deposits have increased from $1.8 million at December 31, 2009 to $24.5 million as of March 31, 2010. Secondary sources of liquidity may include proceeds from FHLB advances and federal funds lines of credit from correspondent banks. However, the FHLB has informed us that due to our financial condition we are not currently permitted to receive any more advances. At March 30, 2010, we had federal funds lines of credit with unrelated banks totaling $5.0 million. These lines are available for general corporate purposes but may be terminated at any time based on our financial condition. Thus, we can make no assurances that this funding source will continue to be available to us. As a result, we must

Formulate and implement, within 60 days from the effective date of the Consent Order, a profit plan and comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank, the major areas in and means by which the Bank will seek to improve the Bank’s operating performance, and the operating assumptions that form the basis for and adequately support major projected income and expense components of the plan.		The Bank created profit plan and budget for all categories of income and expense, which includes adjustments where the Bank either exceeded budget or had budget shortfalls in order to provide realistic projections going forward. The profit plan and budget were reviewed and approved by the Bank’s board of directors on April 20, 2010 and were submitted to the supervisory authorities prior to the April 27, 2010 deadline.

Enhance, within 60 days from the effective date of the Consent Order, the Bank’s written funds management plan addressing liquidity, contingent funding, and asset liability management.		The Bank’s funds management plan, which addresses liquidity, contingent funding, and asset liability management, was reviewed and approved by the Bank’s board of directors and the consent order compliance committee on April 20, 2010 and was submitted to the supervisory authorities prior to the April 27, 2010 deadline.

Not accept, renew, or rollover any brokered deposits. The Bank must develop and submit to the FDIC, within 30 days from the effective date of the Consent Order, a plan for eliminating its reliance on brokered deposits.		A plan was approved by the Bank’s board of directors and consent order compliance committee on March 24, 2010 and was submitted to the FDIC on March 25, 2010. Since entering into the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits and has repaid $28.2 million during 2010.

Not offer an effective yield in excess of 75 basis points over interest paid on deposits (including brokered deposits, if approval is granted for the Bank to accept them) of comparable size and maturity in either the Bank’s normal market area or in the market area in which such deposits would otherwise be accepted.		On April 1, 2010, we applied for and received a determination from the FDIC that our market areas were all high interest rate areas. As a result, we have permission to pay deposit rates of up to 75 basis points over the local rates (assuming the local rates exceed the applicable non-local rates) and on non-local deposits gathered in our normal market area even if these rates exceed non-local rates by more than 75 basis points.

Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.		Since entering into the Consent Order, the Bank has not declared or paid any dividends or bonuses or made any distributions of interest, principal, or other sums on subordinated debentures.

Furnish, within 45 days from the effective date of the Consent Order and within 45 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order. The Bank has furnished written progress reports to the supervisory authorities as required by the Consent Order.		The Bank has furnished written progress reports to the supervisory authorities as required by the Consent Order.

21Since entering into the MOU and continuing after entering into the Consent Order, the Bank has been actively pursuing the corrective actions required first by the MOU and then by Consent Order in an effort to ensure that the requirements of these regulatory actions are met in a timely manner. For example:

~~limit~~· As ~~our~~of ~~growth~~June 30, ~~raise additional capital~~2010, orwe ~~sell~~are ~~assets,~~deemed ~~which~~to ~~could~~be “significantly ~~materially and adversely affect~~undercapitalized.” As ~~our~~described ~~financial~~above, ~~condition~~we ~~and~~did ~~results~~not ofmeet ~~operations. Additionally,~~the ~~deposit~~Consent ~~levels~~Order ~~may~~deadline beto ~~affected~~achieve and bymaintain a ~~number~~“well-capitalized” ~~of factors~~designation, ~~including rates paid by competitors~~therefore, ~~general~~we ~~interest rate~~submitted ~~levels,~~a ~~regulatory~~ revised capital ~~requirements,~~plan ~~returns available~~ to ~~customers~~the ~~on alternative~~FDIC ~~investments~~ and ~~general economic conditions. Because~~ the ~~Bank~~South isCarolina ~~not~~Board ~~well~~of ~~capitalized,~~Financial itInstitutions ~~would~~on ~~normally~~July 28, 2010. Our becapital ~~restricted~~plan ~~from~~outlines ~~offering~~how anwe ~~effective~~will ~~yield~~seek onto return ~~deposits~~our ~~of more~~Bank’s ~~than~~risk-based 75capital ~~basis~~ratio ~~points~~level over ~~the~~10% ~~national rates published~~ by ~~the~~(i) reducing our ~~FDIC~~overall ~~weekly on~~amount ~~its~~of ~~website. However~~assets and, onin ~~April 1~~particular, ~~2010,~~ weour ~~applied~~amount ~~for~~of risk-based assets and ~~received~~(ii) raising aadditional ~~determination~~capital. To ~~from~~reduce ~~the FDIC that~~ our ~~market areas~~amount ~~were~~of ~~all~~assets, ~~high~~we ~~interest~~have ~~rate areas.~~ sold Asassets asuch ~~result,~~as weour ~~have~~bank-owned ~~permission~~life toinsurance ~~pay~~and ~~deposit~~some ~~rates~~ of upour toavailable 75for ~~basis~~sale ~~points~~securities. In ~~over~~addition, ~~the~~we ~~local~~are ~~rates~~actively seeking ~~(assuming~~buyers ~~the~~for ~~local~~part ~~rates~~of ~~exceed~~our ~~the~~loan ~~applicable~~portfolio. ~~non-local~~As ~~rates)~~a ~~and~~result onof ~~non-local~~these ~~deposits~~steps, ~~gathered~~we indecreased our ~~normal~~amount ~~market~~of ~~area~~risk-based assets ~~even~~by if$45.9 ~~these~~million ~~rates~~from ~~exceed~~December 31, ~~non-local~~2009 ~~rates~~to byJune 30, ~~more than 75 basis points~~2010. ~~Nevertheless,~~We ~~if we~~ are ~~unable~~also toexploring ~~attract~~additional financing ~~sufficient~~alternatives ~~deposits~~ to ~~meet~~strengthen ~~our~~the ~~liquidity~~capital ~~needs,~~levels ~~then~~of the Bank. ~~may~~However, bethere ~~placed~~can ~~into~~be ano ~~federal~~assurances ~~conservatorship~~that orthe ~~receivership~~Company bywill ~~the~~be ~~FDIC,~~successful ~~with~~in ~~the~~its ~~FDIC appointed~~efforts asto ~~conservator~~raise additional ~~or receiver~~capital.

~~Memorandum~~· We have developed and implemented a plan to reduce our amount of ~~Understanding~~classified loans by establishing an IMPAC committee (Improving Problem Asset Committee) to focus on the development of work-out plans for our other real estate owned (OREO) and classified loans and to explore approaches to provide additional capital to support our classified loans or to reduce the level of such loans, such as through the sale of loans to third parties. As a result, we have created a more risk-based loan review program, which we believe has enhanced the underwriting and monitoring of our loan portfolio.

As· We have implemented a ~~result~~plan ofto ~~the~~decrease ~~issues~~the ~~stemming~~concentration ~~from~~of ~~the~~our ~~economic~~commercial ~~downturn,~~real onestate ~~June~~loans. Since January 292009, ~~2009~~we ~~the~~have ~~Bank entered~~effectively ~~into~~ceased ~~the~~making ~~MOU~~any ~~with~~new ~~the~~commercial ~~Commissioner~~real ofestate ~~Banking~~loans ofand ~~the~~we ~~South~~are ~~Carolina~~decreasing ~~Board~~the existing level of ~~Financial~~ ~~Institutions~~these ~~and~~loans through the ~~Regional~~normal ~~Director~~sale of ~~the~~real ~~FDIC’s~~estate ~~Atlanta Regional~~by ~~Office. The~~borrowers ~~MOU~~and ~~required~~by ~~the~~encouraging ~~Bank~~borrowers ~~to, among~~who ~~other~~are ~~things,~~not ~~(1) submit~~full arelationship ~~capital~~clients ~~plan to~~ of the ~~supervisory authorities~~Bank ~~for returning~~ to aseek ~~“well-capitalized”~~other ~~designation;~~financing ~~(2) develop specific~~when ~~plans~~their ~~and~~loans ~~proposals~~mature. We ~~for~~are ~~the~~also ~~reduction~~actively ~~and~~seeking ~~improvement~~secondary ~~of assets which~~market ~~are~~permanent ~~subject~~financing tofor ~~adverse~~recently ~~classification~~completed ~~and~~residential ~~past~~construction projects. As ~~due loans; (3) implement~~ a ~~plan~~ toresult ~~decrease~~of ~~the~~these ~~concentration~~efforts, our amount of commercial real estate loans; ~~(4) develop and~~decreased ~~implement~~from an$151.6 ~~adequate~~million ~~loan review program; and (5) review overall liquidity objectives and develop plans and procedures aimed~~ at ~~improving~~ ~~liquidity~~December 31, ~~and~~2008 ~~reducing reliance on volatile liabilities~~ to ~~fund longer-term assets~~$106. In4 ~~addition,~~million ~~the~~at ~~Bank~~June 30, ~~may not pay dividends without the prior written consent of each supervisory authority~~2010.

~~Since~~· We ~~entering~~have ~~into~~developed ~~the~~and implemented an improved ~~MOU~~loan review program, which includes the ~~Bank~~hiring ~~has~~of ~~been~~a ~~actively~~new ~~pursuing~~internal loan review officer and the ~~corrective~~engagement ~~actions~~of ~~required~~a bynew ~~the MOU~~external inloan anreview ~~effort~~firm tofor ~~ensure~~ongoing review ~~that~~and the ~~requirements~~establishment of a new system for tracking borrower financial statements and the ~~MOU~~structure ~~are~~of ~~met~~our inwatch areports. The ~~timely~~new external review firm is active and ~~manner~~since its engagement has been on site three times to evaluate the effectiveness of the program. ~~For~~The ~~example:~~external review firm reviews both specific loans and the overall loan portfolio.

· AsOn ~~of March~~September 3110, ~~2010~~2009, we ~~are~~submitted ~~deemed~~ to the beFDIC ~~“significantly undercapitalized.” We~~and ~~have~~the ~~developed~~South ~~a capital~~Carolina ~~plan~~Board ~~for~~of ~~returning~~Financial toInstitutions a ~~“well-capitalized”~~revised ~~designation, and we~~Funds ~~submitted~~Management ~~this~~Policy ~~plan~~ to ~~the~~reflect ~~FDIC~~our ~~and~~plan ~~the~~to ~~South~~continue ~~Carolina~~to ~~Board~~improve ofliquidity ~~Financial~~levels ~~Institutions~~and inreduce ~~July 2009. Our capital~~our ~~plan~~reliance ~~outlines~~on ~~how~~brokered wedeposits ~~intend~~and toother ~~return our Bank’s risk~~non-~~based~~core ~~capital~~funding sources ~~ratio~~over ~~level~~the ~~over~~next ~~10%~~18 bymonths. We ~~(i) reducing~~grew rapidly in our ~~overall~~initial ~~amount~~years of ~~assets and~~operations, ~~in particular,~~which ~~our~~we ~~amount~~funded ofwith ~~risk-based~~a ~~assets~~combination of local deposits and ~~(ii) raising~~wholesale ~~additional capital. To~~funding, ~~reduce~~including ~~our~~brokered ~~amount~~deposits. As of ~~assets~~June 30, 2010, we ~~have~~are ~~sold~~deemed ~~assets~~to ~~such~~be “significantly asundercapitalized” ~~our~~and, ~~bank-owned~~as ~~life~~a ~~insurance~~result, ~~and~~can ~~some~~no oflonger ~~our~~accept, renew ~~available~~or ~~for~~roll ~~sale~~over ~~securities~~brokered deposits. ~~In addition~~Thus, we are actively ~~seeking~~focused ~~buyers~~on ~~for~~eliminating ~~part~~brokered ofdeposits on our ~~loan portfolio~~balance sheet. AsWe aimproved ~~result~~the ofBank’s ~~these~~liquidity position ~~steps,~~by weraising ~~decreased~~approximately ~~our~~$45.0 ~~amount of~~million ~~risk-based~~in ~~assets~~new bydeposits, net of a $2128.6 2 million ~~from~~decrease ~~December 31~~in brokered deposits, ~~2009~~through tothe ~~March 31, 2010. We~~use ~~are~~of ~~also~~an ~~exploring~~internet ~~additional~~based ~~financing~~deposit ~~alternatives~~gathering tosystem ~~strengthen~~along ~~the~~with ~~capital~~growth ~~levels~~ of ~~the~~local ~~Bank~~deposits from December 31, 2009 to June 30, 2010.

~~· We~~Additionally, ~~have~~on ~~developed~~March 1, 2010, the Company entered into an informal agreement with the Federal Reserve Bank of Richmond. The informal agreement contains provisions similar to those in the Bank’s MOU with the FDIC and ~~implemented~~the South Carolina Board of Financial Institutions, including a ~~plan~~requirement tothat ~~reduce~~the ~~our~~Company obtain the ~~amount~~prior written approval of ~~classified~~the ~~loans~~Federal byReserve ~~establishing~~Bank anof ~~IMPAC~~Richmond ~~committee~~before (~~Improving~~1) declaring ~~Problem~~or ~~Asset~~paying ~~Committee~~any dividends, (2) directly toor ~~focus~~indirectly onaccepting ~~the~~dividends ~~development~~or any other form of ~~work-out~~payment ~~plans~~representing ~~for~~a ~~our other~~reduction ~~real~~in ~~estate~~capital ~~owned~~from the Bank, (~~OREO~~3) making any ~~and~~distributions ~~classified~~of ~~loans~~interest, ~~and~~principal toor ~~explore~~other ~~approaches~~sums on subordinated todebentures ~~provide~~or ~~additional~~trust ~~capital~~preferred tosecurities, ~~support~~(4) directly ~~our~~or ~~classified~~indirectly, incurring, ~~loans~~increasing or toguaranteeing ~~reduce~~any ~~the level~~debt, ofand ~~such~~(5) directly ~~loans~~or indirectly, ~~such~~purchasing asor ~~through~~redeeming ~~the~~any ~~sale~~shares of ~~loans~~its stock. Pursuant to ~~third~~our ~~parties.~~plans Asto ~~a result,~~preserve wecapital ~~have~~and to ~~created~~inject a more ~~risk-based~~capital ~~loan~~into ~~review~~the ~~program~~Bank, ~~which~~the weCompany ~~believe~~ has ~~enhanced~~no ~~the~~plans ~~underwriting~~to ~~and~~undertake ~~monitoring~~ any of ~~our~~the ~~loan~~foregoing ~~portfolio~~activities.

