UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2012

or

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

For the transition period from              to             

Commission File No. 0-24753

ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

North Carolina	56-2090738
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Post Office Box 337, Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)

(252) 925-5501

(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 Exchange Act 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  ¨

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 (Section 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).    Yes  x    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 definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

On May 11, 2012, there were 2,849,841 outstanding shares of Registrant’s common stock.

This Form 10-Q has 62 pages.

Table of Contents

Index		Begins on Page
Part 1 – Financial Information
Item 1.	Financial Statements:
Consolidated Balance Sheets at March 31, 2012 and December 31, 2011			3
Consolidated Results of Operations for Three Months Ended March 31, 2012 and 2011			4
Consolidated Statements of Comprehensive Income (Loss) for Three Months Ended March  31, 2012 and 2011			5
Consolidated Statements of Changes in Shareholders’ Equity for Three Months Ended March 31, 2012 and 2011			6
Consolidated Statements of Cash Flows for Three Months Ended March 31, 2012 and 2011			7
Notes to Consolidated Financial Statements			8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		53
Item 4.	Controls and Procedures		53
Part II – Other Information
Item 1.	Legal Proceedings		53
Item 1A.	Risk Factors		53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 3.	Defaults upon Senior Securities		53
Item 4.	Mine Safety Disclosures		53
Item 5.	Other Information		53
Item 6.	Exhibits		53
Signatures			54
Exhibit Index			55
Certifications			56

2

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2012 and December 31, 2011

(Dollars in thousands, except per share data)

	March 31, 2012			December 31, 2011*
Assets
Non-interest bearing deposits and cash	$	11,959		$	18,363
Interest bearing deposits		61			63
Overnight investments		50			6,305
Total cash and cash equivalents		12,070			24,731
Investment securities
Available-for-sale, at market value (cost of $347,116 and $338,685 at March 31, 2012 and December 31, 2011, respectively)		348,810			339,450
Loans held for sale		3,310			2,866
Loans		491,383			496,542
Allowance for loan losses		(11,385	)		(12,092	)
Loans, net		479,998			484,450
Real estate and repossessions acquired in settlement of loans, net		7,906			6,573
Federal Home Loan Bank common stock, at cost		4,279			3,456
Bank premises and equipment, net		26,286			26,289
Accrued interest receivable		4,984			5,308
Bank owned life insurance		11,879			11,778
Other assets		16,752			16,376
Total	$	916,274		$	921,277
Liabilities and Shareholders’ Equity
Deposits
Demand, noninterest bearing	$	134,828		$	135,732
Demand, interest bearing		277,520			270,119
Savings		57,656			55,517
Time		302,593			336,277
Total deposits		772,597			797,645
Accrued interest payable		457			519
Short-term borrowings		39,218			11,679
Long-term obligations		18,000			25,500
Other liabilities		4,834			5,491
Total liabilities		835,106			840,834
Shareholders’ equity
Preferred stock, Series A		17,495			17,454
Common stock, par value $3.50 per share		9,974			9,974
Capital surplus		25,875			25,873
Warrants		878			878
Retained earnings		26,038			25,926
Accumulated other comprehensive income		908			338
Total shareholders’ equity		81,168			80,443
Total	$	916,274		$	921,277
Common shares outstanding		2,849,841			2,849,841
Common shares authorized		50,000,000			50,000,000
Preferred shares outstanding		17,949			17,949
Preferred shares authorized		2,000,000			2,000,000
Non-voting common shares authorized		2,000,000			2,000,000

* Derived from audited consolidated financial statements.

3

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Results of Operations

For the three months ended March 31, 2012 and 2011

(Dollars in thousands, except per share data)

	Three months ended March 31,
	2012			2011
Interest income:
Interest and fees on loans	$	6,369		$	7,357
Interest on investment securities:
Interest exempt from federal income taxes		235			128
Taxable interest income		1,882			1,937
Dividend income		11			9
Other interest income		2			7
Total interest income		8,499			9,438
Interest expense:
Deposits:
Demand accounts		406			557
Savings		95			53
Time		1,270			1,811
Short-term borrowings		81			69
Long-term obligations		119			180
Total interest expense		1,971			2,670
Net interest income		6,528			6,768
Provision for loan losses		—			3,930
Net interest income after provision for loan losses		6,528			2,838
Noninterest income:
Service charges on deposit accounts		857			765
Other service charges and fees		329			244
Mortgage origination fees		406			326
Net gain on sale of securities		45			26
Income from bank owned life insurance		101			74
Other operating income (expense)		1			(4	)
Total noninterest income		1,739			1,431
Noninterest expenses:
Salaries		2,919			2,564
Retirement and other employee benefits		1,103			676
Occupancy		530			483
Equipment		590			559
Professional fees		219			271
Supplies		74			51
Communications/data lines		198			169
FDIC insurance		204			326
Other outside services		100			181
Net cost of real estate and repossessions acquired in settlement of loans		684			18
Data processing and related expenses		396			70
Other operating expenses		901			876
Total noninterest expenses		7,918			6,244
Income (loss) before income taxes		349			(1,975	)
Income tax benefit		(28	)		(891	)
Net income (loss)		377			(1,084	)
Preferred stock dividends		224			224
Accretion of discount		41			41
Income (loss) available to common shareholders	$	112		$	(1,349	)
Net income (loss) per share - basic	$	0.04		$	(0.47	)
Net income (loss) per share - diluted	$	0.04		$	(0.47	)
Weighted average shares outstanding - basic		2,849,841			2,849,841
Weighted average shares outstanding - diluted		2,849,841			2,849,841

4

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2012 and 2011

(Dollars in thousands)

	Three months ended March 31,
	2012			2011
Net income (loss)	$	377		$	(1,084	)
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities:
Unrealized gains (losses) arising during the period		973			(158	)
Tax related to unrealized gains (losses)		(375	)		61
Reclassification of realized gains during the period		(45	)		(26	)
Tax related to realized gains		17			10
Defined benefit pension plan:
Prior service cost		—			7
Net loss arising during the period		—			(116	)
Tax related to defined benefit pension plan		—			42
Total other comprehensive income (loss)		570			(180	)
Total comprehensive income (loss)	$	947		$	(1,264	)

5

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2012 and 2011

(Dollars in thousands, except per share data)

