	June 30, 2011			December 31, 2010
Commercial real estate	$	331,662,656		$	345,902,319
Residential real estate		132,301,116			138,769,782
Construction, development & acquisition		117,061,159			140,848,750
Commercial and industrial		52,453,842			48,144,401
Consumer		3,622,694			3,838,154
Total loans		637,101,467			677,503,406
Less:
Deferred loan fees		(693,694	)		(700,337	)
Allowance for loan losses		(22,319,000	)		(20,702,000	)
Total	$	614,088,773		$	656,101,069

Loans are primarily made in the Company’s market area of North Carolina, principally Wake, Johnston, Lee, Moore, and New Hanover counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and consumer and other loans can be affected by the local economic conditions.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.

	Three Months Ended June 30, 2011
	Commercial			Commercial			Residential			Construction
	& Industrial			Real Estate			Real Estate			Dev & Acq			Consumer			Total
Allowance for loan losses:
March 31, 2011 balance	$	2,709		$	7,263		$	4,365		$	9,077		$	71		$	23,485
Charge-offs		(509	)		(455	)		(667	)		(2,670	)		(8	)		(4,309	)
Recoveries		26			-			45			36			1			108
Provision		679			1,207			359			784			6			3,035
June 30, 2011 balance	$	2,905		$	8,015		$	4,102		$	7,227		$	70		$	22,319

	Six Months Ended June 30, 2011
	Commercial			Commercial			Residential			Construction
	& Industrial			Real Estate			Real Estate			Dev & Acq			Consumer			Total
Allowance for loan losses:
Dec 31, 2010 balance	$	2,689		$	5,345		$	2,813		$	9,775		$	80		$	20,702
Charge-offs		(778	)		(671	)		(1,006	)		(6,431	)		(22	)		(8,908	)
Recoveries		62			-			55			348			1			466
Provision		932			3,341			2,240			3,535			11			10,059
June 30, 2011 balance	$	2,905		$	8,015		$	4,102		$	7,227		$	70		$	22,319

June 30, 2011 balance:
Individually evaluated for impairment	$	1,295		$	4,211		$	2,223		$	4,897		$	34		$	12,660
Collectively evaluated for impairment	$	1,610		$	3,804		$	1,879		$	2,330		$	36		$	9,659

Loans:
June 30, 2011 balance	$	52,454		$	331,663		$	132,301		$	117,061		$	3,622		$	637,101
Ending balance:
Individually evaluated for impairment	$	3,272		$	17,489		$	12,691		$	28,172		$	35		$	61,659
Collectively evaluated for impairment	$	49,182		$	314,174		$	119,610		$	88,889		$	3,587		$	575,442

	As of December 31, 2010
	Commercial		Commercial		Residential		Construction
	& Industrial		Real Estate		Real Estate		Dev & Acq		Consumer		Total
Allowance for loan losses:
Ending balance	$	2,689	$	5,345	$	2,813	$	9,775	$	80	$	20,702
Individually evaluated for impairment	$	1,094	$	1,780	$	882	$	7,272	$	10	$	11,038
Collectively evaluated for impairment	$	1,595	$	3,565	$	1,931	$	2,503	$	70	$	9,664

Loans:
Ending balance	$	48,144	$	345,903	$	138,729	$	140,889	$	3,838	$	677,503
Ending balance:
Individually evaluated for impairment	$	2,471	$	10,024	$	9,531	$	32,403	$	13	$	54,442
Collectively evaluated for impairment	$	45,673	$	335,879	$	129,198	$	108,486	$	3,825	$	623,061

We use an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average grade of commercial loans, (ii) the level of classified commercial loans, (iii) charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina. The credit grades have been defined as follows:

Risk Grade 1 - Minimal credit risk - A loan to a borrower of unquestionable financial strength. Financial information exhibits superior earnings, leverage and liquidity positions, which firmly establish a repayment source that is substantial in relation to debt. These borrowers would generally have access to national credit and equity markets. Also includes a loan fully protected by cash equivalents or high grade, readily marketable securities.