· We have implemented a plan to decrease the concentration of our commercial real estate loans. Since January 2009, we have effectively ceased making any new commercial real estate loans and we are decreasing the existing level of these loans through the normal sale of real estate by borrowers and by encouraging borrowers who are not full relationship clients of the Bank to seek other financing when their loans mature. We are also actively seeking secondary market permanent financing for recently completed residential construction projects. As a result of these efforts, our amount of commercial real estate loans decreased from $151.6 million at December 31, 2008 to $114.6 million at March 31, 2010.25

~~· We~~Going ~~have~~Concern developed and implemented an improved loan review program, which includes the hiring of a new internal loan review officer and the engagement of a new external loan review firm for ongoing review and the establishment of a new system for tracking borrower financial statements and the structure of our watch reports. The new external review firm is active and since its engagement has been on site three times to evaluate the effectiveness of the program. The external review firm reviews both specific loans and the overall loan portfolio.Considerations

22Due to the conditions and events discussed in this Form 10-Q, substantial doubt exists as to our ability to continue as a going concern. We have determined that significant additional sources of capital will be required for us to continue operations through 2010 and beyond. We also continue to monitor and address liquidity issues. As of June 30, 2010, we are deemed to be “significantly undercapitalized.” As described above, we did not meet the Consent Order deadline to achieve and maintain a “well-capitalized” designation, and therefore we submitted a revised capital plan to the FDIC and the South Carolina Board of Financial Institutions on July 28, 2010.

~~· On~~We ~~September 10,~~have ~~2009,~~engaged wefinancial ~~submitted~~advisors to assist the ~~FDIC and~~Company ~~the~~in ~~South~~its ~~Carolina~~efforts ~~Board~~to ofraise ~~Financial~~additional ~~Institutions~~capital, asell ~~revised~~assets, ~~Funds~~and ~~Management~~explore ~~Policy~~other tostrategic ~~reflect~~alternatives ~~our plan~~ to ~~continue~~address ~~to improve liquidity levels and reduce~~ our ~~reliance~~current ~~on brokered deposits~~ and ~~other non-core funding sources~~expected ~~over~~liquidity ~~the~~and ~~next~~capital ~~18 months~~deficiencies. ~~We grew rapidly~~To indate, ~~our~~those ~~initial~~efforts ~~years~~have ofnot ~~operations,~~yielded ~~which~~any wesignificant ~~funded~~results. As ~~with~~ a ~~combination~~result of ~~local deposits~~our ~~and~~financial ~~wholesale funding~~condition, ~~including~~our regulators ~~brokered deposits. As of March 31, 2010, we~~ are ~~deemed~~continually ~~to be~~monitoring ~~“significantly~~our ~~undercapitalized”~~liquidity and, ascapital aadequacy. In ~~result~~addition, ~~can~~our noregulators ~~longer~~have ~~accept,~~various ~~renew~~enforcement ortools ~~roll~~available ~~over~~to ~~brokered~~them, ~~deposits~~including ~~without~~ the ~~prior~~issuance ~~consent~~ of ~~the~~capital ~~FDIC. Thus~~directives, weorders ~~are~~to ~~actively~~cease ~~focused~~engaging ~~on eliminating~~in ~~brokered~~certain ~~deposits~~business onactivities, ~~our balance sheet. We improved~~ the ~~Bank’s liquidity position by~~ ~~raising~~issuance ~~approximately $27.2 million in new deposits through the use~~ of ~~an internet~~modified ~~based~~or ~~deposit~~additional ~~gathering~~orders ~~system~~or ~~along~~agreements, ~~with~~and ~~growth~~the ofauthority ~~local deposits~~to ~~from~~close ~~December 31,~~the ~~2009 to March 31, 2010~~Bank.

InNotwithstanding ~~addition~~the above, ~~in mid-February 2010~~accompanying ~~the~~consolidated ~~Bank~~financial ~~received~~statements ahave ~~supervisory~~been ~~letter~~prepared ~~from~~on ~~the~~a ~~FDIC~~going ~~dated~~concern ~~February 11~~basis, ~~2010,~~ which ~~provided~~contemplates ~~for additional restrictions and mandatory actions to be taken by~~ the ~~Bank. These~~realization ~~restrictions and~~of ~~actions~~assets ~~were all substantially addressed~~ and ~~superseded by~~ the ~~subsequent~~discharge ~~Consent Order~~of ~~discussed~~ liabilities in the ~~subsection~~normal ~~below. However,~~course inof ~~order~~business tofor ~~comply with~~ the ~~supervisory~~foreseeable ~~letter~~future, ~~the~~and ~~Bank~~do ~~was~~not include ~~required~~any toadjustments ~~prepare and submit~~ to reflect the ~~FDIC~~possible afuture ~~capital~~effects ~~restoration~~on ~~plan~~the ~~no later~~recoverability ~~than~~and ~~April 2,~~classification ~~2010~~of assets, ~~which~~or ~~submission~~the ~~date~~amounts ~~was~~and ~~sooner~~classification ~~than~~of ~~a similar~~liabilities ~~requirement~~that ~~under~~may ~~the~~result ~~Consent~~should ~~Order. The Bank~~we ~~submitted~~be ~~its~~unable ~~capital restoration plan~~ to ~~the~~continue ~~FDIC~~as ona ~~April 2,~~going ~~2010~~concern.

~~Consent~~The Bank’s financial condition has suffered during 2009 and the first ~~Order~~six months of 2010 from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression. The effects of the current economic environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The effects of the economic downturn have been particularly severe during the last year. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans to the Bank. As a result, the Bank’s level of nonperforming assets increased substantially during 2009 and has continued to increase through the second quarter of 2010. As of June 30, 2010, our non-performing assets equaled $43.9 million, or 9.5% of assets, as compared to $42.4 million, or 10.1% of assets, as of December 31, 2009. In addition, our level of impaired loans increased to $68.1 million at June 30, 2010 compared to $34.2 million at December 31, 2009. For the year ended December 31, 2009 and for the six months ended June 30, 2010, the Bank recorded a $17 million and a $2 million provision, respectively, to increase the allowance for loan losses to a level which, in management’s best judgment, adequately reflected the increased risk inherent in the loan portfolio as of the year and quarter end periods, respectively. Nevertheless, given the current economic climate, we recognize the possibility of further deterioration in the loan portfolio in the second half of 2010. For the six months ended June 30, 2010, we recorded net loan charge-offs of $3.4 million, or 1.3% of average loans, as compared to net loan charge-offs of $1.2 million, for the six months ended June 30, 2009.

~~Following~~The Company and the ~~FDIC’s safety~~Bank ~~and~~operate ~~soundness~~in ~~examination~~a ofhighly regulated ~~the~~industry ~~Bank~~and inmust plan for the ~~fourth~~liquidity ~~quarter~~needs of ~~2009,~~each ~~the~~entity ~~Bank~~separately. ~~entered~~A ~~into~~variety ~~the~~of ~~Consent~~sources ~~Order~~of ~~with~~liquidity ~~the~~are ~~FDIC~~available ~~and~~to the ~~South~~Bank ~~Carolina~~to ~~Board~~meet ofits ~~Financial~~short-term ~~Institutions~~and onlong-term ~~February 23,~~funding ~~2010~~needs. ~~The~~ ~~Consent~~Although ~~Order,~~a ~~which~~number ~~supersedes~~of ~~the~~these ~~MOU,~~sources ~~conveys~~have ~~specific~~been ~~actions~~limited ~~needed~~following toexecution ~~address~~of ~~certain~~the ~~findings~~Consent ~~from~~Order with the FDIC’s and ~~Report~~the South Carolina Board of ~~Examination~~Financial ~~and~~Institutions, tomanagement ~~address~~has prepared forecasts of these sources of funds and the Bank’s ~~current~~projected ~~financial~~uses ~~condition,~~of funds ~~primarily~~during ~~related~~2010 in an effort to ~~capital~~ensure ~~planning,~~that ~~liquidity/funds~~the ~~management,~~sources ~~policy~~available ~~and planning~~are ~~issues,~~sufficient ~~management~~to meet ~~oversight,~~the ~~loan~~Bank’s ~~concentrations~~projected ~~and~~liquidity ~~classifications, and~~needs ~~non-performing~~for ~~loans~~this period.

~~Specifically~~The Company relies on dividends from the Bank as its primary source of liquidity. The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, the terms of the Consent Order described above and in greater detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Effect of the Current Economic Environment on our Bank — Consent Order” ~~requires~~will further limit the Bank’s ability to, ~~among~~pay ~~other~~dividends ~~things,~~to the Company to satisfy its funding needs.

~~· establish,~~The ~~within~~Company 30will ~~days~~also ~~from~~need to raise additional capital to increase capital levels to meet the ~~effective~~standards ~~date~~set offorth by the ~~Consent~~FDIC ~~Order,~~as described ain ~~plan~~greater detail tounder ~~monitor~~“Management’s ~~compliance~~Discussion ~~with~~and Analysis of Financial Condition and Results of Operations — The Effect of the Current Economic Environment on our Bank — Consent Order,”. ~~which shall~~As bea ~~monitored~~result byof the ~~Bank’s~~recent ~~board~~downturn in the financial markets, the availability of ~~directors. A~~many ~~plan~~sources of capital (principally to ~~monitor~~financial services ~~compliance~~companies) ~~with~~has ~~the~~become ~~Consent~~significantly restricted or has become ~~Order~~increasingly ~~was~~costly ~~established~~as bycompared to the ~~Bank’s~~prevailing ~~board~~market ofrates ~~directors~~prior atto athe volatility. ~~meeting~~Management ~~held~~cannot onpredict ~~March 16,~~when or if the capital markets will ~~2010. Pursuant~~return to ~~the~~more ~~plan,~~favorable conditions or whether the ~~board~~Company will be able to ~~created~~raise ~~and~~a ~~appointed~~sufficient ~~four~~amount of ~~its~~capital ~~members~~ to ~~serve~~continue onoperations. Management is actively evaluating a ~~consent~~number ~~order~~of capital sources, asset reductions and other ~~compliance~~balance ~~committee~~sheet tomanagement ~~monitor~~strategies ~~the~~in ~~Bank’s~~an ~~compliance~~effort ~~with~~to ensure that the ~~Consent~~Bank’s ~~Order. The~~projected ~~committee~~level ~~has~~of ~~met~~regulatory ~~five~~capital ~~times since~~can support its ~~creation~~balance ~~on March 16, 2010;~~sheet.

~~· ensure~~There can be no assurances that the ~~Bank~~Company will ~~has~~be ~~qualified~~successful ~~management~~in its efforts to raise additional capital. An equity financing transaction would result in ~~place~~substantial dilution to the Company’s ~~carry~~current ~~out~~shareholders and could adversely affect the ~~policies~~market price of the ~~Bank~~ Company’s ~~board~~common ofstock. ~~directors~~It ~~and~~is ~~operate~~difficult ~~the~~to ~~Bank~~predict inif these efforts will be successful, either on a ~~safe~~short-term ~~and~~or ~~sound~~long-term ~~manner~~basis. A ~~management~~Should these efforts be ~~plan~~unsuccessful, ~~which~~due ~~includes~~to ~~organizational~~the ~~structure~~regulatory ~~and~~restrictions ~~management~~which ~~assessment,~~exist ~~was~~that restrict cash ~~approved~~payments bybetween the Bank’s ~~board~~and ofthe ~~directors~~Company, ~~and~~the ~~submitted~~Company may be unable to realize its assets and discharge its liabilities in the ~~supervisory authorities~~normal oncourse ~~April 12,~~of ~~2010;~~business.

~~· achieve~~As ~~and~~a ~~maintain,~~result ~~within~~of ~~120~~management’s ~~days~~assessment ~~from the effective date~~ of the ~~Consent~~Company’s ~~Order,~~ability ~~Total~~to ~~Risk~~continue ~~Based~~as ~~capital~~a atgoing ~~least~~concern, ~~equal~~the toaccompanying ~~10%~~consolidated offinancial ~~risk-weighted~~statements ~~assets~~for ~~and~~the ~~Tier~~Company 1have ~~capital~~been atprepared ~~least~~on ~~equal~~a ~~to 8% of total~~going ~~assets. At~~concern ~~this time~~basis, wewhich docontemplates ~~not~~the ~~believe that~~realization weof ~~will~~assets beand ~~able to meet these minimum capital requirements within 120 days from~~ the ~~effective~~discharge ~~date~~ of ~~the Consent Order.~~ Ifliabilities ~~this~~in ~~were~~the tonormal ~~occur,~~course ~~then within 30 days~~ of ~~such~~business ~~determination~~for the ~~Bank~~ ~~would~~foreseeable befuture, ~~required~~and does tonot ~~submit~~include aany ~~written~~adjustments ~~plan~~ to ~~the~~reflect ~~FDIC describing~~ the ~~means~~ ~~and~~possible ~~timing~~future byeffects ~~which~~on the recoverability ~~Bank will increase such ratios up to~~ or inclassification ~~excess~~ of ~~the established minimums;~~assets.