	Preferred stock, Series A		Common Stock				Common stock warrants		Capital surplus		Retained earnings			Accumulated other comprehensive loss			Total
			Number		Amount
Balance January 1, 2011	$	17,288		2,849,841	$	9,974	$	878	$	25,852	$	28,554		$	(1,652	)	$	80,894
Other comprehensive loss		—		—		—		—		—		—			(180	)		(180	)
Net loss		—		—		—		—		—		(1,084	)		—			(1,084	)
Stock based compensation		—		—		—		—		6					—			6
Preferred stock accretion		41		—		—		—		—		(41	)		—			—
Cash dividends on preferred stock		—		—		—		—		—		(224	)		—			(224	)
Cash dividends ($0.07 per share)		—		—		—		—		—		(199	)		—			(199	)
Balance March 31, 2011	$	17,329		2,849,841	$	9,974	$	878	$	25,858	$	27,006		$	(1,832	)	$	79,213
	Preferred stock, Series A		Common Stock				Common stock warrants		Capital surplus		Retained earnings			Accumulated other comprehensive income			Total
			Number		Amount
Balance January 1, 2012	$	17,454		2,849,841	$	9,974	$	878	$	25,873	$	25,926		$	338		$	80,443
Other comprehensive income		—		—		—		—		—		—			570			570
Net income		—		—		—		—		—		377			—			377
Stock based compensation		—		—		—		—		2					—			2
Preferred stock accretion		41		—		—		—		—		(41	)		—			—
Cash dividends on preferred stock		—		—		—		—		—		(224	)		—			(224	)
Balance March 31, 2012	$	17,495		2,849,841	$	9,974	$	878	$	25,875	$	26,038		$	908		$	81,168

6

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2012 and 2011

(Dollar amounts in thousands)

	Three months ended March 31,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	377		$	(1,084	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		378			374
Amortization of premium on investment securities, net		1,226			749
Provision for loan losses		—			3,930
Gain on sale of securities		(45	)		(26	)
Stock based compensation		2			6
Decrease in accrued interest receivable		324			435
Impairment of real estate and repossessions acquired in settlement of loans		443			—
(Gain) loss on sale of real estate and repossessions acquired in settlement of loans		7			(13	)
Income from Bank owned life insurance		(101	)		(74	)
Originations of mortgage loans held for sale		(16,359	)		(15,910	)
Proceeds from sale of loans held for sale		15,915			19,423
Decrease (increase) in other assets		(734	)		1,162
(Decrease) increase in accrued interest payable		(62	)		8
Decrease in other liabilities, net		(657	)		(1,459	)
Net cash provided by operating activities		714			7,521
Cash flows from investing activities:
Proceeds from sales of investment securities classified as available-for-sale		13,451			4,902
Proceeds from maturities of investment securities classified as available-for-sale		12,940			10,991
Purchases of investment securities classified as available-for-sale		(36,004	)		(48,545	)
Purchases of FHLB stock		(823	)		—
Purchases of premises and equipment		(375	)		(454	)
Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale		348			802
Costs capitalized on real estate and repossessions acquired in settlement of loans and real estate held for sale		(9	)		—
Net loan originations		2,330			15,521
Net cash used by investing activities		(8,142	)		(16,783	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(25,048	)		813
Net increase (decrease) in borrowings		20,039			(1,088	)
Dividends paid to common shareholders		—			(199	)
Dividends paid on preferred stock		(224	)		(224	)
Net cash used by financing activities		(5,233	)		(698	)
Decrease in cash and cash equivalents		(12,661	)		(9,960	)
Cash and cash equivalents at beginning of period		24,731			20,166
Cash and cash equivalents at end of period	$	12,070		$	10,206
Cash paid during the period:
Interest	$	2,033		$	2,662
Taxes		—			—
Supplemental disclosures of noncash financing and investing activities:
Cash dividends declared but not paid	$	—		$	199
Unrealized gains (losses) on available-for-sale securities, net of deferred taxes		570			(113	)
Transfer from loans to real estate and repossessions acquired in settlement of loans		2,122			3,511
Transfer from long-term to short-term borrowings		7,500			7,000

See accompanying notes to consolidated financial statements.

7

ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial statements include the accounts of ECB Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, The East Carolina Bank (the “Bank”) (Bancorp and the Bank collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.

Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuation, postretirement and benefit plan accounting and income taxes.

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Loans

Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.

Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.

Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Troubled debt restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.

Allowance for Loan Losses

The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows

8

expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.

In evaluating the allowance for loan losses, the Company prepares an analysis of its current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Bank’s AFLL is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Unsecured loans are charged-off in full against the Company’s AFLL as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.

(2) Net Income (loss) Per Share

Basic net income (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of basic net income (loss) per share, restricted stock is considered “contingently issuable” and is not included in the weighted average number of common shares outstanding.

9

Diluted net income (loss) per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income (loss) per share. The amount of compensation cost attributed to future services and not yet recognized is considered “proceeds” using the treasury stock method. Restricted stock had no dilutive effect on earnings (loss) per share for the three months ended March 31, 2012 and March 31, 2011.

In computing diluted net income (loss) per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. Diluted weighted average shares outstanding did not increase for the three month periods ended March 31, 2012 and March 31, 2011 as there were no dilutive impacts of options for the periods. As of March 31, 2012, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 8,957 options were not included in the computation of diluted earnings per share because the exercise price exceeded the average market price of the Company’s stock for that period. As of March 31, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted loss per share as the effect would have been anti-dilutive.

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share.

	Three months ended March 31, 2012 (Dollars in thousands, except share and per share data)
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic net income per share	$	112			2,849,841	$	0.04
Effect of dilutive securities		—			—
Diluted net income per share	$	112			2,849,841	$	0.04
	Three months ended March 31, 2011 (Dollars in thousands, except share and per share data)
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic net loss per share	$	(1,349	)		2,849,841	$	(0.47	)
Effect of dilutive securities		—			—
Diluted net loss per share	$	(1,349	)		2,849,841	$	(0.47	)

(3) Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income (loss) for the periods have been presented in the consolidated statements of comprehensive income (loss).

(4) Recent Accounting Pronouncements

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 April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

10

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and are included in Note 9.

The Comprehensive Income topic of the ASC was amended in June 2011 by ASU 2011-05. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

(5) Investment Securities

The following is a summary of the securities portfolio by major classification:

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Government-sponsored enterprises and FFCB bonds	$	3	$	23	$	—		$	26
Obligations of states and political subdivisions		33,200		762		(176	)		33,786
Mortgage-backed securities		124,784		1,278		(150	)		125,912
SBA-backed securities		151,877		970		(512	)		152,335
Corporate bonds		37,252		295		(796	)		36,751
	$	347,116	$	3,328	$	(1,634	)	$	348,810
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Government-sponsored enterprises and FFCB bonds	$	1,003	$	29	$	—		$	1,032
Obligations of states and political subdivisions		27,855		863		—			28,718
Mortgage-backed securities		130,949		1,460		(117	)		132,292
SBA-backed securities		146,195		774		(332	)		146,637
Corporate bonds		32,683		88		(2,000	)		30,771
	$	338,685	$	3,214	$	(2,449	)	$	339,450

Gross realized gains and losses on sales of securities for the three months ended March 31, 2012 and March 31, 2011 were as follows (dollars in thousands):

	Three months ended March  31, (Dollars in thousands)
	2012			2011
Gross realized gains	$	70		$	26
Gross realized losses		(25	)		—
Net realized (losses) gains	$	45		$	26

11

Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment

The following tables set forth the amount of unrealized losses at March 31, 2012 and December 31, 2011 (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other-than-temporarily impaired. The tables are segregated into investments that have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer.

