	Sept 30, 2011			December 31, 2010
Commercial real estate	$	329,699,970		$	345,902,319
Residential real estate		125,459,346			138,769,782
Construction, development & acquisition		113,389,822			140,848,750
Commercial and industrial		44,355,088			48,144,401
Consumer		3,744,271			3,838,154
Total loans		616,648,497			677,503,406
Less:
Deferred loan fees		(668,158	)		(700,337	)
Allowance for loan losses		(22,601,000	)		(20,702,000	)
Total	$	593,379,339		$	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 individualActivity in the Allowance for the three and nine month periods ended September 30, 2010 was as follows (in thousands):

	Three Months Ended September 30, 2011
	Commercial			Commercial			Residential			Construction
	& Industrial			Real Estate			Real Estate			Dev & Acq			Consumer			Total
Allowance for loan losses:
June 30, 2011 balance	$	2,905		$	8,015		$	4,102		$	7,227		$	70		$	22,319
Charge-offs		(778	)		(1,723	)		(308	)		(1,534	)		(7	)		(4,350	)
Recoveries		21			37			22			99			1			180
Provision		433			1,357			684			1,944			34			4,452
Sept 30, 2011 balance	$	2,581		$	7,686		$	4,500		$	7,736		$	98		$	22,601

	Nine Months Ended September 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		(1,556	)		(2,394	)		(1,314	)		(7,965	)		(29	)		(13,258	)
Recoveries		83			37			77			447			2			646
Provision		1,365			4,698			2,924			5,479			45			14,511
Sept 30, 2011 balance	$	2,581		$	7,686		$	4,500		$	7,736		$	98		$	22,601
Individually evaluated for impairment	$	1,124		$	3,636		$	2,715		$	6,146		$	31		$	13,652
Collectively evaluated for impairment	$	1,457		$	4,050		$	1,785		$	1,590		$	67		$	8,949

	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.

	September 30, 2011
			Commercial
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Other		Construction		LOC		Total
1-Minimal Credit Risk	$	906	$	-	$	-	$	7	$	913
2-Modest Credit Risk		354		-		-		-		354
3-Average Credit Risk		1,333		10,454		3,559		-		15,346
4-Acceptable Credit Risk		10,021		144,750		12,343		79		167,193
5-Acceptable Credit Risk		24,986		126,931		30,623		107		182,647
6-Special Mention		2,817		28,874		29,206		11		60,908
7-Substandard		3,262		16,205		28,954		92		48,513
8-Doubtful		41		2,295		1,291		-		3,627
9-Loss		-		-		-		-		-
Other		148		191		69		230		638
Total	$	43,868	$	329,700	$	106,045	$	526	$	480,139

	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

	September 30, 2011
	Residential
	Real Estate		Consumer
	Other		Construction		Home Equity		Consumer		Total
1-Minimal Credit Risk	$	-	$	-	$	-	$	494	$	494
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		9,892		1,698		7,198		473		19,261
4-Acceptable Credit Risk		30,942		3,706		29,647		942		65,237
5-Acceptable Credit Risk		19,055		774		8,397		721		28,947
6-Special Mention		3,975		784		2,444		356		7,559
7-Substandard		9,231		383		4,004		33		13,651
8-Doubtful		249		-		-		-		249
9-Loss		-		-		-		-		-
Other		105		-		317		689		1,111
Total	$	73,449	$	7,345	$	52,007	$	3,708	$	136,509

	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

	September 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	$	842	$	536	$	1,378	$	42,490	$	43,868	$	-
Commercial – Construction		7,167		17,610		24,777		81,268		106,045		-
Commercial - Real Estate		6,060		9,080		15,140		314,560		329,700		-
Commercial - Lines of Credit		101		-		101		425		526		-
Commercial – Other		-		-		-		-		-		-
Consumer		2		-		2		3,706		3,708		-
Consumer – Construction		54		-		54		7,291		7,345		-
Consumer – Other		-		-		-		-		-		-
Home Equity		861		937		1,798		50,209		52,007		-
Residential Real Estate		1,418		1,873		3,291		70,158		73,449		-
Total	$	16,505	$	30,036	$	46,541	$	570,107	$	616,648	$	-