~~· develop,~~Current ~~within~~Business 45 days from the effective date of the Consent Order, a written analysis and assessment of the Bank’s management and staffing needs. The Bank prepared a written analysis and assessment of its management and staffing needs and submitted this analysis to the supervisory authorities on April 12, 2010;Strategy

~~· establish,~~In ~~within~~addition 60to ~~days from~~ the ~~effective~~actions ~~date~~required of by the ~~Consent Order~~MOU, awe ~~comprehensive~~have ~~policy~~been ~~for~~actively pursuing ~~determining~~ the ~~adequacy~~corrective ofactions ~~the Bank’s~~required ~~allowance~~by ~~for loan and lease losses, which must provide for a review of~~ the ~~Bank’s~~Consent ~~allowance~~Order ~~for~~in ~~loan~~an ~~and~~effort ~~lease losses at least once each calendar~~to ~~quarter. The~~ensure ~~Bank’s~~that ~~board of directors and consent order compliance committee reviewed and approved a comprehensive policy for determining~~ the ~~adequacy~~requirements of the ~~Bank’s~~Consent ~~allowance~~Order ~~for~~are ~~loan~~met ~~and~~in ~~lease~~a timely ~~losses~~manner. Specifically, ~~and~~we ~~this~~are ~~policy~~currently focusing ~~was~~our ~~submitted~~efforts toin the ~~supervisory~~following ~~authorities prior to the April 27, 2010 deadline;~~areas:

~~· enhance, within 60 days from the effective date of the Consent Order, the Bank’s written plan for the reduction~~ 26

23· Increasing and Strengthening Our Capital Position.

As of ~~classified~~June 30, ~~assets~~2010, ~~which~~the ~~shall~~Bank ~~include,~~is ~~among~~deemed ~~other~~to ~~things,~~be a“significantly ~~reduction~~undercapitalized.” Management ofhas ~~the~~developed ~~Bank’s~~a ~~risk~~plan to increase and ~~position~~preserve inour ~~each~~capital ~~asset~~with inthe ~~excess~~goal of ~~$250,000~~returning ~~that~~to isand ~~classified~~maintaining asa “~~Substandard~~well-capitalized” ~~or “Doubtful~~status.~~” A~~ ~~plan~~These toinitiatives ~~reduce~~include, among other things, restructuring the Bank’s ~~classified~~balance ~~assets~~sheet ~~was~~by ~~reviewed~~limiting ~~and~~new ~~approved~~loan byactivity ~~the~~and ~~Bank’s~~aggressively ~~board~~attempting ofto ~~directors~~sell certain real estate-related loans and ~~consent~~other ~~order~~assets, ~~compliance~~and ~~committee~~raising onadditional capital ~~April~~through a stock offering. 20 Additionally, ~~2010. The~~we ~~plan~~are ~~was~~actively ~~submitted~~evaluating a number of capital sources and balance sheet management strategies to ~~the~~ensure ~~supervisory~~that our projected level of regulatory ~~authorities~~capital oncan ~~the~~support ~~April 27,~~our ~~2010~~balance ~~deadline;~~sheet and meet or exceed minimum requirements.

· ~~not extend any additional credit to any borrower who~~Managing ~~has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful”~~ and ~~is uncollected. In~~Improving ~~addition,~~Asset the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or in part, “substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the BankQuality. The Bank has not knowingly extended, directly or indirectly, any additional credit to, or for the benefit of, any borrower who was a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected;

~~· perform,~~The ~~within~~economic 45recession ~~days from~~ and the ~~effective~~deterioration ~~date~~ of the ~~Consent~~ ~~Order,~~housing aand ~~risk~~real ~~segmentation~~estate ~~analysis~~markets ~~with~~have ~~respect~~had toan ~~the Bank’s~~adverse ~~Concentrations~~impact ofon ~~Credit~~the ~~and~~credit aquality ~~written~~of ~~plan~~our toloan ~~systematically~~portfolio. ~~reduce~~In ~~any segment~~response, ofour ~~the~~Bank intends ~~portfolio~~to ~~that~~significantly isreduce anthe ~~undue~~amount ~~concentration~~ of ~~credit. The~~its ~~Bank~~non-performing ~~performed a risk segmentation~~assets. ~~analysis~~Non-performing ~~with~~assets ~~respect~~hurt toour ~~its~~profitability ~~concentrations~~because ofthey ~~credit,~~reduce ~~and~~the ~~this~~balance ~~analysis was~~of ~~reviewed~~earning ~~and~~assets, ~~approved~~may byrequire ~~the~~additional ~~consent~~loan ~~order~~loss ~~compliance~~provisions ~~committee~~or ~~on April 6~~write-downs, ~~2010~~ and require bysignificant ~~the~~devotion ~~Bank’s board~~ of ~~directors~~staff ontime ~~April 8,~~and ~~2010.~~financial ~~This~~resources ~~analysis~~to ~~was~~resolve. We ~~submitted~~believe toour ~~the~~asset ~~supervisory~~quality ~~authorities~~plan byaggressively ~~the~~addresses ~~April 12, 2010~~these ~~deadline;~~issues. For example,

· ~~revise,~~In ~~within 60 days from the effective date~~ February of ~~the~~ ~~Consent Order~~2009, ~~the~~we ~~Bank’s~~restructured ~~internal~~the ~~loan~~credit ~~review~~administration and ~~grading system to provide for the periodic review of the Bank’s~~ loan ~~portfolio~~operations ~~in order to identify and~~departments ~~categorize the Bank’s loans,~~ and ~~other~~hired ~~extensions~~a ofskilled chief credit ~~which~~officer ~~are~~to ~~carried on~~oversee the ~~Bank’s~~enhancement ~~books as loans, on the basis~~ of ~~credit quality. The Bank revised and updated its internal~~our ~~loan~~processes ~~review plan, which was reviewed~~ and ~~approved~~procedures byin ~~the~~this ~~Bank’s board of directors and the consent order compliance committee on April 20, 2010~~area. ~~The plan was submitted to the supervisory authorities prior to the April 27, 2010 deadline;~~

· ~~formulate~~In ~~and implement, within 60 days from the effective date~~ June of ~~the Consent Order, a profit plan and comprehensive budget for~~ ~~all categories of income and expense~~2009, ~~which~~we ~~must~~established ~~address,~~an ~~at minimum, goals and strategies for~~ improving ~~and~~problem ~~sustaining~~asset ~~the~~committee ~~earnings~~to ofassist ~~the~~ Bank~~, the major~~ ~~areas~~management in ~~and~~policy ~~means~~development, bymanagement ~~which the Bank will seek to improve the Bank’s operating performance~~strategy, and/or ~~the~~liquidation ~~operating assumptions that form the basis for and~~of ~~adequately~~problem ~~support major projected income and expense components of the plan~~assets. ~~The~~ ~~Bank~~We ~~created~~are ~~profit~~currently ~~plan~~proactively ~~and~~seeking ~~budget~~avenues ~~for all categories of income and expense, which includes adjustments where the Bank either exceeded budget or had budget shortfalls in order~~ to ~~provide~~sell ~~realistic~~bank-owned ~~projections~~properties ~~going forward. The profit plan~~ and ~~budget~~problem ~~were~~assets ~~reviewed and approved by the Bank’s board of directors on April 20, 2010 and were submitted~~ to ~~the~~outside ~~supervisory authorities prior to the April 27, 2010 deadline;~~investors.

· ~~enhance,~~In ~~within 60 days from the effective date~~ January of ~~the~~ ~~Consent Order~~2009, ~~the~~we ~~Bank’s~~implemented ~~written~~a ~~funds~~process ~~management~~for ~~plan~~the ~~addressing~~continuous ~~liquidity, contingent~~review ~~funding,~~of ~~and~~all ~~asset liability management. The Bank’s funds management plan, which~~classified ~~addresses liquidity~~loans, ~~contingent~~watch ~~funding~~loans, ~~and~~past ~~asset~~due ~~liability management~~loans, ~~was reviewed~~relationships ~~and~~over ~~approved~~$500,000, ~~by the Bank’s board of directors~~ and ~~the~~any ~~consent order~~other ~~compliance~~potential ~~committee~~risky onloans ~~April 20, 2010~~ and ~~was~~applied ~~submitted~~conservative torisk ~~the supervisory authorities prior to the April 27, 2010 deadline;~~grades.

· ~~not~~Throughout ~~accept, renew, or rollover any brokered~~2009 ~~deposits. The Bank must develop~~ and ~~submit~~ ~~to the FDIC~~2010, ~~within~~we 30conducted ~~days~~disciplined ~~from~~watch ~~the~~loan ~~effective~~meetings ~~date~~to oftrack ~~the~~and ~~Consent~~monitor ~~Order~~progress, aincluding ~~plan for eliminating its reliance on brokered deposits. A plan was approved by~~ the ~~Bank’s~~execution ~~board~~ of ~~directors~~ ~~and~~workout ~~consent order compliance committee on March 24~~plans, ~~2010~~obtainment ~~and~~of ~~was~~current ~~submitted~~financial ~~to the FDIC on March 25~~data, ~~2010. Since~~and ~~entering~~detailed ~~into~~progress ~~the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits;~~updates.

· ~~not~~Throughout ~~offer an effective yield in excess of 75 basis~~2009 ~~points over interest paid on deposits (including brokered deposits, if approval is granted for the Bank to accept them) of comparable size~~ and ~~maturity~~through ~~in either~~June ~~the Bank’s normal market area or in the market area in which such deposits would otherwise be accepted. However~~30, ~~on April 1,~~ 2010, we ~~applied~~maintained ~~for~~what ~~and received a determination from the FDIC that our market areas were all high interest rate areas. As a result,~~ we ~~have~~believe ~~permission to~~is ~~pay~~an ~~deposit~~adequate ~~rates of up to 75 basis points over the local rates (assuming~~reserve ~~the~~for ~~local~~loan ~~rates~~losses ~~exceed~~given the ~~applicable~~risk ~~non-local~~profile ~~rates)~~of ~~and on non-local deposits gathered in~~ our ~~normal market area even if these rates exceed non-local rates by more than 75 basis points;~~Bank.

24· In May of 2009, we implemented a risk-focused internal and external loan review program.

· ~~not~~During ~~declare or pay any dividends or bonuses or make~~the ~~any~~first ~~distributions~~six ofmonths ~~interest, principal, or other sums on subordinated debentures without the prior approval~~ of ~~the supervisory authorities. Since entering into the Consent Order~~2010, ~~the Bank~~we ~~has~~updated ~~not~~our ~~declared~~policies orand ~~paid~~procedures ~~any~~and ~~dividends or bonuses or made any~~enhanced ~~distributions~~staffing ofrelated ~~interest,~~to ~~principal,~~loan orwork-outs ~~other~~and ~~sums~~collection ~~on subordinated debentures; and~~processes.

· ~~furnish, within 45 days from the effective date of the~~Decreasing ~~Consent~~Concentrations ~~Order~~in ~~and~~Our ~~within~~Loan ~~45 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order~~Portfolio. ~~The Bank has furnished written progress reports to the supervisory authorities as required by the Consent Order.~~

~~Additionally,~~We are focused on ~~March 1,~~reducing ~~2010,~~our ~~the~~concentrations ~~Company~~in ~~entered~~commercial ~~into~~real anestate ~~informal~~(CRE), ~~agreement~~specifically ~~with~~acquisition development ~~the~~and ~~Federal~~construction ~~Reserve Bank~~loans, ofand ~~Richmond~~residential construction loans. ~~The~~Since ~~informal~~January 2009, ~~agreement~~we have effectively ~~contains~~ceased ~~provisions~~making ~~similar~~any tonew ~~those~~CRE inloans while proactively decreasing the ~~Bank’s~~level ~~MOU~~of ~~with~~these existing ~~the~~loan ~~FDIC~~types. We ~~and~~have ~~the~~worked to ~~South~~decrease ~~Carolina~~our ~~Board~~concentration ofby ~~Financial~~various ~~Institutions~~means, including a(1) through ~~requirement that~~ the normal ~~Company~~sale ~~obtain~~of ~~the~~real ~~prior~~estate ~~written~~by ~~approval~~borrowers, (2) by seeking avenues to sell a portion of the ~~Federal~~CRE ~~Reserve~~portfolio ~~Bank~~to ~~of Richmond~~outside ~~before~~investors, (13) ~~declaring~~by orproactively seeking ~~paying~~secondary ~~any~~market ~~dividends~~permanent financing for recently completed residential construction projects, and (24) ~~directly or~~by ~~indirectly~~encouraging ~~accepting~~transactional ~~dividends~~CRE orcustomers to ~~any~~seek other ~~form~~financing ofwhen ~~payment~~their ~~representing~~loans mature. As a ~~reduction~~ inresult ~~capital~~of ~~from~~these ~~the Bank~~efforts, ~~(3) making~~our ~~any~~amount ~~distributions~~ of ~~interest,~~CRE ~~principal~~loans ordecreased ~~other~~29.8% ~~sums~~from on$151.6 ~~subordinated~~million ~~debentures~~of orour ~~trust~~total ~~preferred securities~~loan portfolio at December 31, 2008 (to $106.4~~) directly~~ ormillion ~~indirectly,~~of ~~incurring,~~our ~~increasing~~loan ~~or guaranteeing~~portfolio ~~any~~at ~~debt~~June 30, ~~and~~2010. We ~~(5) directly~~have oralso ~~indirectly,~~reduced ~~purchasing~~our orresidential ~~redeeming~~construction ~~any~~portfolio ~~shares~~96.4% offrom ~~its stock~~$33.8 million at December ~~Pursuant~~31, 2008 to $1.2 ~~our~~million ~~plans~~at toJune 30, ~~preserve~~2010. We expect ~~capital~~commercial ~~and~~real toestate ~~inject~~loan ~~more~~portfolio ~~capital into~~balances ~~the~~to ~~Bank,~~continue ~~the~~to ~~Company~~decrease in ~~has~~2010 nothrough ~~plans~~the tocontinued ~~undertake~~successful ~~any~~implementation of the ~~foregoing~~plans outlined ~~activities~~above.

~~Going Concern Considerations~~27

~~The going concern~~· Reducing ~~assumption~~Operating ~~is a fundamental principle in the preparation of financial statements~~Expenses. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In assessing this assumption, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of March 31, 2010. The Company has a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank’s financial condition has suffered during 2009 and the first quarter of 2010 from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression.