Risk Grade 2 – Modest credit risk - Loans to borrowers of better than average financial strength. Earnings performance is consistent and primary and secondary sources of repayment are well established. Borrower exhibits very good asset quality and liquidity with strong debt servicing capacity. Company management has depth, is experienced and well regarded in the industry. This risk grade is reserved for loans secured by readily marketable collateral or is a loan made within guidelines to borrowers with liquid financial statements.

Risk Grade 3 – Average credit risk - Loans to borrowers involving satisfactory financial strength. Earnings performance is consistent with primary and secondary sources of repayment well defined and adequate to retire the debt in a timely and orderly fashion. These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. This risk grade is reserved for the Bank’s top quality loans.

Risk Grade 4 – Acceptable credit risk - Loans to borrowers with more than average risk but with little risk of ultimate collection. The loan may contain certain characteristics that require some supervision and attention by the lender. Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available. The borrower may be fully leveraged, and unable to overcome major setbacks. Covenants are structured to ensure adequate protection. Management may have limited experience and depth. Includes loans, which are highly leveraged transactions due to regulatory constraints. Also includes loans involving reasonable exceptions to policy. This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection.

Risk Grade 5 – Acceptable credit risk - A loan that is sound yet ultimate collectability may depend on guarantor support or tertiary repayment sources. Although asset quality remains acceptable, the borrower has a smaller and/or less diverse asset base, very little liquidity and limited debt capacity. Earnings performance is inconsistent and the borrower may be highly leveraged and below average size or lower-tier competitor. Limited management experience and depth. May be well-conceived start-up venture, but repayment is still dependent upon a successful operation. Includes loans with significant documentation or policy exceptions, improper loan structure or inadequate loan servicing procedures. May also include a loan in which strong reliance for a secondary repayment source is placed on a guarantor who exhibits the ability and willingness to repay. These credits require significant supervision by the lender and covenants structured to ensure adequate protection. Loans which are highly leveraged transactions due to the obligor's financial status. This grade is given to acceptable loans that show signs of weakness in either sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.

Risk Grade 6 – Special mention - Criticized Exposure. A loan which still has the capacity to perform but contains certain characteristics that require continual supervision and attention from the lender. These characteristics may include but are not limited to (1) adverse trends in financial condition or key operating, liquidity, trading asset turn, or leverage ratios; (2) inconsistent repayment performance; or (3) fatal documentation errors that would prevent the Bank from enforcing its note or security instruments. Material adverse trends have not yet been developed.

Risk Grade 7 – Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. A loan classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the collection of all payments contractually due the Bank upon liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Risk Grade 8 – Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

Risk Grade 9 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets are charged against the Allowance for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter end.

	June 30, 2011
			Commercial
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Other		Construction		LOC		Total
1-Minimal Credit Risk	$	2,302	$	-	$	-	$	13	$	2,315
2-Modest Credit Risk		388		-		-		-		388
3-Average Credit Risk		497		11,587		2,487		-		14,571
4-Acceptable Credit Risk		11,013		150,804		13,895		169		175,881
5-Acceptable Credit Risk		25,549		129,457		44,561		110		199,677
6-Special Mention		3,504		22,326		20,530		2		46,362
7-Substandard		3,053		15,016		26,138		1		44,208
8-Doubtful		218		2,473		1,741		-		4,432
9-Loss		-		-		-		-		-
Other		5,409		-		-		226		5,635

Total	$	51,933	$	331,663	$	109,352	$	521	$	493,469

	December 31, 2010
			Commercial
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Other		Construction		LOC		Total
1-Minimal Credit Risk	$	3,704	$	-	$	-	$	-	$	3,704
2-Modest Credit Risk		276		-		-		-		276
3-Average Credit Risk		638		11,177		1,850		-		13,665
4-Acceptable Credit Risk		13,125		164,402		22,265		173		199,965
5-Acceptable Credit Risk		24,025		144,810		51,069		87		219,991
6-Special Mention		3,595		15,419		24,150		5		43,169
7-Substandard		2,044		8,456		29,911		-		40,411
8-Doubtful		132		1,568		2,225		-		3,925
9-Loss		-		-		-		-		-
Other		67		70		49		273		459