March 31, 2012

	Less Than 12 Months				12 Months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Obligations of states and political subdivisions	$	6,424	$	176	$	—	$	—	$	6,424	$	176
Mortgage-backed securities		29,576		114		2,800		36		32,376		150
SBA-backed securities		83,174		512		—		—		83,174		512
Corporate bonds		12,487		222		11,280		574		23,767		796
Total	$	131,661	$	1,024	$	14,080	$	610	$	145,741	$	1,634

December 31, 2011

	Less Than 12 Months				12 Months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Mortgage-backed securities	$	25,011	$	81	$	2,880	$	36	$	27,891	$	117
SBA-backed securities		62,543		332		—		—		62,543		332
Corporate bonds		11,824		485		13,755		1,515		25,579		2,000
Total	$	99,378	$	898	$	16,635	$	1,551	$	116,013	$	2,449

12

As of March 31, 2012 and December 31, 2011, management concluded that the unrealized losses presented above, which consisted of sixty-four securities at March 31, 2012 and fifty securities at December 31, 2011, are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent to hold these investments for a time necessary to recover their cost and it is not likely that the Bank would be required to sell prior to recovery. The sixty-four securities at March 31, 2012 were comprised of five obligations of states and political subdivisions, fifteen mortgage-backed securities, ten corporate bonds and thirty-four SBA-backed securities. The fifty securities at December 31, 2011 were comprised of twelve mortgage-backed securities, twelve corporate bonds and twenty-six SBA-backed securities. The losses above are on debt securities that have contractual maturity dates and are primarily related to market interest rates. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not affect the expected cash flows of the underlying collateral or the issuer. The Bank’s mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.

At March 31, 2012 and December 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company was $4.3 million and $3.5 million, respectively. On March 28, 2012, FHLB paid a dividend for the fourth quarter of 2011 with an annualized rate of 1.23%. The dividend rate was equal to average three-month LIBOR for the period of October 1, 2011 to December 31, 2011 plus 0.75%, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at March 31, 2012 by remaining contractual maturity are as follows:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Government-sponsored enterprises and FFCB bonds:
Due in one through five years	$	3	$	26
Obligations of states and political subdivisions:
Due in one year or less		150		151
Due in one through five years		960		1,027
Due in five through ten years		20,382		20,723
Due after ten years		11,708		11,885
Mortgage-backed securities:
Due in five through ten years		10,677		10,767
Due after ten years		114,107		115,145
SBA-backed securities:
Due in five through ten years		7,127		7,155
Due after ten years		144,750		145,180
Corporate bonds:
Due in one through five years		17,956		18,018
Due in five through ten years		19,296		18,733
Total securities	$	347,116	$	348,810

13

Securities with an amortized cost of $216.3 million at March 31, 2012 are pledged as collateral. Of this total, securities with an amortized cost of $64.0 million and fair value of $64.4 million are pledged as collateral for FHLB advances.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2011 by remaining contractual maturity are as follows:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Government-sponsored enterprises and FFCB bonds:
Due in one through five years	$	3	$	28
Due in five through ten years		1,000		1,004
Obligations of states and political subdivisions:
Due in one year or less		250		252
Due in one through five years		961		1,033
Due in five through ten years		11,768		12,083
Due after ten years		14,876		15,350
Mortgage-backed securities:
Due in five through ten years		7,415		7,490
Due after ten years		123,534		124,802
SBA-backed securities:
Due in five through ten years		2,967		3,007
Due after ten years		143,228		143,630
Corporate bonds:
Due in one year through five years		13,338		13,081
Due in five through ten years		19,345		17,690
Total securities	$	338,685	$	339,450

Securities with an amortized cost of $197.6 million at December 31, 2011 were pledged as collateral. Of this total, securities with an amortized cost of $47.4 million and fair value of $48.0 million were pledged as collateral for FHLB advances.

14

(6) LOANS

Loans at March 31, 2012 and December 31, 2011 classified by type are as follows (dollars in thousands):

	March 31, 2012		December 31, 2011
Real estate loans:
Construction and land development	$	66,929	$	67,232
Secured by farmland		28,954		29,947
Secured by residential properties		107,772		110,238
Secured by nonfarm, nonresidential properties		201,779		203,287
Consumer installment		5,762		6,485
Credit cards and related plans		1,668		1,660
Commercial and all other loans:
Commercial and industrial		46,414		45,649
Loans to finance agricultural production		21,754		21,524
All other loans		10,421		10,587
		491,453		496,609
Less deferred fees and costs, net		70		67
	$	491,383	$	496,542
Included in the above:
Nonaccrual loans	$	19,406	$	15,973
Restructured loans 1		10,892		10,138

1. Restructured loans include loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans.

15

(6) LOANS, continued

There were no loans outstanding that were past due ninety days or more that were still accruing at March 31, 2012 or December 31, 2011.

The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company’s policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.

The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.

Responsibility for loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan underwriting and approval. This is accomplished through individual lender approval authorities with supervision by Credit Policy Officers who review and approve loans which exceed the lender’s authority. Also, all Special Mention and Classified loans are reviewed quarterly. Detailed, written action plans are updated by the lenders and those plans are reviewed by a joint committee consisting of Regional Managers, Credit Policy Officers, CCO, Commercial Banking Manager and Special Assets Manager.

The following describe the risk characteristics relevant to each of the portfolio segments.

Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.

Construction and land development loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected “as built” appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.

Loans secured by farmland are made to agricultural customers for the purpose of acquisition or improvement of farmland. The loans are typically secured by land which is cultivated for primarily row- crop production and related interests, such as grain elevator facilities and farming operations buildings. Repayment of loans secured by farmland may depend on successful crop production or other farm related operations.

Residential loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. Loans with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years.

Nonfarm and nonresidential loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.

16

Consumer Installment Loans, Credit Cards and Related Plans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.

Commercial and Industrial and Agricultural Loans. Our commercial and industrial loan and loans to finance agriculture includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.

At March 31, 2012 and December 31, 2011, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $51.2 million and $53.2 million, respectively.

Loans with a book value of approximately $24.2 million at March 31, 2012 are pledged as eligible collateral for FHLB advances. Loans with a book value of approximately $25.8 million at December 31, 2011 were pledged as eligible collateral for FHLB advances.