~~The~~We ~~effects~~have ofalways ~~the current~~focused ~~economic environment are being felt across many industries, with~~on ~~financial~~controlling ~~services~~expenses and ~~residential~~managing ~~real~~efficient ~~estate~~overhead. During ~~being~~2010, ~~particularly~~management ~~hard~~intends ~~hit.~~to ~~The~~further ~~effects~~reduce ofcosts ~~the~~in ~~economic~~a ~~downturn~~manner ~~have~~which ~~been~~does ~~particularly~~not ~~severe~~impact ~~during~~ the ~~last 150~~quality ~~days. The Bank, with a loan portfolio consisting~~ of aour ~~concentration in~~customer ~~commercial~~service. Given ~~real~~the ~~estate~~prolonged ~~loans including residential construction and development~~economic ~~loans~~recession, ~~has~~we ~~seen~~have aembarked ~~decline~~on inan ~~the~~extremely ~~value~~aggressive ofexpense ~~the~~reduction campaign. Management ~~collateral~~has ~~securing~~already ~~its portfolio~~reduced assalary ~~well as rapid deterioration in its borrowers’ cash flow~~ and ~~ability~~benefits toexpenses ~~repay their~~by ~~outstanding~~reducing ~~loans~~staffing ~~to the Bank. As a result~~levels, ~~the~~freezing ~~Bank’s~~salaries ~~level of~~at ~~nonperforming~~2008 ~~assets~~levels, ~~has increased substantially during 2009~~ and ~~the~~reducing ~~first quarter~~compensation ofin ~~2010.~~several ~~For the quarter ended March 31~~positions. Additionally, ~~2010,~~we ~~the~~will ~~Bank~~continue ~~recorded~~to aseek to ~~$1,000,000~~renegotiate ~~provision~~vendor ~~increase~~contracts ~~the~~and ~~allowance~~implement ~~for~~several ~~loan~~other ~~losses~~cost-saving measures to areduce ~~level~~noninterest ~~which, in~~expenses. Reducing ~~management’s~~our ~~best~~level ~~judgment,~~of ~~adequately reflected the increased risk inherent~~nonperforming inassets ~~the~~will ~~loan~~also ~~portfolio~~lower asour ofoperating ~~March 31, 2010~~costs.

~~The Company and the Bank~~· Enhancing ~~operate~~Funds inManagement ~~a highly-regulated industry~~ and ~~must plan for the liquidity needs of each entity separately~~Liquidity. A variety of sources of liquidity are available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources have been limited following execution of the Consent Order with the FDIC and the South Carolina Board of Financial Institutions, management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2010 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.

~~The~~We ~~Company~~grew ~~relies~~rapidly onfrom our ~~dividends~~inception ~~from~~through ~~the~~2008, ~~Bank~~and ashave ~~its~~historically ~~primary~~funded ~~source~~our asset growth with a combination of ~~liquidity~~local deposits and wholesale funding, specifically brokered deposits. ~~The~~As ~~Company~~of isJune 30, a2010, we had brokered deposits of $174.6 million, ~~legal~~representing ~~entity~~41.41% ~~separate~~of our total deposits, of which $79.7 million are scheduled to mature in the third quarter of 2010 and ~~distinct~~$94.9 ~~from~~million are scheduled to mature in the ~~Bank~~fourth quarter of 2010. Because ~~Various~~of ~~legal~~the limitations on ~~restrict~~brokered deposits imposed by the Consent Order and our significantly undercapitalized status, the Bank ~~from~~may ~~lending~~no longer accept, renew, or ~~otherwise~~roll ~~supplying~~over brokered deposits. Thus, we must find other sources of liquidity to replace these deposits as they mature. We have amended our funds management policy to ~~the~~reflect ~~Company~~our plan to continue to improve ~~meet~~liquidity ~~its~~levels ~~obligations~~and reduce our use of brokered deposits and other non-core funding sources. Our funds management policy also includes our plan to reduce assets, ~~including~~certain ~~paying~~loans, ~~dividends~~and other bank-owned real estate. InWe ~~addition~~plan to reduce our brokered deposit usage by executing on our comprehensive deposit acquisition program, ~~the~~which ~~terms~~creates an environment of ~~the~~consistent deposit growth based on ~~Consent~~relationship-based ~~Order~~banking, ~~described~~advocate-based ~~above~~selling ~~will~~and ~~further~~an ~~limit~~aggressive, ~~the~~focused calling ~~Bank’s~~program ~~ability~~combined towith ~~pay~~offering internet based certificates of deposit. ~~dividends~~Our toexperienced ~~the~~team ~~Company~~of bankers is actively cross-selling core deposits to ~~satisfy~~our local ~~its~~depositors ~~funding~~and ~~needs~~borrowers, and is held accountable for production through twice-weekly sales meetings. Production is enhanced by our relationship-based culture training, which includes advanced customer service techniques and one-on-one coaching. We also plan to generate core deposits through a combination of competitive products and pricing, customer service excellence, and targeted marketing campaigns

~~The Company will also~~· Enhancing ~~need~~Our to raise additional capital to increase capital levels to meet the standards set forth by the FDIC. As a result of the recent downturn in the financial markets, the availability of many sources of capital (principally to financial services companies) has become significantly restricted or has become increasingly costly as compared to the prevailing market rates prior to the volatility. Management cannot predict when or if the capital markets will return to more favorable conditions. Management is actively evaluating a number of capital sources asset reductions and other balance sheet management strategies to ensure that the Bank’s ~~projected~~Relationship ~~level of regulatory capital can support its balance sheet~~Culture.

25While the bulk of our strategic plan encompasses strategies to survive the prolonged economic recession, management recognizes that we must also place the Bank in the best position to thrive as we emerge from this recession. In this regard, planning has also centered on enhancing the Bank’s culture. We believe the enhancement of our culture will place the Bank in the best position possible to provide unmatched customer service and to take advantage of market opportunities through advocate-based selling and relationship banking strategies. Enhancement plans include, among others, the following:

~~There can be no~~· implementing ~~assurances~~consistent ~~that~~customer ~~the~~service ~~Company~~and ~~will~~communication bestandards ~~successful~~ in ~~its~~all ~~efforts~~areas ~~to raise additional capital during 2010. An equity financing transaction would result in substantial dilution to the Company’s current shareholders and could adversely affect the market price~~ of the ~~Company’s common stock. It is difficult to~~ predict if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to the regulatory restrictions which exist that restrict cash payments between the Bank ~~and the Company, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.~~;

As· training ~~a result of management’s~~and ~~assessment~~certifying of the ~~Company’s~~non-negotiables ~~ability to continue as a going concern, the accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization~~ of ~~assets and~~relationship ~~the~~banking ~~discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments~~ to ~~reflect~~all ~~the possible future effects on the recoverability or classification of assets.~~employees;

~~Current~~· ensuring ~~Business~~all employees ~~Strategy~~are engaged and motivated while enabling management to measure the enhancement of the culture by conducting quarterly employee engagement surveys;

~~In addition to the~~· implementing ~~actions~~consistent ~~required~~management bystandards ~~the~~for ~~MOU,~~all wesupervisors ~~have~~resulting ~~been actively pursuing the corrective actions required by the Consent Order~~ in aninternal ~~effort to ensure that the~~and ~~requirements~~external ~~of the Consent Order are met in a timely manner. Specifically, we are currently focusing our efforts in the following areas:~~advocacy;

· ~~Increasing~~refining the Bank’s customer experience measurements, including branch mystery shopping and customer ~~Strengthening~~survey ~~Our~~programs; and ensuring all programs evaluate and measure the ~~Capital~~Bank’s ~~Position~~expectations and areas of focus.

AsThe ~~of March 31, 2010, the~~ Bank iswill ~~deemed~~continue to beserve ~~“significantly~~customers ~~undercapitalized.” Management~~in ~~has~~all ~~developed~~areas, aincluding processing ~~plan~~banking totransactions, ~~increase and~~paying ~~preserve~~competitive ~~our~~rates ~~capital~~on ~~with~~deposits, ~~the~~and providing ~~goal~~access ofto ~~returning~~lines toof ~~and~~credit. All customer ~~maintaining~~deposits aare ~~“well-capitalized” status.~~fully ~~These~~insured ~~initiatives~~to ~~include,~~the ~~among~~highest ~~other~~limits ~~things,~~set ~~restructuring~~by the ~~Bank’s~~FDIC, ~~balance~~which ~~sheet~~are by$250,000 ~~limiting~~for ~~new~~individually ~~loan~~titled ~~activity~~accounts and ~~aggressively~~$250,000 ~~attempting to sell~~for ~~certain~~individually ~~real~~titled ~~estate-related~~IRA ~~loans~~accounts. ~~and~~In ~~other assets~~addition, ~~and~~the ~~raising~~Bank ~~additional~~participates in the ~~capital~~FDIC ~~through~~Transaction aAccount ~~stock~~Guarantee ~~offering~~Program (the “TAGP”). ~~Additionally~~ Under this program, all wenon-interest ~~are~~bearing ~~actively~~transaction ~~evaluating~~accounts aare ~~number~~fully ofguaranteed ~~capital~~by ~~sources,~~the FDIC ~~balance~~for ~~sheet~~the ~~management~~entire ~~strategies,~~amount ~~and~~of ~~other~~the ~~strategic~~account. ~~alternatives~~The guarantee also applies to ~~ensure~~interest ~~that~~bearing ~~our~~transaction ~~projected~~accounts ~~level~~with ofinterest ~~regulatory~~rates ~~capital~~of ~~can~~0.25% ~~support~~or ~~our~~less. ~~balance~~On ~~sheet and~~April 13, ~~meet~~2010, orthe ~~exceed~~FDIC ~~minimum~~approved ~~requirements.~~an interim

~~· Managing and Improving Asset Quality.~~28

~~The~~rule that ~~economic~~extends ~~recession and~~ the ~~deterioration~~TAGP ofto ~~the~~December 31, ~~housing~~2010. ~~and~~We ~~real estate markets~~ have ~~had an~~ ~~adverse~~elected ~~impact~~to oncontinue ~~the~~our ~~credit~~voluntary ~~quality~~participation ofin ~~our~~the ~~loan portfolio~~program. This Inprogram ~~response,~~is ~~our~~in ~~Bank intends~~addition to ~~significantly~~and ~~reduce~~separate from the ~~amount~~coverage ofavailable ~~its~~under ~~non-performing~~the ~~assets. Non-performing~~FDIC ~~assets~~general ~~hurt~~deposit ~~our~~insurance rules. We ~~profitability~~believe ~~because~~participation ~~they~~in ~~reduce~~ the ~~balance of~~ ~~earning~~program ~~assets,~~is ~~may~~enhancing ~~require~~our ~~additional~~ability ~~loan loss provisions or write-downs, and require significant devotion of staff time and financial resources~~ to ~~resolve. We~~ ~~believe~~retain ~~our~~customer ~~asset quality plan aggressively addresses these issues~~deposits. ~~For example,~~

~~· In~~However, ~~February of~~should ~~2009,~~the weBank ~~restructured~~fail to comply with the ~~credit administration~~capital and ~~loan~~liquidity funding ~~operations~~requirements ~~departments~~in ~~and~~the ~~hired~~Consent aOrder, ~~skilled~~or ~~chief~~suffer ~~credit~~a continued deterioration ~~officer~~in toour ~~oversee~~financial condition, the ~~enhancement~~Bank ofmay ~~our~~be ~~processes~~subject ~~and~~to ~~procedures~~being inplaced ~~this~~into a ~~area~~federal conservatorship or receivership by the FDIC, with the FDIC appointed as conservator or receiver.

~~· In~~Recent ~~June of~~Legislative ~~2009, we established an improving problem asset committee to assist Bank management in policy development, management strategy,~~ and~~/or~~ ~~liquidation~~Regulatory ofInitiatives ~~problem assets. We are currently proactively seeking avenues~~ to ~~sell~~Address ~~bank-owned~~Financial ~~properties~~ and ~~problem assets to~~ ~~outside~~Economic ~~investors.~~Crises

~~· In~~Markets in ~~January~~the United States and elsewhere have experienced extreme volatility and disruption for more than 24 months. These circumstances have exerted significant downward pressure on prices of ~~2009~~equity securities and virtually all other asset classes, weand ~~implemented~~have aresulted in ~~process~~substantially ~~for~~increased market volatility, severely constrained credit and ~~the~~capital ~~continuous~~markets, ~~review~~particularly for financial institutions, and an overall loss of ~~all~~investor ~~classified~~confidence. Loan ~~loans~~portfolio performances have deteriorated at many institutions resulting from, ~~watch~~among ~~loans~~other factors, ~~past~~a ~~due~~weak economy and a decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing ~~relationships~~foreclosures ~~over~~and ~~$500~~unemployment,~~000~~ have created strains on financial institutions. Many borrowers are now unable to repay their loans, and ~~any~~the ~~other~~collateral ~~potential~~securing ~~risky~~these loans ~~and~~has, ~~applied~~in ~~conservative~~some ~~risk~~cases, ~~grades~~declined below the loan balance. In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:

· ~~Throughout~~The ~~2009~~Emergency ~~and~~Economic Stabilization ~~2010~~Act, weapproved ~~conducted~~by ~~disciplined~~Congress and signed by President Bush on October 3, ~~watch~~2008, ~~loan~~which, ~~meetings~~among other provisions, allowed the U.S. Treasury to ~~track~~purchase troubled ~~and~~assets ~~monitor~~from ~~progress~~banks, ~~including~~authorized the ~~execution~~SEC to suspend the application of ~~workout~~marked-to-market ~~plans~~accounting, ~~obtainment~~and raised the basic limit of ~~current~~FDIC ~~financial~~deposit insurance ~~data~~from $100,000 ~~and~~to ~~detailed~~$250,000 ~~progress updates~~through December 31, 2013.

· ~~Throughout~~On ~~2009~~October 7, ~~and 2010~~2008, ~~we maintained an adequate~~the ~~reserve~~FDIC ~~for~~approved ~~loan~~a ~~losses~~plan ~~given~~to increase the ~~risk~~rates ~~profile~~banks ofpay ~~our~~for ~~Bank~~deposit insurance.

· InOn ~~May~~October of14, ~~2009~~2008, the weU.S. ~~implemented~~Treasury announced the creation of a ~~risk-focused~~new program, the Capital Purchase ~~internal~~Program, that encourages and ~~external~~allows ~~loan~~financial ~~review~~institutions ~~program~~to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable.