Total	$	47,606	$	345,902	$	131,519	$	538	$	525,565

	June 30, 2011
	Residential
	Real Estate		Consumer
	Other		Construction		Home Equity		Consumer		Total
1-Minimal Credit Risk	$	-	$	-	$	-	$	349	$	349
2-Modest Credit Risk		-		-		66		-		66
3-Average Credit Risk		10,424		1,113		7,398		490		19,425
4-Acceptable Credit Risk		32,125		4,527		31,916		1,000		69,568
5-Acceptable Credit Risk		23,636		786		9,015		783		34,220
6-Special Mention		3,200		990		1,691		309		6,190
7-Substandard		9,112		293		3,579		35		13,019
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Other		119		-		20		656		795

Total	$	78,616	$	7,709	$	53,685	$	3,622	$	143,632

	December 31, 2010
	Residential
	Real Estate		Consumer
	Other		Construction		Home Equity		Consumer		Total
1-Minimal Credit Risk	$	-	$	-	$	-	$	421	$	421
2-Modest Credit Risk		-		-		78		-		78
3-Average Credit Risk		9,707		2,275		6,440		597		19,019
4-Acceptable Credit Risk		34,191		5,297		35,153		1,041		75,682
5-Acceptable Credit Risk		24,648		704		10,392		736		36,480
6-Special Mention		6,808		788		1,463		377		9,436
7-Substandard		5,996		221		3,368		13		9,598
8-Doubtful		295		45		167		-		507
9-Loss		-		-		-		-		-
Other		-		-		64		653		717

Total	$	81,645	$	9,330	$	57,125	$	3,838	$	151,938

	June 30, 2011
											Recorded
	Greater than										Investment >
	30-89 Days		90 Days		Total				Total		90 Days &
	Past Due(1)		Past Due(2)		Past Due		Current		Loans		Accruing
Commercial & Industrial	$	414	$	587	$	1,001	$	50,932	$	51,933	$	-
Commercial – Construction		2,283		17,054		19,337		90,015		109,352		-
Commercial - Real Estate		-		13,153		13,153		318,510		331,663		-
Commercial - Lines of Credit		22		-		22		499		521		-
Commercial – Other		-		-		-		-		-		-
Consumer		4		-		4		3,618		3,622		-
Consumer – Construction		-		166		166		7,543		7,709		-
Consumer – Other		-		-		-		-		-		-
Home Equity		228		980		1,208		52,477		53,685		-
Residential Real Estate		1,225		1,527		2,752		75,864		78,616		-
Total	$	4,176	$	33,467	$	37,643	$	599,458	$	637,101	$	-

	December 31, 2010
											Recorded
	Greater than										Investment >
	30-89 Days		90 Days		Total				Total		90 Days &
	Past Due(1)		Past Due(2)		Past Due		Current		Loans		Accruing
Commercial & Industrial	$	469	$	167	$	636	$	46,970	$	47,606	$	-
Commercial – Construction		6,118		8,649		14,767		116,752		131,519		-
Commercial - Real Estate		3,943		7,301		11,244		334,658		345,902		-
Commercial - Lines of Credit		-		-		-		538		538		-
Commercial – Other		-		-		-		-		-		-
Consumer		-		5		5		3,833		3,838		-
Consumer – Construction		221		45		266		9,064		9,330		-
Consumer – Other		-		-		-		-		-		-
Home Equity		350		881		1,231		55,894		57,125		-
Residential Real Estate		3,601		2,093		5,694		75,951		81,645		-
Total	$	14,702	$	19,141	$	33,843	$	643,660	$	677,503	$	-