17

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

The following tables summarize the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the quarters ending March 31, 2012 and March 31, 2011, and for the year ending December 31, 2011 (dollars in thousands):

Allowance for Loan Losses

As of and for the Three Months Ended March 31, 2012

Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland			Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion			Total
Beginning balance	$	3,655		$	15		$	2,418		$	1,740		$	46		$	18		$	555		$	115		$	26		$	3,504		$	12,092
Charge-offs		(219	)		(—	)		(102	)		(238	)		(41	)		(3	)		(357	)		(—	)		(52	)		(—	)		(1,012	)
Recoveries		226			—			27			1			1			—			10			—			40			—			305
Provisions		(562	)		—			143			62			144			53			297			7			14			(158	)		—
Ending Balance	$	3,100		$	15		$	2,486		$	1,565		$	150		$	68		$	505		$	122		$	28		$	3,346		$	11,385
Ending Balance: individually evaluated for impairment	$	321		$	—		$	642		$	890		$	—		$	—		$	—		$	—		$	—		$	—		$	1,853
Ending Balance: collectively evaluated for impairment	$	2,779		$	15		$	1,844		$	675		$	150		$	68		$	505		$	122		$	28		$	3,346		$	9,532
Loans
Ending Balance	$	66,820		$	28,900		$	107,912		$	201,567		$	5,890		$	1,668		$	46,434		$	21,770		$	10,422		$	—		$	491,383
Ending Balance: individually evaluated for impairment	$	9,166		$	—		$	7,314		$	16,310		$	—		$	—		$	335		$	—		$	—		$	—		$	33,125
Ending Balance: collectively evaluated for impairment	$	57,654		$	28,900		$	100,598		$	185,257		$	5,890		$	1,668		$	46,099		$	21,770		$	10,422		$	—		$	458,258

18

Allowance for Loan Losses

As of and for the Three Months Ended March 31, 2011

Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland			Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion			Total
Beginning balance	$	6,168		$	28		$	3,450		$	1,007		$	12		$	21		$	882		$	18		$	139		$	1,522		$	13,247
Charge-offs		(1,273	)		(—	)		(449	)		(—	)		(9	)		(9	)		(254	)		(—	)		(66	)		(—	)		(2,060	)
Recoveries		—			—			1			—			2			—			63			—			36			—			102
Provisions		2,692			1			1,000			111			11			177			441			(3	)		21			(521	)		3,930
Ending Balance	$	7,587		$	29		$	4,002		$	1,118		$	16		$	189		$	1,132		$	15		$	130		$	1,001		$	15,219
Ending Balance: individually evaluated for impairment	$	2,113		$	—		$	751		$	594		$	—		$	169		$	362		$	—		$	—		$	—		$	3,989
Ending Balance: collectively evaluated for impairment	$	5,474		$	29		$	3,251		$	524		$	16		$	20		$	770		$	15		$	130		$	1,001		$	11,230
Loans
Ending Balance	$	84,045		$	27,812		$	119,202		$	215,979		$	4,192		$	2,366		$	55,150		$	22,086		$	15,809		$	—		$	546,641
Ending Balance: individually evaluated for impairment	$	15,642		$	—		$	7,285		$	4,573		$	—		$	200		$	843		$	—		$	—		$	—		$	28,543
Ending Balance: collectively evaluated for impairment	$	68,403		$	27,812		$	111,917		$	211,406		$	4,192		$	2,166		$	54,307		$	22,086		$	15,809		$	—		$	518,098

19

Allowance for Loan Losses

As of and for the Year Ended December 31, 2011

Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland			Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion			Total
Beginning balance	$	6,168		$	28		$	3,450		$	1,007		$	12		$	21		$	882		$	18		$	139		$	1,522		$	13,247
Charge-offs		(5,150	)		(—	)		(1,985	)		(1,887	)		(20	)		(294	)		(385	)		(—	)		(237	)		(—	)		(9,958	)
Recoveries		10			—			12			43			5			3			103			—			144			—			320
Provisions		2,627			(13	)		941			2,577			49			288			(45	)		97			(20	)		1,982			8,483
Ending Balance	$	3,655		$	15		$	2,418		$	1,740		$	46		$	18		$	555		$	115		$	26		$	3,504		$	12,092
Ending Balance: individually evaluated for impairment	$	637		$	—		$	480		$	1,181		$	—		$	—		$	165		$	—		$	—		$	—		$	2,463
Ending Balance: collectively evaluated for impairment	$	3,018		$	15		$	1,938		$	559		$	46		$	18		$	390		$	115		$	26		$	3,504		$	9,629
Loans
Ending Balance	$	67,127		$	29,890		$	110,374		$	203,063		$	6,620		$	1,661		$	45,679		$	21,539		$	10,589		$	—		$	496,542
Ending Balance: individually evaluated for impairment	$	10,074		$	—		$	5,514		$	14,029		$	—		$	—		$	561		$	1,111		$	—		$	—		$	31,289
Ending Balance: collectively evaluated for impairment	$	57,053		$	29,890		$	104,860		$	189,034		$	6,620		$	1,661		$	45,118		$	20,428		$	10,589		$	—		$	465,253

20

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings. These indicators are included in the Company’s loan policy which is reviewed and updated at least annually.

Pass: Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.

Weak Pass: Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.

Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The following tables present loans as of March 31, 2012 and December 31, 2011 classified by risk type (dollars in thousands):

Credit Quality Indicators

As of March 31, 2012

	Pass		Weak Pass		Special Mention		Substandard		Total
Real Estate – Construction and Land Development Loans	$	29,928	$	21,389	$	5,639	$	9,864	$	66,820
Real Estate – Secured by Farmland		21,136		3,617		4,147		—		28,900
Real Estate – Secured by Residential Properties		58,227		30,126		11,102		8,457		107,912
Real Estate – Secured by Nonfarm Nonresidential		91,605		68,083		20,178		21,701		201,567
Consumer Installment		3,738		1,782		302		68		5,890
Credit Cards and Related Plans		821		572		273		2		1,668
Commercial and Industrial		25,957		16,536		2,147		1,794		46,434
Loans to Finance Agriculture Production		18,783		2,297		690		—		21,770
All Other Loans		5,940		4,458		24		—		10,422
Total	$	256,135	$	148,860	$	44,502	$	41,886	$	491,383

21

Credit Quality Indicators

As of December 31, 2011

	Pass		Weak Pass		Special Mention		Substandard		Total
Real Estate – Construction and Land Development Loans	$	27,833	$	23,237	$	4,853	$	11,204	$	67,127
Real Estate – Secured by Farmland		22,008		4,430		3,452		—		29,890
Real Estate – Secured by Residential Properties		60,121		31,146		12,302		6,805		110,374
Real Estate – Secured by Nonfarm Nonresidential		90,099		75,384		18,663		18,917		203,063
Consumer Installment		4,025		2,212		254		129		6,620
Credit Cards and Related Plans		850		529		279		3		1,661
Commercial and Industrial		25,133		16,146		2,686		1,714		45,679
Loans to Finance Agriculture Production		16,473		3,290		584		1,192		21,539
All Other Loans		3,171		7,393		25		—		10,589
Total	$	249,713	$	163,767	$	43,098	$	39,964	$	496,542

The following tables summarize the past due loans by category as of March 31, 2012 and December 31, 2011 (dollars in thousands):