	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 nine months ended September 30, 2011
							3 Month		QTD		9 Month		YTD
	Recorded		Unpaid		Related		Average		Interest		Average		Interest
	Investment		Principal		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Consumer	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial & industrial		361		403		-		180		1		162		3
Commercial construction		3,275		4,082		-		3,481		16		6,125		72
Commercial real estate		2,461		2,822		-		2,664		14		3,428		29
Consumer construction		-		-		-		-		-		5		-
Home equity lines/loans		317		318		-		306		1		667		14
Residential real estate		1,808		1,810		-		1,709		10		2,187		30
Sub-Total		8,222		9,435		-		8,340		42		12,574		148
With an allowance recorded:
Consumer		33		33		31		33		1		36		3
Commercial & industrial		3,034		3,096		1,124		3,066		16		3,111		96
Commercial construction		26,970		30,359		6,086		25,213		119		28,203		453
Commercial real estate		16,039		18,073		3,636		15,277		77		14,162		198
Consumer construction		383		383		60		394		2		340		6
Home equity lines/loans		3,686		3,977		1,507		3,511		15		3,251		61
Residential real estate		7,673		8,453		1,208		7,087		39		6,598		157
Sub-Total		57,818		64,374		13,652		54,581		269		55,701		974
Totals:
Commercial		3,395		3,499		1,124		3,246		17		3,273		99
Commercial real estate		18,500		20,895		3,636		17,941		91		17,590		227
Construction		30,628		34,824		6,146		29,088		137		34,673		531
Consumer		33		33		31		33		1		36		3
Residential real estate		13,484		14,558		2,715		12,613		65		12,703		262
Grand Total	$	66,040	$	73,809	$	13,652	$	62,921	$	311	$	68,275	$	1,122

	Twelve months ended December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
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

	Sept 30, 2011
Commercial
Commercial & industrial	$	1,221
Commercial LOC		92
Commercial other		-
Commercial real estate
Commercial construction		23,488
Commercial real estate – other		11,029
Consumer
Consumer LOC		1
Consumer other		-
Residential real estate
Consumer construction		54
Home equity loans/lines		1,458
Residential real estate – other		5,772
Total	$	43,115

	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

In the current economic environment it has become more common to restructure or modify the terms of certain loans that meet an established set of conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan.

Modifications are usually accomplished through either a reduction in the monthly payment and/or interest rate on the loan or through extension of the loan repayment period. We have not forgiven any material principal amounts on any loan modifications to date. A summary of the types of concesions made are presented in the table below.

	Three months ended						Nine months ended
	September 30, 2011						September 30, 2011
			Pre-Mod		Post –Mod				Pre-Mod		Post-Mod
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
Below market interest rate:
Commercial & industrial		1	$	286	$	286		1	$	286	$	286
Commercial construction		-		-		-		2		4,562		4,562
Commercial real estate		-		-		-		2		4,174		4,174
Residential real estate		-		-		-		1		1,683		1,683
Sub-Total		1	$	286	$	286		6	$	10,705	$	10,705
Extended payment terms:
Commercial & industrial		2	$	486		486		5	$	814		814
Commercial construction		-		-		-		8		2,970		2,970
Commercial real estate		-		-		-		1		636		636
Home equity lines/loans		1		83		83		2		738		738
Residential real estate		-		-		-		2		477		477
Sub-Total		3	$	569	$	569		18	$	5,635	$	5,635
Change in terms:
Commercial construction		-	$	-	$	-		1	$	109	$	109
Commercial real estate		1		766		766		2		3,346		3,346
Residential real estate		1		34		34		4		849		849
Sub-Total		2		800		800		7		4,304		4,304
Grand Total		6	$	1,655	$	1,655		31	$	20,644	$	20,644

	Three months ended				Nine months ended
	September 30, 2011				September 30, 2011
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
Below market interest rate:
Commercial construction		-	$	-		2	$	3,238
Sub-Total		-	$	-		2	$	3,238
Extended payment terms:
Commercial & industrial		-	$	-		2	$	248
Commercial construction		-		-		6		2,485
Commercial real estate		-		-		1		633
Home equity lines/loans		-		-		1		656
Sub-Total		-	$	-		10	$	4,022
Change in terms:
Commercial construction		-	$	-		1	$	106
Commercial real estate		1		770		2		2,436
Residential real estate		-		-		3		808
Sub-Total		1	$	770		6	$	3,350
Grand Total		1	$	770		18	$	10,610

It is still early in our experience with these types of activities, but approximately $7.4 million or 36% of all loans classified as TDRs as of September 30, 2011 are current pursuant to their modified terms, and about $13.1 million, or approximately 64% of our total TDRs are not performing pursuant to their modified terms.

Long-term success with our performing TDRs is an unknown, and will depend to a great extent on the future of our economy and our local real estate markets. Thus far, there does not appear to be any significant difference in success rates with one type of concession versus another. The following table presents the successes and failures of the different types of modifications for those modifications occurring between January 1, 2011 and September 30, 2011:

	Paying as				Converted to				Foreclosure
	restructured				non-accrual				or default
	Number		Recorded		Number		Recorded		Number		Recorded
	of loans		Investment		of loans		Investment		of loans		Investment
Below market interest rate		4	$	5,427		-	$	-		2	$	3,238
Extended payment terms		8		1,170		2		835		8		3,186
Change in terms		1		32		5		1,685		1		1,665
Total		13	$	6,629		7	$	2,520		11	$	8,089