	Three and six months ended June 30, 2011
							3 Month		QTD		6 Month		YTD
	Recorded		Unpaid		Related		Average		Interest		Average		Interest
	Investment		Principal		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Consumer	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial & industrial		75		83		-		77		-		153		2
Commercial construction		3,978		4,672		-		7,785		34		7,469		56
Commercial real estate		3,461		3,461		-		3,917		8		3,815		15
Consumer construction		-		-		-		-		-		8		-
Home equity lines/loans		312		312		-		353		1		851		13
Residential real estate		2,438		2,438		-		2,518		9		2,430		20

Sub-Total		10,264		10,966		-		14,650		52		14,726		106
With an allowance recorded:
Consumer		35		35		34		38		1		37		2
Commercial & industrial		3,197		3,197		1,295		3,327		44		3,134		80
Commercial construction		23,901		26,991		4,818		25,905		143		29,591		334
Commercial real estate		14,028		15,117		4,211		13,761		69		13,595		121
Consumer construction		293		293		79		295		2		312		4
Home equity lines/loans		3,601		3,892		1,212		3,508		30		3,120		46
Residential real estate		6,340		7,079		1,011		5,948		78		6,349		118

Sub-Total		51,395		56,604		12,660		52,782		367		56,138		705
Totals:
Commercial		3,272		3,280		1,295		3,404		44		3,287		82
Commercial real estate		17,489		18,578		4,211		17,678		77		17,410		136
Construction		28,172		31,956		4,897		33,985		179		37,380		394
Consumer		35		35		34		38		1		37		2
Residential real estate		12,691		13,721		2,223		12,327		118		12,750		197

Grand Total	$	61,659	$	67,570	$	12,660	$	67,432	$	419	$	70,864	$	811

	Twelve months ended December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Investment
With no related allowance recorded:
Consumer	$	-	$	-	$	-	$	49	$	1
Commercial & industrial		83		92		-		1,200		3
Commercial construction		2,649		4,475		-		11,132		354
Commercial real estate - other		3,366		3,366		-		6,154		226
Consumer construction		45		133		-		258		15
Home equity lines/loans		1,883		2,032		-		1,780		74
Residential real estate - other		2,820		2,820		-		1,894		58

Sub-Total		10,846		12,918		-		22,467		731
With an allowance recorded:
Consumer		13		13		10		220		8
Commercial & industrial		2,093		2,093		984		2,261		96
Commercial construction		29,488		30,529		7,251		17,409		677
Commercial real estate – other		6,658		7,328		1,780		9,730		230
Consumer construction		221		221		20		367		9
Home equity lines/loans		1,652		1,879		547		1,099		14
Residential real estate - other		3,471		5,197		446		6,107		223

Sub-Total		43,596		47,260		11,038		37,193		1,257
Totals:
Commercial		2,176		2,185		984		3,461		99
Commercial real estate		10,024		10,694		1,780		15,884		456
Construction		32,403		35,358		7,271		29,166		1,055
Consumer		13		13		10		269		9
Residential real estate		9,826		11,928		993		10,880		369

Grand Total	$	54,442	$	60,178	$	11,038	$	59,660	$	1,988

	June 30, 2011
Commercial
Commercial & industrial	$	854
Commercial LOC		-
Commercial other		-
Commercial real estate
Commercial construction		19,628
Commercial real estate – other		13,153
Consumer
Consumer LOC		-
Consumer other		-
Residential real estate
Consumer construction		167
Home equity loans/lines		1,314
Residential real estate – other		3,989

Total	$	39,105

	Dec 31, 2010
Commercial
Commercial & industrial	$	616
Commercial LOC		-
Commercial other		-
Commercial real estate
Commercial construction		16,614
Commercial real estate – other		7,633
Consumer
Consumer LOC		5
Consumer other		-
Residential real estate
Consumer construction		221
Home equity loans/lines		1,314
Residential real estate – other		4,166

Total	$	30,569