Past Due Loans

As of March 31, 2012

	30 -59 Days Past Due		60 -89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
Real Estate Construction and Land Development	$	591	$	79	$	4,791	$	5,461	$	61,359	$	66,820
Real Estate Secured by Farmland		42		—		—		42		28,858		28,900
Real Estate Secured by Residential Properties		1,040		65		1,859		2,964		104,948		107,912
Real Estate Secured by Nonfarm Nonresidential		583		1,377		6,040		8,000		193,567		201,567
Consumer Installment		20		9		—		29		5,861		5,890
Credit Cards and Related Plans		6		—		—		6		1,662		1,668
Commercial and Industrial		64		138		159		361		46,073		46,434
Loans to Finance Agricultural Production		—		—		—		—		21,770		21,770
All Other Loans		—		—		—		—		10,422		10,422
Total	$	2,346	$	1,668	$	12,849	$	16,863	$	474,520	$	491,383
Non-Accrual Loans Included in above Total	$	1,256	$	1,536	$	12,849	$	15,641	$	3,765	$	19,406

22

Past Due Loans

As of December 31, 2011

	30 -59 Days Past Due		60 -89 Days Past Due		Greater than 89 Days(1)		Total Past Due		Current		Total
Real Estate Construction and Land Development	$	447	$	198	$	6,142	$	6,787	$	60,340	$	67,127
Real Estate Secured by Farmland		—		—		—		—		29,890		29,890
Real Estate Secured by Residential Properties		1,055		993		1,278		3,326		107,048		110,374
Real Estate Secured by Nonfarm Nonresidential		2,357		—		4,446		6,803		196,260		203,063
Consumer Installment		65		—		22		87		6,533		6,620
Credit Cards and Related Plans		2		2		—		4		1,657		1,661
Commercial and Industrial		294		—		205		499		45,180		45,679
Loans to Finance Agricultural Production		—		—		—		—		21,539		21,539
All Other Loans		—		—		—		—		10,589		10,589
Total	$	4,220	$	1,193	$	12,093	$	17,506	$	479,036	$	496,542
Non-Accrual Loans Included in above Total	$	1,426	$	588	$	12,093	$	14,107	$	1,866	$	15,973

23

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

The following tables summarize impaired loans as of March 31, 2012, March 31, 2011 and December 31, 2011 (dollars in thousands). The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material amounts.

Impaired Loans

As of and for the Three Months Ended March 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real Estate Construction and Land Development	$	5,776	$	8,508	$	—	$	6,030	$	23
Real Estate Secured by Farmland		—		—		—		—		—
Real Estate Secured by Residential Properties		1,455		1,611		—		1,587		12
Real Estate Secured by Nonfarm Nonresidential		7,723		7,991		—		7,151		34
Consumer Installment		—		—		—		—		—
Credit Cards and Related Plans		—		—		—		—		—
Commercial and Industrial		335		500		—		303		2
Loans to Finance Agricultural Production		—		—		—		586		8
All Other Loans		—		—		—		—		—
Total impaired loans with no related allowance	$	15,289	$	18,610	$	—	$	15,657	$	79
With an allowance recorded:
Real Estate Construction and Land Development	$	3,399	$	3,465	$	321	$	3,904	$	15
Real Estate Secured by Farmland		—		—		—		—		—
Real Estate Secured by Residential Properties		5,867		5,950		642		5,130		39
Real Estate Secured by Nonfarm Nonresidential		8,600		8,829		890		8,775		41
Consumer Installment		—		—		—		—		—
Credit Cards and Related Plans		—		—		—		—		—
Commercial and Industrial		—		—		—		182		2
Loans to Finance Agricultural Production		—		—		—		—		—
All Other Loans		—		—		—		—		—
Total impaired loans with related allowance recorded	$	17,866	$	18,244	$	1,853	$	17,991	$	97
Total
Construction and Land Development	$	9,175	$	11,973	$	321	$	9,934	$	38
Residential		7,322		7,561		642		6,717		51
Commercial		16,658		17,320		890		16,997		87
Consumer		—		—		—		—		—
Total impaired loans	$	33,155	$	36,854	$	1,853	$	33,648	$	176

24

Impaired Loans

As of and for the Three Months Ended March 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real Estate Construction and Land Development	$	6,858	$	10,859	$	—	$	8,534	$	45
Real Estate Secured by Farmland		—		—		—		—		—
Real Estate Secured by Residential Properties		4,406		4,694		—		3,837		15
Real Estate Secured by Nonfarm Nonresidential		1,548		1,546		—		851		6
Consumer Installment		—		—		—				—
Credit Cards and Related Plans		—		—		—		—		—
Commercial and Industrial		393		518		—		434		5
Loans to Finance Agricultural Production		—		—		—		—		—
All Other Loans		—		—		—		—		—
Total impaired loans with no related allowance	$	13,205	$	17,617	$	—	$	13,656	$	71
With an allowance recorded:
Real Estate Construction and Land Development	$	8,792	$	9,796	$	2,112	$	7,622	$	40
Real Estate Secured by Farmland		—		—		—		—		—
Real Estate Secured by Residential Properties		2,885		2,880		751		2,921		11
Real Estate Secured by Nonfarm Nonresidential		3,030		3,095		594		3,402		22
Consumer Installment		—		—		—		—		—
Credit Cards and Related Plans		201		200		170		200		3
Commercial and Industrial		452		451		362		449		6
Loans to Finance Agricultural Production		—		—		—		—		—
All Other Loans		—		—		—		—		—
Total impaired loans with related allowance recorded	$	15,360	$	16,422	$	3,989	$	14,594	$	82
Total
Construction and Land Development	$	15,650	$	20,655	$	2,112	$	16,156	$	85
Residential		7,291		7,574		751		6,758		26
Commercial		5,423		5,610		956		5,136		39
Consumer		201		200		170		200		3
Total impaired loans	$	28,565	$	34,039	$	3,989	$	28,250	$	153

25

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

Impaired Loans

As of December 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Real Estate Construction and Land Development	$	6,280	$	11,137	$	—
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		2,135		2,611		—
Real Estate Secured by Nonfarm Nonresidential		7,075		7,484		—
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		379		500		—
Loans to Finance Agricultural Production		1,109		1,110		—
All Other Loans		—		—		—
Total impaired loans with no related allowance	$	16,978	$	22,842	$	—
With an allowance recorded:
Real Estate Construction and Land Development	$	3,806	$	3,794	$	637
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		3,391		3,382		480
Real Estate Secured by Nonfarm Nonresidential		6,976		6,957		1,181
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		186		186		165
Loans to Finance Agricultural Production		—		—		—
All Other Loans		—		—		—
Total impaired loans with related allowance recorded	$	14,359	$	14,319	$	2,463
Total
Construction and Land Development	$	10,086	$	14,931	$	637
Residential		5,526		5,993		480
Commercial		15,725		16,237		1,346
Consumer		—		—		—
Total impaired loans	$	31,337	$	37,161	$	2,463

26

The following table presents nonaccrual loans as of March 31, 2012 and December 31, 2011 by loan category (dollars in thousands):

Nonaccrual Loans

	March 31, 2012		December 31, 2011
Real Estate Construction and Land Development	$	5,937	$	6,795
Real Estate Secured by Farmland		—		—
Real Estate Secured by Residential Properties		2,263		2,113
Real Estate Secured by Nonfarm Nonresidential		10,898		6,767
Consumer Installment		8		22
Credit Cards and Related Plans		—		—
Commercial and Industrial		300		276
Loans to Finance Agricultural Production		—		—
All Other Loans		—		—
Total	$	19,406	$	15,973

Interest income not recognized due to loans being on nonaccrual status during the quarters ended March 31, 2012 and March 31, 2011 was approximately $248 thousand and $205 thousand, respectively.