· ~~During~~On ~~2010~~October 14, we2008, the ~~plan~~FDIC toannounced ~~create~~the acreation ~~special~~of ~~assets~~the Temporary Liquidity Guarantee Program (“TLGP”), ~~division~~which seeks to ~~focus~~strengthen ~~our~~confidence ~~efforts~~ and ~~enhance~~encourage ~~staffing~~liquidity ~~related~~in tothe ~~loan~~banking system. The ~~work-outs~~TLGP has two primary ~~and~~components ~~collection~~that ~~processes.~~are available on a voluntary basis to financial institutions:

26· Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and

· ~~Decreasing~~ Unlimited ~~Concentrations~~deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in ~~Our~~addition to the ~~Loan~~insurance ~~Portfolio~~premiums paid for standard deposit insurance.

We· On ~~are focused on reducing our concentrations in commercial real estate (CRE)~~February 10, ~~specifically acquisition development and construction loans, and residential construction loans. Since January~~ 2009, ~~we have~~ ~~effectively ceased making any new CRE loans while proactively decreasing~~ the ~~level~~ ~~of these existing loan types~~U. ~~We have~~S. ~~worked~~Treasury toannounced ~~decrease our concentration by various means, including (1) through~~ the ~~normal~~Financial ~~sale~~Stability ~~of real estate by borrowers~~Plan, ~~(2) by~~which ~~seeking~~earmarked ~~avenues to~~$350 ~~sell~~billion ~~a portion~~ of the ~~CRE~~TARP ~~portfolio~~funds toauthorized ~~outside~~under ~~investors,~~EESA. ~~(3) by proactively~~Among ~~seeking secondary market permanent financing for recently completed residential construction projects, and (4) encouraging transactional CRE customers to seek~~ other ~~financing when their loans mature. As a result of these efforts~~things, ~~our amount of~~the ~~CRE~~Financial ~~loans~~Stability ~~decreased~~Plan 24.4% from $151.6 million of our total loan portfolio at December 31, 2008 to $114.6 million of our loan portfolio at March 31, 2010. We have also reduced our residential construction portfolio 96.2% from $33.8 million at December 31, 2008 to $1.3 million at March 31, 2010. We expect commercial real estate loan portfolio balances to continue to decrease in 2010 through the continued successful implementation of the plans outlined above.includes:

· ~~Reducing~~A ~~Operating~~capital ~~Expenses.~~assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;

We· A ~~have~~consumer ~~always focused on controlling expenses~~ and ~~managing~~business ~~efficient~~lending ~~overhead. During~~initiative ~~2010, management intends~~ to ~~further~~ ~~reduce~~fund ~~costs~~new inconsumer ~~a manner which does not impact the quality of our customer service. Given the prolonged economic recession~~loans, wesmall ~~have~~business ~~embarked~~loans ~~on an extremely aggressive expense reduction campaign. Management has already reduced salary~~ and ~~benefits~~commercial ~~expenses by reducing staffing levels, freezing salaries at~~mortgage ~~2008 levels, and reducing compensation in several positions. Additionally, we will continue to renegotiate vendor contracts and implement several other cost~~asset-~~saving~~backed ~~measures~~securities ~~to reduce noninterest expenses. Reducing our level of nonperforming assets will also lower our operating costs.~~issuances;

· ~~Enhancing~~A ~~Funds~~new ~~Management~~public-private investment fund that will leverage public and private capital with public financing to purchase up ~~Liquidity.~~to $500 billion to $1 trillion of legacy “toxic assets” from financial

We have grown rapidly since our inception through 2008, and have historically funded our asset growth with a combination of local deposits and wholesale funding, specifically brokered deposits. As of March 31, 2010, we had brokered deposits of $195.9 million, representing 49.36% of our total deposits, of which $79.7 million are scheduled to mature in the third quarter of 2010 and $94.9 million are scheduled to mature in the fourth quarter of 2010. Because of the limitations on brokered deposits imposed by the Consent Order and our undercapitalized status, the Bank may no longer accept, renew, or roll over brokered deposits. Thus, we must find other sources of liquidity to replace these deposits as they mature. We have amended our funds management policy to reflect our plan to continue to improve liquidity levels and reduce our use of brokered deposits and other non-core funding sources. Our funds management policy also includes our plan to reduce assets, certain loans, and other bank-owned real estate. We plan to reduce our brokered deposit usage by executing on our comprehensive deposit acquisition program, which creates an environment of consistent deposit growth based on relationship-based banking, advocate-based selling and an aggressive, focused calling program. Our experienced team of bankers is actively cross-selling core deposits to our local depositors and borrowers, and is held accountable for production through twice-weekly sales meetings. Production is enhanced by our relationship-based culture training, which includes advanced customer service techniques and one-on-one coaching. We also plan to generate core deposits through a combination of competitive products and pricing, customer service excellence, and targeted marketing campaigns29

~~· Enhancing Our Bank’s Relationship~~institutions; ~~Culture.~~and

~~While~~· Assistance ~~the~~for ~~bulk~~homeowners ~~of our~~by ~~strategic~~providing ~~plan~~up ~~encompasses strategies~~ to ~~survive the prolonged economic~~ ~~recession,~~$75 ~~management~~billion ~~recognizes that we must also place the Bank in the best position~~ to ~~thrive~~reduce asmortgage wepayments ~~emerge~~and ~~from~~interest ~~this~~rates ~~recession.~~and ~~In this regard, planning~~establishing ~~has~~loan ~~also~~modification ~~centered~~guidelines onfor ~~enhancing~~government ~~the Bank’s culture. We believe the enhancement of our culture will place the Bank in the best position possible to provide unmatched customer service~~ and toprivate ~~take advantage of market opportunities through advocate-based selling and relationship banking strategies~~programs. ~~Enhancement plans include, among others, the following:~~

· ~~implementing~~On ~~consistent~~February 17, ~~customer~~2009, ~~service~~the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an ~~communication~~effort ~~standards~~to, among other things, create jobs and stimulate growth in ~~all~~the ~~areas~~United States economy. The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, ~~Bank;~~unemployment compensation, and nutrition assistance programs. The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paid by participants in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).

· ~~training~~On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and ~~certifying~~the Federal Reserve, announced the ~~non~~Public-~~negotiables~~Private ofPartnership Investment Program for Legacy Assets ~~relationship~~which ~~banking~~consists toof ~~all~~two ~~employees;~~separate plans, addressing two distinct asset groups:

· ~~ensuring~~The ~~all~~first ~~employees~~plan is ~~are~~the ~~engaged~~Legacy ~~and~~Loan ~~motivated~~Program, ~~while enabling~~which ~~management~~has a primary purpose to ~~measure~~facilitate the ~~enhancement~~ sale of ~~the~~troubled ~~culture~~mortgage loans by ~~conducting~~eligible institutions, including FDIC-insured ~~quarterly~~federal ~~employee~~or ~~engagement~~state ~~surveys~~banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury.

27· The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers. As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by Treasury, representing $12.4 billion of total equity capital. Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage backed securities and commercial mortgage backed securities and cash equivalents pending investment.

· ~~implementing~~On ~~consistent~~May 22, ~~management~~2009, ~~standards~~the ~~for~~FDIC ~~all~~levied a ~~supervisors~~one-time ~~resulting~~special inassessment ~~internal~~on ~~and~~all ~~external~~banks ~~advocacy;~~due on September 30, 2009.

· ~~refining~~On ~~the~~November 12, ~~Bank’s~~2009, ~~customer~~the ~~experience~~FDIC ~~measurements,~~issued a ~~including~~final ~~branch~~rule to ~~mystery~~require ~~shopping~~banks ~~and~~to ~~customer~~prepay ~~survey~~their ~~programs;~~estimated ~~and~~quarterly ~~ensuring~~risk-based ~~all~~assessments ~~programs~~for ~~evaluate~~the fourth quarter of 2009 and ~~measure~~for ~~the~~all ~~Bank’s~~of ~~expectations~~2010, 2011 and ~~areas~~2012 and ofto ~~focus~~increase assessment rates effective on January 1, 2011.

~~The~~· On ~~Bank will continue to serve customers in all areas~~February 2, ~~including processing banking transactions~~2010, ~~paying competitive~~the ~~rates on deposits, and providing access to lines of credit~~U. ~~All~~S. ~~customer deposits are fully insured to~~President ~~the~~called ~~highest~~on ~~limits set by~~ the ~~FDIC, which are $250,000 for individually titled accounts and $250,000 for individually titled IRA accounts~~U.S. InCongress ~~addition,~~to ~~the Bank~~create ~~participates~~a innew ~~the~~Small ~~FDIC~~Business ~~Transaction~~Lending ~~Account Guarantee Program (the “TAGP”)~~Fund. Under this ~~program~~proposal, ~~all~~$30 ~~non-interest~~billion ~~bearing~~in ~~transaction accounts are fully~~TARP ~~guaranteed~~funds bywould ~~the~~be ~~FDIC~~transferred ~~for~~to ~~the~~a ~~entire~~new ~~amount~~program outside of ~~the~~TARP ~~account. The guarantee also applies~~ to ~~interest~~support ~~bearing transaction accounts with interest rates of 0.50%~~small orbusiness ~~less~~lending. As ~~On April 13~~proposed, ~~2010, the FDIC approved an interim rule that~~only ~~extends~~small- ~~the~~and ~~TAGP~~medium-sized tobanks ~~December 31,~~would ~~2010.~~qualify ~~We have elected~~ to ~~continue~~participate ~~our voluntary participation~~ in the program. This program is in addition to and separate from the coverage available under the FDIC general deposit insurance rules. We believe participation in the program is enhancing our ability to retain customer deposits.

~~However~~· On July 21, ~~should~~2010, the ~~Bank~~U.S. President ~~fail~~signed tointo ~~comply~~a ~~with~~law the ~~capital~~Dodd-Frank ~~and~~Wall ~~liquidity~~Street ~~funding~~Reform ~~requirements~~and inConsumer ~~the~~Protection Act ~~Consent~~of ~~Order~~2010, ora ~~suffer~~comprehensive aregulatory ~~continued~~framework ~~deterioration~~that inwill ~~our~~affect ~~financial~~every ~~condition,~~financial institution in the ~~Bank~~U.S. U.S. ~~may~~financial regulators bewill ~~subject~~begin tothe ~~being~~rulemaking ~~placed~~process ~~into~~over athe ~~federal~~next ~~conservatorship~~6 orto 18 months which ~~receivership~~will byset the ~~FDIC,~~parameters ~~with~~of the ~~FDIC~~new ~~appointed~~regulatory asframework ~~conservator~~and orprovide ~~receiver~~a clearer understanding of the legislation’s effect on banks.

~~Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises~~30

~~Markets in~~It ~~the~~is ~~United~~likely ~~States~~that ~~and~~further ~~elsewhere~~regulatory ~~have~~actions ~~experienced~~may ~~extreme~~arise ~~volatility~~as and disruption for more than 12 months. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the ~~value of the collateral supporting~~Federal ~~their~~government ~~loans. Dramatic~~continues ~~slowdowns in the housing industry, due in part~~ to ~~falling~~attempt ~~home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable~~ to ~~repay~~address ~~their loans, and~~ the ~~collateral~~economic ~~securing these loans has, in some cases, declined below the loan balance~~situation. ~~In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:~~

~~· The~~We ~~Emergency~~are ~~Economic~~participating ~~Stabilization~~in ~~Act,~~the ~~approved~~TAGP ~~by Congress~~component ~~and~~of ~~signed~~the byTLGP. As ~~President~~a ~~Bush~~result onof ~~October 3,~~the ~~2008,~~enhancements ~~which,~~to ~~among~~deposit ~~other~~insurance ~~provisions,~~protection ~~allowed~~and the ~~U.S.~~expectation ~~Treasury~~that tothere ~~purchase~~will ~~troubled~~be ~~assets~~demands ~~from~~on the FDIC’s ~~banks~~deposit insurance fund, ~~authorized~~our ~~the~~deposit ~~Securities~~insurance costs have increased and ~~Exchange~~will continue ~~Commission~~to increase significantly throughout the remainder of 2010. We have elected not to ~~suspend~~participate in the ~~application~~CPP. Regardless of ~~marked-to-market~~our ~~accounting~~lack of participation, ~~and~~governmental ~~raised~~intervention ~~the~~and ~~basic~~new ~~limit~~regulations ofunder ~~FDIC~~these ~~deposit~~programs ~~insurance~~could ~~from~~materially ~~$100,000~~and toadversely ~~$250~~affect our business,~~000~~ ~~through~~financial condition and results of operations. ~~December 31,~~The following ~~2013;~~discussion and analysis describes our performance in this challenging economic environment.

~~· On~~Results ~~October 7,~~of ~~2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;~~Operations

~~· On~~Three ~~October 14,~~Months ~~2008,~~ended ~~the U.S. Treasury announced the creation of a new program~~June 30, ~~the~~2010 ~~Capital Purchase Program, that encourages~~ and ~~allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;~~2009

· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:Overview

~~· Guarantee~~Our net loss was $2.2 million for the three months ended June 30, 2010 as compared to a net loss of ~~newly-issued~~$805,000 ~~senior~~for ~~unsecured~~the ~~debt;~~three months ended June 30, 2009. The increase of $1.4 million in net loss for 2010 was primarily the result of $1.1 million lower net interest ~~guarantee~~income ~~would~~and ~~apply~~$795,000 higher non-interest expense. We have experienced a decrease in our net interest margin to ~~new~~1.41% ~~debt~~from ~~issued~~2.87% onfor orthe ~~before~~quarters ~~October~~ended June 3130, 2010 and 2009, respectively, which was the primary reason for the drop in net interest income. This decrease is due to an increased volume of non-performing assets as well as increased liquidity in anticipation of repayment of brokered deposits maturing in 2010. For the three months ended June 30, 2010, we realized $4,098,000 in interest income, of which $683,000 was from investment activities and $3,415,000 was from loan ~~would~~activities. For ~~provide~~the ~~protection~~three ~~until~~months ~~December~~ended June 3130, 2009, ~~2012;~~we ~~issuers~~realized ~~electing~~$4,628,000 toin interest income, of which $336,000 was from ~~participate~~investment ~~would~~activities ~~pay~~and a$4,292,000 75was ~~basis~~from ~~point~~loan ~~fee~~activities. The primary source of funding for our loan portfolio is deposits that are acquired both locally, via the ~~guarantee;~~national brokered certificate market, and internet obtained certificates of deposit. We incurred interest expense of $2,525,000 and $1,951,000 for the three months ended June 30, 2010 and June 30, 2009, respectively.