Troubled Debt Restructurings

Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as “troubled debt restructurings” or “TDRs”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Company identified no loans as TDRs which the allowance for loan losses had previously been measured under a general allowance methodology. TDRs are treated as impaired loans in determining the adequacy of the allowance for loan loss.

For the quarters ended March 31, 2012 and March 31, 2011 the following table presents a breakdown of the types of concessions made by loan class. The recorded investment balances presented are balances at the time of concessions.

	March 31, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Below market interest rate:
Real Estate Secured by Residential Properties		1	$	1,943	$	1,943
	March 31, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Below market interest rate:
Real Estate Secured by Residential Properties		1	$	219	$	219
Real Estate Secured by Nonfarm Nonresidential		1	$	1,145	$	1,145
Total		2	$	1,364	$	1,364

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The following table presents the successes and failures during the quarter of loans modified by the types of modifications during the twelve months prior to March 31, 2012. The recorded investment balances presented are as of March 31, 2012.

	Paid in Full				Paying as Restructured				Converted to Non-accrual				Foreclosure/Default
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(Dollars in thousands)
Below market interest rate		—	$	—		4	$	3,520		1	$	622		—	$	—
Extended payment terms		—		—		9		2,889		—		—		—		—
Forgiveness of principal		—		—		—		—		—		—		—		—
Total	$	—	$	—		13	$	6,409		1	$	622	$	—	$	—

There was one loan with a recorded investment of $169 thousand that is included in paying as restructured in the table above that was placed on non-accrual in a prior period. While the loan was not ninety days past due, it was moved into nonaccrual status due to payment concerns. There were no loans that were restructured during the year ending on March 31, 2012 that were ninety or more past due and therefore had a payment default.

(8) Benefit Plans

Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the three months ended March 31, 2012 and 2011 includes the following components.

	Three months ended March 31,
Components of Net Periodic Benefit Cost	2012		2011
	(Dollars in thousands)
Service cost	$	2	$	2
Interest cost		9		9
Prior service cost		—		—
Amortization of (gain) loss		3		—
Net periodic postretirement benefit cost	$	14	$	11

The Company expects to contribute $56 thousand to its postretirement benefit plan in 2012. No contributions were made in the first quarter of 2012.

Stock Option and Restricted Option Plans

During the quarter ended March 31, 2012 19,556 stock options were forfeited. There was no other activity during the quarter.

(9) Fair Value Of Financial Instruments

Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.

28

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2012 and December 31, 2011. For short-term financial assets such as cash and cash equivalents, accrued interest receivable and loans held for sale the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, savings deposits, short-term borrowing and accrued interest payable the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

The fair value of investment securities available-for-sale are recorded at fair value utilizing Level 1, Level 2 and Level 3 inputs and is described in more detail below.

The fair value of net loans is based on estimated 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. This does not include consideration of liquidity that market participants would use to value such loans. The estimated fair values of time deposits and long-term obligations are based on estimated cash flows discounted at market interest rates.

The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.

29

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011:

	March 31, 2012
	Carrying Amount		Fair Value		Fair Value Measurements Using
(Dollarss in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	12,070	$	12,070	$	12,070	$	—	$	—
Investment securities		348,810		348,810		158,134		188,887		1,789
FHLB stock		4,279		4,279		—		3,532		—
Accrued interest receivable		4,984		4,984		—		4,984		—
Net loans		479,998		478,078		—		—		478,078
Loans held for sale		3,310		3,310		—		3,310		—
Liabilities
Demand, noninterest bearing deposits	$	134,828	$	134,828	$	—	$	134,828	$	—
Demand, interest-bearing deposits		277,520		277,520		—		277,520		—
Savings deposits		57,656		57,656		—		57,656		—
Time deposits		302,593		309,067		—		309,067		—
Accrued interest payable		457		457		—		457		—
Short-term borrowing		39,218		39,218		—		39,218		—
Long-term borrowing		18,000		18,722		—		18,722		—

	December 31, 2011
	Carrying Amount		Fair Value		Fair Value Measurements Using
(Dollarss in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	24,731	$	24,731	$	24,731	$	—	$	—
Investment securities		339,450		339,450		151,714		186,094		1,642
FHLB stock		3,456		3,456		—		3,456		—
Accrued interest receivable		5,308		5,308		—		5,308		—
Net loans		484,450		482,851		—		—		482,851
Loans held for sale		2,866		2,866		—		2,866		—
Liabilities
Demand, noninterest bearing deposits	$	135,732	$	135,732	$	—	$	135,732	$	—
Demand, interest-bearing deposits		270,119		270,119		—		270,119		—
Savings deposits		55,517		55,517		—		55,517		—
Time deposits		336,277		343,374		—		343,374		—
Accrued interest payable		519		519		—		519		—
Short-term borrowing		11,679		11,679		—		11,679		—
Long-term borrowing		25,500		26,296		—		26,296		—

30

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

There were no changes to the techniques used to measure fair value during the period.

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Mortgage Banking Activity

The Company enters into interest rate lock commitments and commitments to sell mortgages. At March 31, 2012 and December 31, 2011, the amount of fair value associated with these interest rate lock commitments was $111 thousand and $76 thousand, respectively, which is included in other assets. Fair value associated with the interest rate lock commitments are classified as Level 3 measurements due to the use of significant management judgment and estimation. Forward loan sale commitments have been deemed insignificant for both periods.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, the majority of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. The fair values of impaired loans are generally based on judgment and therefore are considered to be level 3 assets.

Real Estate and Repossessions Acquired in Settlement of Loans

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair

31

value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. The fair values of foreclosed assets are generally based on judgment and therefore are considered to be level 3 assets.

32

Assets recorded at fair value on a recurring basis

March 31, 2012	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	26	$	—	$	26	$	—
Obligations of states and political subdivisions		33,786		—		33,786		—
Mortgage-backed securities		125,912		10,885		115,027		—
SBA-backed securities		152,335		147,249		5,086		—
Corporate bonds		36,751		—		34,962		1,789
Total Securities	$	348,810	$	158,134	$	188,887	$	1,789
Interest rate lock commitments	$	111	$	—	$	—	$	111
Total assets at fair value	$	348,921	$	158,134	$	188,887	$	1,900

December 31, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment Securities Available-for-Sale
Government-sponsored enterprises and FFCB bonds	$	1,032	$	—	$	1,032	$	—
Obligations of states and political subdivisions		28,718		6,752		21,966		—
Mortgage-backed securities		132,292		—		132,292		—
SBA-backed securities		146,637		144,962		1,675		—
Corporate bonds		30,771		—		29,129		1,642
Total Securities	$	339,450	$	151,714	$	186,094	$	1,642
Interest rate lock commitments	$	76	$	—	$	—	$	76
Total assets at fair value	$	339,526	$	151,714	$	186,094	$	1,718

33

Assets recorded at fair value on a nonrecurring basis

March 31, 2012	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	7,302	$	—	$	—	$	7,302
Real estate—secured by residential properties		5,478		—		—		5,478
Real estate—secured by nonfarm nonresidential properties		8,776		—		—		8,776
Commercial and industrial		135		—		—		135
Total impaired loans	$	21,691	$	—	$	—	$	21,691
Real estate and repossessions acquired in settlement of loans
Total real estate and repossessions acquired in settlement of loans	$	7,906	$	—	$	—	$	7,906
Total assets at fair value	$	29,597	$	—	$	—	$	29,597
December 31, 2011	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Impaired Loans
Real estate—construction and land development	$	9,169	$	—	$	—	$	9,169
Real estate—secured by residential properties		3,893		—		—		3,893
Real estate—secured by nonfarm nonresidential properties		8,805		—		—		8,805
Commercial and industrial		196		—		—		196
Total impaired loans	$	22,063	$	—	$	—	$	22,063
Real estate and repossessions acquired in settlement of loans
Real estate and repossessions acquired in settlement of loans	$	6,573	$	—	$	—	$	6,573
Total assets at fair value	$	28,636	$	—	$	—	$	28,636

34

As of March 31, 2012 there were $6.6 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2011. These obligations of states and political subdivisions were transferred from Level 1 to Level 2 during the first quarter of 2012 because the December 31, 2011 pricing was based on the Company’s actual trades for the securities at initial purchase while the March 31, 2012 pricing was through a pricing system.

During the first quarter of 2012 and 2011 there were no investment securities transferred in or out of Level 3. The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first quarter of 2012 and the first quarter of 2011.

	Corporate Bonds			Interest Rate Lock Commitments			Total
	(Dollars in thousands)
Balance, December 31, 2011	$	1,642		$	76		$	1,718
Total gains or losses (realized/unrealized):
Included in earnings		—			35			35
Included in other comprehensive income		147			—			147
Purchases, issuances, and settlements		—			—			—
Transfers in to/out of Level 3		—			—			—
Balance, March 31, 2012	$	1,789		$	111		$	1,900
	Corporate Bonds			Interest Rate Lock Commitments			Total
	(Dollars in thousands)
Balance, December 31, 2010	$	1,716		$	101		$	1,817
Total gains or losses (realized/unrealized):
Included in earnings		—			(6	)		(6	)
Included in other comprehensive income		(392	)		—			(392	)
Purchases, issuances, and settlements		—			—			—
Transfers in to/out of Level 3		—			—			—
Balance, March 31, 2011	$	1,324		$	95		$	1,419

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

Level 3 Assets with Significant Unobservable Inputs	Fair Value At 3/31/2012		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Corporate Bonds	$	916	Fundamental Analysis Pricing Model	Spread		+500/7 yr BB Finance Paper
				Yield		10.92	%
Corporate Bonds		873	Fundamental Analysis Pricing Model	Spread		+100/7 yr BB Finance Paper
				Yield		6.92	%
				Discount Margin		635
Interest Rate Lock Commitments		111	Pricing Model	Weighted average Closing Ratio		90	%
Impaired Loans		21,691	Discounted appraisals(1)	Appraisal  adjustments(2)		8% to 86%
OREO		7,906	Discounted appraisals(1)	Appraisal adjustments(2)		4% to 70%

(1) Fair value is generally based on appraisals of the underlying collateral but is also based on discounted cash flows for some loans.

(2) Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

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The significant unobservable inputs used in the fair value measurement of the Company’s Corporate Bonds are the yield expected to be earned on the bonds and the spread. The yield is applied to a discounted cash flow in order to arrive at a price and corresponding market value. A discount margin represents a spread over the floating rate index. Spread represents an additional yield that is applied over a comparable security or curve (such as the treasury curve). Yield of the comparable or curve plus the “spread” in basis points is equal to the yield or discount rate applied in a discounted cash flow in order to arrive at a price and corresponding market value. The spread is based on various factors such as liquidity, earning history and capital ratios.

The significant unobservable input used in the fair value measurement of the Company’s interest rate lock commitments (IRLC) is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate. The fair value would be negative if the prevailing rate was higher. When a higher percentage of loans are estimated to close, the increase in the closing ratio will result in a positive effect to fair value. The closing ratio is dependent upon the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock.

Impaired loans and real estate and repossessions acquired in settlement of loans classified as Level 3 are based are management judgment and estimation.

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(10) U.S. Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program

On January 16, 2009, we issued Series A Preferred Stock in the amount of $17,949,000 and a warrant to purchase 144,984 shares of our common stock to the U.S. Treasury as a participant in the TARP Capital Purchase Program. The Series A Preferred Stock qualifies as Tier 1 capital for purposes of regulatory capital requirements and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Prior to January 16, 2012, unless we have redeemed all of this preferred stock or the U.S. Treasury has transferred all of this preferred stock to a third party, the consent of the U.S. Treasury will be required for us to, among other things, increase our common stock dividend above $0.1825 per share or repurchase our common stock except in limited circumstances. In addition, until the U.S. Treasury ceases to own our securities sold under the TARP Capital Purchase Program, the compensation arrangements for our senior executive officers must comply in all respects with the U.S. Emergency Economic Stabilization Act of 2008 and the rules and regulations thereunder.

(11) Regulatory Matters

Bancorp’s and the Bank’s actual capital ratios for purposes of bank regulatory capital guidelines are presented in the following table:

	Ratio required to be well capitalized under prompt corrective action provisions			Minimum ratio required for capital adequacy purposes			Bancorp’s Ratio			Bank’s Ratio
As of March 31, 2012:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.23	%		8.23	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		12.39			12.39
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.65			13.65
As of December 31, 2011:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.25	%		8.25	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		12.59			12.59
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.85			13.85
As of March 31, 2011:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.42	%		8.42	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		11.97			11.97
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.24			13.24

During April 2011, the Bank’s Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take various actions designed to address issues related to the Bank’s operations. The Resolution provides that, among other things, the Bank will (1) establish and continue to maintain an adequate reserve for loan losses, and review the adequacy of the reserve with the Board prior to each quarter-end and make appropriate provisions to the reserve; (2) in order to maintain sufficient capital levels, establish and document a prudent policy regarding cash dividends the Bank pays to Bancorp, document an analysis of amounts to be paid by each quarter-end prior to payment, and not pay any cash dividend to Bancorp without seeking the prior approval of the FDIC and N.C. Commissioner of Banks; (3) implement various recommendations regarding risk management policies and practices for the Bank’s funds management and investment functions; (4) provide for the internal audit program to include a review and coverage of activities sufficient to determine compliance with the Bank’s policies, applicable laws and regulations and sound banking principles, and identification of audit personnel who periodically report directly to the Board; (5) correct or eliminate various credit administration weaknesses and establish an effective credit administration function, and ascertain that all necessary supporting documentation is obtained and evaluated before loans are extended; and (6) correct violations of and ensure further compliance with applicable laws, rules and regulations.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements in this Report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available through our Internet website at www.myecb.com or directly through the Commission’s website at www.sec.gov. Forward-looking statements in this Report may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “feels,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, (a) pressures on our earnings, capital and liquidity resulting from current and future conditions in the credit and equity markets, (b) continued or unexpected increases in credit losses in our loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets; (h) weather and similar conditions, particularly the effect of hurricanes on our banking and operations facilities and on our customers and the communities in which we do business; and (i) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements in this Report are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and we do not intend, to update these forward-looking statements.