~~· Unlimited~~Provision ~~deposit insurance~~ for ~~non-interest~~Loan ~~bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance.~~Losses

~~· On~~Our ~~February~~provision for loan losses for the three months ended June 1030, 2010 ~~2009~~was $1,000,000 compared to $1,500,000 for the ~~U.S.~~comparable ~~Treasury~~prior ~~announced~~year period. Although our 2010 provision was less than the ~~Financial~~prior ~~Stability~~year, ~~Plan~~we are still experiencing deterioration of our loan portfolio. As noted earlier, ~~which~~we ~~earmarked~~have approximately $~~350~~31.7 ~~billion~~million of ~~the~~acquisition ~~TARP~~and ~~funds~~development (A&D) loans ~~authorized~~outstanding ~~under~~at ~~EESA~~June 30, 2010. We are ~~Among~~experiencing ~~other~~increased ~~things~~levels of loan delinquencies, defaults and foreclosures with these loans. Further, the ~~Financial~~downturn ~~Stability~~in ~~Plan~~the real estate market has adversely impacted the value of the ~~includes:~~underlying collateral (real estate) for the A&D loans. The greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. As a result of these factors, we recognize there may be further deterioration in our loan portfolio in the second half of 2010.

28Non-interest Income

~~· A~~We ~~capital~~had ~~assistance~~non-interest ~~program~~income ~~that~~of ~~will~~$858,000 ~~invest~~and in$441,000 for the three ~~mandatory~~months ~~convertible~~ended ~~preferred~~June 30, ~~stock~~2010 ofand ~~certain~~2009, ~~qualifying~~respectively. The ~~institutions~~increase was mainly due to a $424,000 ~~determined~~gain on asale ~~basis~~of ~~and~~securities ~~through~~for athe ~~process~~three ~~similar~~months toended June 30, 2010. There was no such gain for the ~~Capital~~three ~~Purchase~~months ended June 30, 2009. Mortgage ~~Program;~~origination revenue for the three months ended June 30, 2010 was $235,000. We had $198,000 in mortgage origination revenue in the second quarter of 2009. This increase is due to an increased sales staff.

~~· A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;~~31

~~· A new public~~Non-~~private~~interest ~~investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and~~Expense

~~· Assistance~~We ~~for~~incurred ~~homeowners~~non-interest byexpense ~~providing~~of up$3,633,000 toduring the three months ended June 30, 2010, which was an increase of $75796,000 ~~billion~~over the three months ended June 30, 2009. Included in the expense was $1,275,000 of salaries and employee benefits, $171,000 of data processing expense, $353,000 of professional fees expense, $38,000 of advertising expense, $16,000 of expense related to ~~reduce~~office supplies, ~~mortgage~~$32,000 ~~payments~~of telephone expense and $779,000 of assessments related to the FDIC. The non-interest ~~rates~~expense incurred in the three months ended June 30, 2009 was $2,837,000. Included in the expense was $1,363,000 of salaries and ~~establishing~~employee ~~loan~~benefits, $249,000 of data processing expense, $74,000 of ~~modification~~professional ~~guidelines~~fee expense, $60,000 of advertising expense, $20,000 of expense related to office supplies, $38,000 of telephone expense and $271,000 of assessments related to the FDIC. Included in the FDIC assessments for ~~government~~the three months ended June 30, 2009 was a one time FDIC insurance premium that equated to a $178,000 one time charge to the Bank in 2009. This was expensed in June 2009 and ~~private~~paid ~~programs~~September 30, 2009.

~~· On~~For ~~February 17, 2009,~~ the ~~American~~three ~~Recovery~~months ~~and Reinvestment~~ended ~~Act~~June 30, ~~(the~~2010, ~~“Recovery~~we ~~Act”)~~incurred ~~was~~other property ~~signed~~and ~~into~~equipment ~~law~~expenses inof ~~an effort to~~$158, ~~among~~000 ~~other~~in ~~things,~~depreciation ~~create jobs~~ and ~~stimulate~~$74,000 ~~growth~~ in equipment ~~the~~maintenance ~~United~~and ~~States economy~~rental. ~~The Recovery Act specifies~~For ~~appropriations~~the ofthree ~~approximately~~months ~~$787~~ended ~~billion~~June 30, ~~for~~2009, awe ~~wide~~incurred ~~range~~other ofproperty ~~Federal~~and ~~programs~~equipment ~~and~~expenses ~~will~~of ~~increase~~$182,000 orin ~~extend~~depreciation ~~certain~~and ~~benefits~~$36,000 ~~payable~~in ~~under the~~equipment ~~Medicaid,~~maintenance ~~unemployment compensation,~~ and ~~nutrition assistance programs~~rental. ~~The~~We ~~Recovery Act also reduces individual and~~incurred ~~corporate~~$175,000 ~~income tax collections~~ and ~~makes~~$168,000 ain ~~variety~~occupancy ofexpense ~~other~~related ~~changes~~ to ~~tax laws. The~~all ~~Recovery~~of ~~Act~~our ~~also imposes~~office ~~certain~~locations ~~limitations~~for onthe ~~compensation~~three ~~paid~~months byended ~~participants~~June 30, in2010 ~~the~~and ~~U.S.~~2009, ~~Treasury’s Troubled Asset Relief Program (“TARP”)~~respectively.

~~· On~~The ~~March 23, 2009,~~increase in non-interest expense is the ~~U.S.~~result ~~Treasury,~~of the increased administrative expenses including an increase in ~~conjunction~~professional ~~with~~fees of $279,000, increased assessments related to the FDIC of $508,000, and ~~the~~an ~~Federal~~increase ~~Reserve,~~in loan ~~announced~~expenses ~~the~~of ~~Public-Private~~$67,000 ~~Partnership~~resulting ~~Investment~~from ~~Program~~the ~~for~~increased ~~Legacy~~cost ~~Assets~~of problem loans and ~~which~~foreclosures. ~~consists~~The ofhigher ~~two~~professional ~~separate~~fees ~~plans,~~were ~~addressing~~related ~~two~~to ~~distinct~~a ~~asset~~stock ~~groups:~~offering that was abandoned during the quarter ended June 30, 2010.

~~· The~~Six ~~first plan~~Months isended ~~the Legacy Loan Program~~June 30, ~~which~~2010 ~~has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks~~ and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury. Under the Legacy Loan Program, the FDIC has sold certain troubled assets out of an FDIC receivership in two separate transactions relating to the failed Illinois bank, Corus Bank, NA, and the failed Texas bank, Franklin Bank, S.S.B. These transactions were completed in September 2009 ~~and October 2009, respectively.~~

· The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers. As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by Treasury, representing $12.4 billion of total equity capital. Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power. As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage backed securities and commercial mortgage backed securities and cash equivalents pending investment.Overview

~~· On~~Our ~~May~~net loss was $4.3 million for the six months ended June 2230, 2010 as compared to net loss of $841,000 for the six months ended June 30, 2009. For the six months ended June 30, 2010, we realized $8,315,000 in interest income, of which $1,357,000 was from investment activities and $6,958,000 was from loan activities. For the ~~FDIC~~six ~~levied~~months aended ~~one-time~~June 30, 2009, ~~special~~we ~~assessment~~realized on$9,560,000 ~~all~~in ~~banks~~interest ~~due~~income, onof ~~September~~which $899,000 was from investment activities and $8,661,000 was from loan activities. The primary source of funding for our loan portfolio is deposits that are acquired locally, via the national brokered certificate market, and internet obtained certificates of deposit. We incurred interest expense of $4,861,000 and $4,031,000 for the six months ended June 30, 2010 and June 30, 2009;, respectively. We have experienced a decrease in our net interest margin to 1.61% from 2.96% for the six months ended June 30, 2010 and 2009, respectively. This decrease is due to an increased volume of non-performing assets as well as increased liquidity in anticipation of repayment of brokered deposits maturing in 2010. Due to the large volume of brokered deposits maturing in the third and fourth quarters of 2010, the Bank has had to steadily increase other deposits through the first six months of 2010 to be able to replace the maturing brokered deposits.

~~· On~~Rate/Volume November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.Analysis

29Net interest income can be analyzed in terms of the impact of changing interest rates and changing volumes. The following tables set forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in the net interest income for the periods presented.

It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation.

	Six Months Ended June 30, 2010 vs. 2009
	Increase (decrease) Due to
							Rate /
(Dollars in thousands)	Volume			Rate			Volume			Total
Interest Income
Loans	$	(1,527	)	$	(214	)	$	38		$	(1,703	)
Investment securities (1)	1,204			(332		)	(455		)	417
Federal funds	70			(6		)	(23		)	41
Total Interest Income	$	(253	)	$	(552	)	$	(440	)	$	(1,245	)

Interest Expense
Deposits	$	949		$	(117	)	$	(34	)	$	798
Other borrowings	(208		)	323			(83		)	32
Total Interest Expense	$	741		$	206		$	(117	)	$	830

Net Interest Income	$	(994	)	$	(758	)	$	(323	)	$	(2,075	)

We are participating in the TAGP component of the TLGP. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC’s deposit insurance fund, our deposit insurance costs have increased and will continue to increase significantly throughout the remainder of 2010. We have elected not to participate in the CPP. Regardless of our lack of participation, governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations. The following discussion and analysis describes our performance in this challenging economic environment.32

~~Results~~(1) For the purpose of ~~Operations~~this table, the investment securities include marketable and non-marketable securities.

~~Three~~Average ~~Months ended March 31~~Balances, Income ~~2010~~and Expenses and ~~2009~~Rate

~~Overview~~The following table sets forth, for the six months ended June 30, 2010 and 2009, information related to the Company’s average balance sheet and its average yields on earning assets and average costs of interest-bearing liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding earning assets or interest-bearing liabilities. Average balances have been derived from the daily balances throughout the periods indicated.

Our net loss was $2.1 million for the three months ended March 31, 2010 as compared to net loss of $36,000 for the three months ended March 31, 2009. For the three months ended March 31, 2010, we realized $4,217,000 in interest income, of which $674,000 was from investment activities and $3,543,000 was from loan activities. For the three months ended March 31, 2009, we realized $4,933,000 in interest income, of which $563,000 was from investment activities and $4,370,000 was from loan activities. The primary source of funding for our loan portfolio is deposits that are acquired both locally and via the national brokered certificate market. We incurred interest expense of $2,337,000 and $2,080,000 for the three months ended March 31, 2010 and March 31, 2009, respectively. We have experienced a decrease in our net interest margin to 1.83% from 3.05% for the quarters ended March 31, 2010 and 2009, respectively. This decrease is due to an increased volume of non-performing assets as well as increased liquidity in anticipation of repayment of brokered deposits maturing in 2010.

	Six Months Ended June 30, 2010							Six Months Ended June 30, 2009
	Average			Income /		Yield/		Average			Income /		Yield /
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Earning assets:
Loans (1)	$	260,220		$	6,958	5.39	%	$	315,912		$	8,661	5.53	%
Investment securities (2)	114,442			1,298		2.29	%	48,353			881		3.67	%
Federal funds sold and other	57,684			59		0.21	%	11,809			18		0.31	%
Total earning assets	432,346			8,315		3.88	%	376,074			9,560		5.13	%
Cash and due from banks	7,775							7,217
Premises and equipment	3,720							4,579
Other assets	11,635							8,926
Allowance for loan losses	(12,403		)					(8,240		)
Total assets	$	443,073						$	388,556

Liabilities
Interest-bearing liabilities:
Repurchase agreements	$	30,000		598		4.02	%	$	30,000		486		3.27	%
Federal funds purchased	—			—		—	%	441			1		0.46	%
Federal Home Loan Bank advances	—			—		—	%	10,856			72		1.34	%
Note Payable	—			—		—	%	497			7		2.84	%
Subordinated Debt	4,325			247		11.50	%	4,325			247		11.50	%
Interest-bearing transaction accounts	18,283			55		0.61	%	18,534			107		1.16	%
Savings deposits	68,647			862		2.53	%	15,981			118		1.49	%
Time deposits	289,316			3,099		2.16	%	256,027			2,993		2.36	%
Total interest-bearing liabilities	410,571			4,861		2.39	%	336,661			4,031		2.41	%
Demand deposits	22,804							22,416
Accrued interest and other liabilities	1,979							1,214
Total liabilities	435,354							360,291
Shareholders’ equity	7,719							28,265
Total liabilities and shareholders’ equity	$	443,073						$	388,556

Net interest income				$	3,454						$	5,529
Net interest spread						1.49	%						2.72	%
Net interest margin						1.61	%						2.96	%

~~Rate/Volume Analysis~~33

~~Net~~(1) There ~~interest~~were $30.1 ~~income~~million ~~can~~and be$22.8 ~~analyzed~~million inof ~~terms~~loans ofin ~~the~~non-accrual ~~impact~~status as of ~~changing~~June 30, ~~interest~~2010 ~~rates~~ and ~~changing~~2009, ~~volumes~~respectively. The effect ~~following~~of ~~tables~~fees ~~set~~collected ~~forth~~on loans for the ~~effect~~six ~~which~~months ended June 30, 2010 and 2009 totaled $20,000 and $91,000, respectively, and increased the ~~varying~~annualized ~~levels~~yield on ofloans by 1 basis point from 5.38% for June 30, 2010 and by 6 basis ~~interest-~~points from 5.47% for June 30, 2009. The effect of such fees on the annualized yield on earning assets ~~and~~was ~~interest-bearing~~an increase ~~liabilities~~of 1 basis point from 3.87% for June 30, 2010 and ~~the~~an ~~applicable~~increase of ~~rates~~5 ~~have~~basis ~~had~~points from 5.08% for June 30, 2009. The effects of such fees on ~~changes~~net ininterest spread ~~the~~were an increase of 1 basis point from 1.48% for June 30, 2010 and an increase of 5 basis points from 2.67% for June 30, 2009. The effects of such fees on net interest margin ~~income~~were an increase of 1 basis point from 1.60% for ~~the~~June 30, ~~periods~~2010 ~~presented~~and an increase of 4 basis points from 2.92% for June 30, 2009.

	Three Months Ended March 31, 2010 vs. 2009
	Increase (decrease) Due to
							Rate /
(Dollars in thousands)	Volume			Rate			Volume			Total
Interest Income
Loans	$	(697	)	$	(153	)	$	24		$	(826	)
Investment securities (1)	479			(209		)	(179		)	91
Federal funds	35			(3		)	(13		)	19
Total Interest Income	$	(183	)	$	(365	)	$	(168	)	$	(716	)
Interest Expense
Deposits	$	443		$	(117	)	$	(32	)	$	294
Other borrowings	(180		)	241			(98		)	(37		)
Total Interest Expense	$	263		$	124		$	(130	)	$	257
Net Interest Income	$	(446	)	$	(489	)	$	(38	)	$	(973	)

(2) For the purpose of this table, the investment securities include marketable and non-marketable securities.

~~(1) For~~Provision ~~the~~for ~~purpose~~Loan ~~of this table, the investment securities include marketable and non-marketable securities.~~Losses

Our provision for loan losses for the six months ended June 30, 2010 was $2,000,000 compared to $2,805,000 for the comparable prior year period. Although the provision was lower for 2010, we are still experiencing deterioration of our loan portfolio. As noted earlier, we have approximately $31.7 million of acquisition and development (A&D) loans outstanding at June 30, 2010. We are experiencing increased levels of loan delinquencies, defaults and foreclosures with these loans. Further, the downturn in the real estate market has adversely impacted the value of the underlying collateral (real estate) for the A&D loans. The greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. As a result of these factors, we recognize there may be further deterioration in our loan portfolio in the second half of 2010.

~~Average Balances,~~Non-interest Income ~~and Expenses and Rate~~

~~The~~We ~~following~~had ~~table~~non-interest ~~sets~~income ~~forth~~of $1,280,000 and $1,255,000 for the ~~nine months~~six months ended ~~March~~June 3130, 2010 and 2009, ~~information~~respectively. Gain ~~related~~on tosale ~~the~~of ~~Company’s average~~securities ~~balance~~was ~~sheet~~$478,000 and $519,000 ~~its~~for ~~average~~the ~~yields~~six onmonths ~~earning~~ended ~~assets~~June 30, 2010 and ~~average~~2009, ~~costs~~respectively. Mortgage oforigination revenue ~~interest-bearing~~for ~~liabilities. Such~~the ~~yields~~six ~~are~~months ~~derived~~ended byJune 30, ~~dividing~~2010 ~~income~~was ~~or expense~~$363,000. We byhad ~~the~~$305,000 ~~average~~in ~~balance~~mortgage oforigination revenue for the ~~corresponding~~six ~~earning~~months ~~assets~~ended ~~or interest-bearing~~June 30, ~~liabilities~~2009. ~~Average balances~~This ~~have~~increase ~~been~~is ~~derived~~due ~~from~~to ~~the~~an ~~daily~~increased ~~balances throughout the periods~~sales ~~indicated~~staff.

	Three Months Ended March 31, 2010							Three Months Ended March 31, 2009
	Average			Income /		Yield/		Average			Income /		Yield /
(Dollars in thousands)	Balance			Expense		Rate		Balance			Expense		Rate
Assets
Earning assets:
Loans (1)	$	268,880		$	3,543	5.34	%	$	319,943		$	4,369	6.76	%
Investment securities (2)	93,156			648		2.82	%	50,062			557		4.99	%
Federal funds sold and other	54,004			26		0.20	%	8,994			7		3.57	%
Total earning assets	416,040			4,217		4.11	%	378,999			4,933		6.43	%
Cash and due from banks	8,093							6,957
Premises and equipment	3,796							4,619
Other assets	11,794							12,295
Allowance for loan losses	(13,013		)					(8,097		)
Total assets	$	426.710						$	394,773
Liabilities
Interest-bearing liabilities:
Repurchase agreements	$	30,000		283		3.83	%	$	30,000		240		3.24	%
Federal funds purchased	—			—		—	%	631			1		0.64	%
Federal Home Loan Bank advances	—			—		—	%	21,833			72		1.34	%
Note Payable	—			—		—	%	1,006			7		2.82	%
Subordinated Debt	4,325			123		11.50	%	4,325			123		11.50	%
Interest-bearing transaction accounts	18,368			27		0.60	%	17,579			53		1.22	%
Savings deposits	71,505			450		2.55	%	14,642			60		1.66	%
Time deposits	269,471			1,454		2.19	%	250,624			1,524		2.47	%
Total interest-bearing liabilities	393,669			2,337		2.41	%	340,640			2,080		2.35	%
Demand deposits	22,094							22,493
Accrued interest and other liabilities	2,207							1,280
Total liabilities	417,970							364,413
Shareholders’ equity	8,740							30,360
Total liabilities and shareholders’ equity	$	426,710						$	394,773
Net interest income				$	1,880						$	2,853
Net interest spread						1.70	%						2.80	%
Net interest margin						1.83	%						3.05	%

Non-interest Expense

~~(1) There~~We ~~were~~incurred ~~$32.7~~non-interest ~~million~~expense ~~and~~of $~~16.~~7,040,000 ~~million~~during ofthe ~~loans~~six inmonths ~~non-accrual~~ended ~~status as of March~~June 3130, 2010, ~~and~~an ~~2009,~~increase ~~respectively,~~of ~~that~~$1.8 ~~were included~~million inover the ~~loan~~six ~~balance. The~~months ~~effect~~ended ofJune 30, ~~fees~~2009. ~~collected~~Included onin ~~loans for~~ the ~~three~~expense ~~months~~was ~~ended March 31~~$2,670,000 ~~2010~~of salaries and ~~2009~~employee ~~totaled~~benefits, $9386,000 ~~and~~of data processing expense, $40707,000 of professional fees expense, ~~respectively~~$74,000 ~~and~~of ~~increased~~advertising ~~the~~expense, ~~annualized yield~~$39,000 onof ~~loans~~expense related byto 1office ~~basis~~supplies, ~~point~~$67,000 ~~from~~of ~~5.33%~~telephone ~~for~~expense ~~March 31~~and $1,181,000 ~~2010~~of ~~and~~assessments related byto 5FDIC. The non-interest ~~basis~~expense ~~points~~incurred ~~from~~in ~~5.49%~~the ~~for~~six ~~March~~months ended June 3130, 2009 was $5,253,000. ~~The~~Included ~~effect~~in ~~of such fees on~~ the ~~annualized~~expense was ~~yield~~$2,603,000 onof ~~earning~~salaries ~~assets~~and ~~was~~employee anbenefits, ~~increase~~$471,000 of 1data ~~basis~~processing expense, ~~point~~$165,000 ~~from~~of ~~4.10%~~professional ~~for~~fee ~~March 31~~expense, ~~2010~~ ~~and~~$97,000 anof ~~increase~~advertising expense, $42,000 of 4expense ~~basis~~related ~~points~~to ~~from~~office ~~5.24%~~supplies, ~~for March 31~~$75,000 ~~2009. The effects~~ of ~~such~~telephone ~~fees~~expense ~~on net interest~~and ~~spread~~$367,000 ~~were an increase~~ of 1assessments ~~basis~~related ~~point~~to ~~from 1~~FDIC.~~69%~~ ~~for~~Included ~~March 31,~~in ~~2010~~the ~~and an~~FDIC ~~increase~~assessments offor the 4six ~~basis~~months ~~points~~ended ~~from 2.76% for March~~June 3130, 2009~~. The~~ ~~effects~~was ofa ~~such~~one ~~fees~~time onFDIC ~~net~~insurance ~~interest~~premium ~~margin~~that ~~were~~equated anto ~~increase~~a of$178,000 1one ~~basis~~time ~~point~~charge ~~from~~to ~~1.82%~~the ~~for~~Bank ~~March 31,~~in ~~2010~~2009. This ~~and an~~was ~~increase~~expensed ofin 4June 2009 ~~basis~~and ~~points~~paid ~~from 3.01% for March~~September 3130, 2009.

~~(2)~~ For the ~~purpose~~six ofmonths ~~this~~ended June 30, 2010, we incurred other property ~~table~~and equipment expenses of $334,000 in depreciation and $151,000 in equipment maintenance and rental. For the ~~investment~~six months ~~securities~~ended ~~include~~June 30, ~~marketable~~2009, we incurred other property and ~~non-marketable~~equipment ~~securities~~expenses of $361,000 in depreciation and $79,000 in equipment maintenance and rental. We incurred $357,000 and $339,000 in occupancy expense related to all of our office locations for the six months ended June 30, 2010 and 2009, respectively.

31The increase in non-interest expense is the result of the increased administrative expenses including an increase in professional fees of $542,000, increased assessments related to the FDIC of $814,000, and an increase in loan expenses of $333,000 resulting from the increased cost of problem loans and foreclosures. The increase in FDIC assessments for 2010 was the result of higher assessment rates and increased deposit balances.

~~Provision for Loan Losses~~34

~~Our~~Assets provision for loan losses for the three months ended March 31, 2010 was $1,000,000 compared to $1,305,000 for the comparable prior year period. This was a result of the continued deterioration of our loan portfolio. As noted earlier, we have approximately $36.2 million of acquisition and development (A&D) loans outstanding at March 31, 2010. We are experiencing higher levels of loan delinquencies, defaults and foreclosures. Further, the downturn in the real estate market has adversely impacted the value of the underlying collateral (real estate) for the A&D loans. The greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due.Liabilities

~~Non-interest Income~~General

WeAt ~~had~~June 30, ~~non-interest~~2010, ~~income~~total ofassets ~~$422,000~~increased ~~and~~10.1% to $~~814,000~~464.1 ~~for~~million as ~~the~~compared ~~three months~~to ~~ended~~$421.5 ~~March~~million at December 31, ~~2010~~2009, ~~and~~primarily ~~2009~~a result of an increase in investments of $87.9 million, ~~respectively~~or 84. ~~The~~8%, offset by a decrease ~~was~~in federal ~~mainly~~funds ~~due~~sold toof $16.1 million, or 51.8%, and a decrease of $~~520,000~~30.3 million ~~gain~~in ongross ~~sale~~loans, ofor ~~securities~~11.0%, ~~for~~during the ~~three~~first six months ~~ended~~of ~~March 31~~2010. As described below, ~~2009~~federal funds sold ~~compared~~decreased to a$15.0 ~~gain~~million ofat ~~$54~~June 30,~~000~~ ~~for~~2010 ~~the~~compared ~~three~~to ~~months~~$31.0 ~~ended~~million ~~March~~at December 31, ~~2010~~2009. ~~Mortgage~~Cash ~~origination~~and ~~revenue~~cash ~~for~~equivalents ~~the~~decreased ~~three~~$15.8 ~~months~~million, ~~ended~~or ~~March 31~~41.8%, ~~2010~~since ~~was $163~~December 31,~~000~~ 2009. WeAs ~~had~~described ~~$62~~below,~~000~~ indeposits ~~mortgage~~increased ~~origination~~$45.0 ~~revenue~~million, inor 12.0%, during the first ~~quarter~~six months of ~~2009~~2010. At June ~~This~~30, ~~increase~~2010, isshareholders’ ~~due~~equity was to$6.0 ~~an increased sales staff~~million.

~~Non-interest~~Investment ~~Expense~~Securities

WeInvestments ~~incurred~~available ~~non-interest~~for ~~expense~~sale ofincreased by $~~3,407,000~~87.9 ~~during the three months ended March 31~~million, ~~2010,~~or ~~which was an increase of $991~~84.8%,~~000 over the three~~ ~~months~~since ~~ended March~~December 31, 2009~~. Included~~ indue to the ~~expense~~purchase ~~was $1,395,000~~ of ~~salaries~~US ~~and~~treasury ~~employee~~securities ~~benefits,~~of $~~216,000~~150 ofmillion ~~data~~coupled ~~processing~~with ~~expense,~~the ~~$354,000~~sale of ~~professional fees expense,~~ $~~36,000~~63.6 ofmillion ~~advertising expense, $23,000~~ of ~~expense~~mortgage ~~related to office supplies,~~backed ~~$35,000 of telephone expense and $402,000 of assessments related to the FDIC~~securities. ~~The~~This ~~non-interest~~general ~~expense~~increase ~~incurred~~ in ~~the~~securities ~~three~~is ~~months~~due ~~ended~~to ~~March 31,~~our ~~2009~~efforts ~~was~~to ~~$2,416,000. Included~~increase liquidity in ~~the~~anticipation ~~expense was $1,239,000~~ of ~~salaries~~ ~~and~~repayment ~~employee benefits, $222,000~~ of ~~data processing expense, $91,000 of~~ ~~professional~~brokered ~~fee~~deposits ~~expense,~~scheduled ~~$36,000 of advertising expense, $23,000 of expense related~~ to ~~office~~mature ~~supplies,~~in ~~$35,000 of telephone expense and $96,000 of assessments related to the FDIC~~2010.

~~For~~Other the three months ended March 31, 2010, we incurred other property and equipment expenses of $176,000 in depreciation and $77,000 in equipment maintenance and rental. For the three months ended March 31, 2009, we incurred other property and equipment expenses of $180,000 in depreciation and $42,000 in equipment maintenance and rental. We incurred $182,000 and $171,000 in occupancy expense related to all of our office locations for the three months ended March 31, 2010 and 2009, respectively.Investments

~~The~~Other ~~increase~~investments, inconsisting ~~non-interest expense is the result~~ of ~~the~~FHLB ~~increased administrative~~stock, ~~expenses~~were ~~including~~$1.6 anmillion ~~increase~~for ~~in professional fees of $263,000,~~both ~~increased~~June 30, ~~assessments~~2010 ~~related~~and ~~to the FDIC of $306~~December 31,~~000,~~ ~~and an increase in loan~~2009. ~~expenses~~All of ~~$175,000~~the ~~resulting~~FHLB ~~from~~stock ~~the~~is ~~increased~~used ~~cost~~to ofcollateralize ~~problem~~advances ~~loans~~with ~~and foreclosures~~the FHLB.

~~Assets and Liabilities~~Loans

~~General~~Since loans typically provide higher interest yields than other types of interest earning assets, we allocate the majority of our earning assets to our loan portfolio. Gross loans decreased by $30.3 million, or 11.0%, during the first six months of 2010. Loan demand has slowed during the first six months of 2010 due to general economic conditions and the real estate market, along with management’s decision to shrink the size of the Bank’s loan portfolio to help improve the Bank’s risk profile. We expect this trend to continue during the next quarter.

AtBalances ~~March 31,~~within ~~2010,~~major ~~total~~loan ~~assets~~categories ~~increased~~are ~~4.6% to $440.9 million~~ as compared to $421.5 million at December 31, 2009, primarily a result of an increase in investments of $54.8 million, or 52.9%, offset by a decrease in federal funds sold of $20.7 million, or 66.8%, and a decrease of $15.4 million in gross loans, or 5.6%, during the first three months of 2010. As described below, federal funds sold decreased to $10.3 million at March 31, 2010 compared to $31.0 million at December 31, 2009. Cash and cash equivalents decreased $19.9 million, or 52.4%, since December 31, 2009. As described below, deposits increased $20.38 million, or 5.4%, during the first three months of 2010. At March 31, 2010, shareholders’ equity was $8.0 million.follows:

Investment Securities

(dollar amounts in thousands)	June 30, 2010			December 31, 2009
Real estate - construction	$	68,514		$	81,128
Real estate - mortgage	154,414			167,296
Commercial and industrial	20,665			25,028
Consumer and other	1,183			1,652
Total loans, gross	244,776			275,104
Less allowance for loan losses	(11,601		)	(12,963		)
Total loans, net	$	233,175		$	262,141

~~Investments~~Generally, we ~~available~~place ~~for~~a ~~sale~~delinquent ~~increased~~loan byin ~~$54.8~~non-accrual ~~million,~~status when the loan becomes 90 days or 52more past due.9% Additionally, we ~~since~~discontinue ~~December 31,~~accrual ~~2009~~of ~~due~~interest on a loan when we conclude it is doubtful that we will be able to collect the ~~purchase~~full amount of ~~short-term~~principal USand ~~treasury~~interest from the ~~securities~~borrower. We reach this conclusion by taking into account factors such as the borrower’s financial condition, economic and business conditions, value of ~~$80~~the ~~million~~collateral ~~coupled~~underlying ~~with~~the loan, and the ~~sale~~results of ~~$26~~our previous collection efforts.1 When ~~million~~we ofplace ~~mortgage~~a loan in non-accrual status, ~~backed~~we ~~securities~~reverse all interest which has been accrued on the loan but remains unpaid and we deduct this interest from earnings as a reduction of reported interest income. ~~This~~We ~~general~~do ~~increase~~not accrue any additional ininterest ~~securities~~on the loan balance until we conclude the collection of both principal and interest is ~~due~~reasonably tocertain. At ~~our~~June 30, 2010, ~~efforts~~there towere ~~increase~~$30.1 ~~liquidity~~million in ~~anticipation~~loans ofthat were non-accruing and $6.8 million ~~repayment~~in ofloans ~~brokered~~that ~~deposits~~were ~~scheduled~~30 todays ~~mature~~past due, excluding non-accrual loans. At December 31, 2009, there were $29.4 million in ~~2010~~loans that were non-accruing and $4.8 million in loans that were 30 days past due, excluding non-accrual loans.

32The increase of $681,000 in non-accrual loans from December 31, 2009 to June 30, 2010 is related primarily to continued deterioration in the Bank’s overall Commercial Real Estate loan portfolio. The number of loans on non-accrual has increased from 79 to 83 since December 31, 2009. The average non-accrual loan balance is $372,000 and $362,000 as of December 31, 2009 and June 30, 2010, respectively. At June 30, 2010, 94.1% of the non-accrual loans were secured by real estate. At this time, management is unable to determine the length of the economic downturn and therefore unable to determine the ultimate impact on the Bank’s Commercial Real Estate portfolio.

~~Other Investments~~35

~~Other~~We ~~investments,~~have ~~consisting~~approximately $31.7 million of ~~FHLB~~A&D ~~stock~~loans as of June 30, 2010, ~~were~~most $1of which are on properties located in the Upstate of South Carolina and Western North Carolina.6 A&D loans ~~million~~are typically comprised of loans to borrowers for ~~both~~real estate to be developed ~~March 31,~~(into ~~2010~~properties ~~and~~such ~~December 31,~~as ~~2009~~sub-divisions or spec houses). Normally, these loans are repaid with the ~~All~~proceeds from the sale of the ~~FHLB~~developed ~~stock~~property. The isgreater ~~used~~degree of strain on these types of loans and the significance to ~~collateralize~~our ~~advances~~overall ~~with~~loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ~~FHLB~~ultimate collectability of amounts due. The majority of these borrowers are having financial difficulties. Our analysis has resulted in a significant provision expense in order to meet the estimated allowance for loan loss reserve requirement.

~~Loans~~Included in our loans secured by real estate, we have approximately $35.7 million of acreage and finished or buildable lot loans as of June 30, 2010. These loans are comprised of loans to borrowers for raw land and lots in subdivisions that have utilities and are ready to be built on individually but not as part of an entire development project. These loans are generally repaid with the proceeds from the sale of the property. Many of these borrowers are also experiencing financial difficulties.

~~Since~~The ~~loans~~current ~~typically~~economic ~~provide~~environment ~~higher~~in ~~interest~~our ~~yields~~market ~~than~~area ~~other~~has ~~types~~resulted in a ofdownturn ~~interest~~in ~~earning~~the ~~assets,~~real weestate ~~allocate~~market, ~~the~~which ~~majority~~has ofplaced ~~our~~greater ~~earning~~pressure ~~assets~~on to our borrowers’ ~~loan~~repayment ~~portfolio~~capabilities. ~~Gross loans~~We ~~decreased~~are byexperiencing ~~$15.4~~higher ~~million~~levels of loan delinquencies, ordefaults 5and foreclosures.6% Further, ~~during~~the downturn in the ~~first~~real ~~three~~estate ~~months~~market has adversely impacted the value of the underlying real ~~2010~~estate securing the loans. ~~Loan~~The ~~demand~~greater degree ~~has~~of ~~slowed~~strain ~~during~~on these types of loans and the significance to our overall ~~first~~loan ~~quarter~~portfolio ofhas ~~2010~~caused ~~due~~us to ~~general~~apply ~~economic~~a ~~conditions~~greater ~~and~~degree of scrutiny in analyzing the ~~real~~ultimate ~~estate~~collectability of amounts due. ~~market~~Our analysis has resulted in a significant provision expense recorded in 2009, ~~along~~and ~~with~~an ~~management’s~~additional ~~decision~~$2,000,000 torecorded ~~shrink~~in the ~~size~~first six months of 2010, in order to meet the ~~Bank’s~~estimated allowance for loan loss reserve requirement. Nevertheless, given the current economic ~~portfolio~~environment, tothere ~~help~~is ~~improve~~a risk of further impairment to the ~~Bank’s~~value ~~risk~~of ~~profile. We~~our ~~expect~~collateral ~~this~~on ~~trend~~these loans, which would require even further increases to ~~continue~~our allowance ~~during~~for loan losses and in the ~~next~~corresponding ~~quarter~~expense charged to our provision for loan losses.

~~Balances~~Changes ~~within~~in ~~major~~the allowance for loan ~~categories~~losses ~~are~~for were as follows (dollars in thousands):

(dollar amounts in thousands)	March 31, 2010			December 31, 2009
	Six-months ended June 30, 2010			Six-months ended June 30, 2009
Real estate - construction	$	74,749		$	81,128
Balance, beginning of period	$	12,963		$	8,088
Real estate - mortgage	161,480			167,296
Provision charged to operations	2,000			2,805
Commercial and industrial	22,063			25,028
Net collections (charge-offs)	(3,362		)	(1,205		)
Consumer and other	1,447			1,652
Balance, end of period	$	11,601		$	9,688
Total loans, gross	259,739			275,104
Less allowance for loan losses	(12,941		)	(12,963		)
Total loans, net	$	246,798		$	262,141

Generally, we place a delinquent loan in non-accrual status when the loan becomes 90 days or more past due. Additionally, we discontinue accrual of interest on a loan when we conclude it is doubtful that we will be able to collect the full amount of principal and interest from the borrower. We reach this conclusion by taking into account factors such as the borrower’s financial condition, economic and business conditions, value of the collateral underlying the loan, and the results of our previous collection efforts. When we place a loan in non-accrual status, we reverse all interest which has been accrued on the loan but remains unpaid and we deduct this interest from earnings as a reduction of reported interest income. We do not accrue any additional interest on the loan balance until we conclude the collection of both principal and interest is reasonably certain. At March 31, 2010, there were $32.7 million in loans that were non-accruing and $6.5 million in loans that were 30 days past due, excluding non-accrual loans. At December 31, 2009, there were $29.4 million in loans that were non-accruing and $4.8 million in loans that were 30 days past due, excluding non-accrual loans.Impaired Loans

The Company ~~increase~~identifies ofimpaired ~~$3.3~~loans ~~million~~through inits ~~non-accrual~~normal ~~loans~~internal ~~from~~loan ~~December 31,~~review ~~2009~~process. Loans are considered to ~~March 31~~be impaired when, ~~2010~~in ismanagement’s ~~related~~judgment ~~primarily~~and tobased ~~continued~~on ~~deterioration~~current in information, the full ~~Bank’s~~collection ~~overall~~of ~~Commercial~~principal ~~Real~~and ~~Estate~~interest ~~loan~~becomes ~~portfolio.~~doubtful ~~The~~according ~~number~~to the contractual terms of ~~loans~~the loan agreement. onA ~~non-accrual~~loan ~~has~~is ~~decreased~~also ~~from~~considered 79impaired toif 71its ~~since~~terms ~~December 31,~~are ~~2009~~modified in a troubled debt restructuring. These ~~The~~loans ~~average~~are ~~non-accrual~~evaluated ~~loan~~in ~~balance~~determining iswhether ~~$372,000~~all outstanding principal and ~~$460,000~~interest asare expected ofto ~~December 31,~~be collected. Loans are not ~~2009~~considered impaired if a minimal payment delay occurs and ~~March 31~~all amounts due, including ~~2010~~accrued interest at the contractual interest rate for the period of delay, ~~respectively~~are expected to be collected. AtManagement ~~March 31,~~has ~~2010,~~determined ~~96.7%~~that of the ~~non-accrual~~Company ~~loans~~had ~~were~~$68.1 ~~secured~~million ~~by real~~and ~~estate~~$34.2 million Atin ~~this~~impaired ~~time~~loans at June 30, ~~management~~2010 isand ~~unable~~December 31, to2009, respectively. $6.4 ~~determine~~million ~~the~~and ~~length~~$2.0 million of the ~~economic~~ ~~downturn~~allowance ~~and~~for ~~therefore~~loan ~~unable~~loss tohas ~~determine~~been ~~the~~specifically ~~ultimate~~allocated ~~impact~~to ~~on the~~these ~~Bank’s~~relationships ~~Commercial~~at ~~Real~~June 30, ~~Estate~~2010 ~~portfolio~~and December 31, 2009, respectively.

~~We have approximately $36.2~~Potential ~~million~~Problem of A&D loans as of March 31, 2010, most of which are on properties located in the Upstate of South Carolina and Western North Carolina. A&D loans are typically comprised of loans to borrowers for real estate to be developed (into properties such as sub-divisions or spec houses). Normally, these loans are repaid with the proceeds from the sale of the developed property. The greater degree of strain on these types of loans and the significance to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. The majority of these borrowers are having financial difficulties. Our analysis has resulted in a significant provision expense in order to meet the estimated allowance for loan loss reserve requirement.Loans

~~Included~~Potential problem inloans ~~our~~are loans ~~secured~~ bythat ~~real~~are ~~estate~~not included in impaired loans, webut ~~have~~about which ~~approximately~~management ~~$37.2~~has ~~million~~become aware of ~~acreage~~information ~~and~~about possible credit problems ~~finished~~of orthe ~~buildable~~borrowers ~~lot~~that ~~loans~~causes asdoubt ofabout ~~March 31,~~their ~~2010. These~~ability ~~loans~~to ~~are~~comply ~~comprised~~with ofcurrent repayment ~~loans~~terms. Loans toon the Company’s ~~borrowers~~potentially ~~for~~problem ~~raw~~loan ~~land~~list ~~and~~are ~~lots~~considered inpotentially ~~subdivisions~~impaired ~~that~~loans. At ~~have~~June 30, ~~utilities~~2010 and ~~are~~December 31, ~~ready~~2009, tothe beCompany ~~built~~had onidentified ~~individually~~$0 ~~but~~and ~~not~~$15.9 asmillion, ~~part~~respectively, of potential anproblem ~~entire~~loans ~~development project~~through its internal review procedures. ~~These~~The ~~loans~~results ~~are~~of ~~generally repaid~~this ~~with~~internal ~~the~~review ~~proceeds~~process are ~~from~~considered ~~the~~in ~~sale~~determining management’s assessment of the ~~property. Many~~adequacy of ~~these~~the allowance ~~borrowers~~for ~~are~~loan ~~also experiencing financial difficulties~~losses.

The current economic environment in our market area has resulted in a downturn in the real estate market, which has placed greater pressure on our borrowers’ repayment capabilities. We are experiencing higher levels of loan delinquencies, defaults and foreclosures. Further, the downturn in the real estate market has adversely impacted the value of the underlying real estate securing the loans. The greater degree of strain on these types of loans and the significance to our overall loan 36

33Provision and Allowance for Loan Losses

~~portfolio~~The Company has ~~caused~~developed ~~us to~~policies ~~apply~~and

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