Executive Summary

ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the “Bank”), is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, “we,” “us” and “our” refers to the Bank and the bank holding company as a single, consolidated entity unless the context otherwise indicates.

As of March 31, 2012, we had consolidated assets of approximately $916.3 million, total loans of approximately $491.4 million, total deposits of approximately $772.6 million and shareholders’ equity of approximately $81.2 million. For the three months ended March 31, 2012, we had a net income attributable to common shareholders of $0.1 million or $0.04 basic and diluted earnings per share, compared to loss available to common shareholders of $1.3 million, or $0.47 basic and diluted loss per share for the three months ended March 31, 2011.

Recent Developments

During April 2011, the Bank’s Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take various actions designed to address issues related to the Bank’s operations. More detailed information is described in Note 11 of the unaudited consolidated financial statements included in Item 1 of this Report.

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Critical Accounting Policies

The Company’s accounting policies are in accordance with accounting principles generally accepted in the United States and with general practices within the banking industry. Our significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2011. Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuations, postretirement and benefit plan accounting and income taxes.

We consider our policy regarding the allowance for loan losses to be our most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not currently known to management. For additional discussion concerning our allowance for loan losses and related matters, see “—Asset Quality” and “—Nonperforming Assets.” Other real estate acquired through the settlement of loans is carried at fair value less cost to sell. Management relies on outside appraisals and estimates of costs of disposal in determining this value. The actual disposal value could vary from this fair value estimate.

The determination of retirement plans and other postretirement benefit plans requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities. Our retirement plans and other postretirement benefit plans are actuarially determined based on assumptions on the discount rate and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs could have a material impact to our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year.

Management seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.

Comparison of the Results of Operations for the Three Month Periods Ended March 31, 2012 and 2011

Results of Operations

The following table summarizes components of income and expense and the changes in those components for the three-month period ended March 31, 2012 as compared to the same period in 2011.

Condensed Consolidated Results of Operations

	For the Three  months ended March 31, 2012			For the Three  months ended March 31, 2011			Changes from the Prior Year
							Amount			%
	(Dollars in thousands)
Gross interest income	$	8,499		$	9,438		$	(939	)		(9.9	)
Gross interest expense		1,971			2,670			(699	)		(26.2	)
Net interest income		6,528			6,768			(240	)		(3.5	)
Provision for loan losses		—			3,930			(3,930	)		(100.0	)
Net interest income after provision for loan losses		6,528			2,838			3,690			130.0
Noninterest income		1,739			1,431			308			21.5
Noninterest expense		7,918			6,244			1,674			26.8
Income (loss) before income taxes		349			(1,975	)		2,324			(117.7	)
Income tax benefit		(28	)		(891	)		863			(96.9	)
Net income (loss)	$	377		$	(1,084	)		1,461			(134.8	)
Preferred stock dividend and accretion of discount		265			265			—			—
Net income (loss) available to common shareholders	$	112		$	(1,349	)	$	1,461			(108.3	)

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Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended March 31, 2012 was $6.5 million compared to $6.8 million for the three months ended March 31, 2011.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as non-interest-bearing deposits.

Interest income decreased $939 thousand or 9.9% for the three months ended March 31, 2012 compared to the same three months of 2011. The decrease for the three months ended March 31, 2012 is mainly due to the decrease in the volume of loans and decrease in rates on securities which was partially offset by an increase in the volume of securities. Average earning assets remained flat for the quarter ending on March 31, 2012 as compared to the same period in 2011. The tax equivalent yield on average earning assets decreased 43 basis points for the quarter ended March 31, 2012 to 4.17% from 4.60% for the same period in 2011. Management attributes the decrease in the yield on our earning assets to the continued low level of short-term market interest rates and the decline in volume of higher yielding loans which were replaced by lower yielding taxable securities. Yields on our taxable securities decreased approximately 56 basis points for the first quarter of 2012 as compared to the same period last year as additional securities have been purchased at lower yields and securities sold, called or matured have been replaced with lower yielding securities.

Our average cost of funds during the first quarter of 2012 was 1.14%, a decrease of 35 basis points when compared to 1.49% for the first quarter of 2011. Average rates paid on bank certificates of deposit decreased 27 basis points from 1.89% for the quarter ended March 31, 2011 to 1.62% for the quarter ended March 31, 2012, while our average cost of borrowed funds decreased 66 basis points during the first quarter of 2012 compared to the same period in 2011. The decrease in the average cost of borrowed funds occurred because there was a larger percentage of short-term obligations to total borrowing during the first quarter of 2012 as compared to the same period in 2011. Total interest expense decreased $699 thousand or 26.2% during the first quarter of 2012 compared to the same period in 2012, primarily the result of decreased market rates paid on certificates of deposit.

The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.

Our annualized net interest margin, on a tax-equivalent basis, for the three months ended March 31, 2012 was 3.22% compared to 3.30% in the first quarter of 2011 while our net interest spread decreased 8 basis points to 3.03% for the three months ended March 31, 2012 compared to 3.11% during that same period in 2011. The decrease in our net interest margin is mainly the result of decreased average yield of 56 basis points earned on our taxable securities. Average interest-bearing liabilities, as a percentage of interest-earning assets for the quarters ended March 31, 2012 and 2011 was 83.9% and 86.4%, respectively.

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Average Consolidated Balance Sheets and Net Interest Analysis Fully on Tax Equivalent Basis

For the three months ended

	March 31, 2012							March 31, 2011
	Average Balance		Yield/ Rate(5)			Income/ Expense		Average Balance		Yield/ Rate(5)			Income/ Expense
	(Dollars in thousands)
Assets
Loans – net (1)	$	481,586		5.36	%	$	6,369	$	547,223		5.45	%	$	7,357
Taxable securities		321,525		2.39	%		1,893		267,627		2.95	%		1,946
Non-taxable securities (2)		32,135		4.49	%		356		12,646		6.22	%		194
Other investments		3,376		0.24	%		2		11,162		0.25	%		7
Total interest- earning assets		838,622		4.17	%	$	8,620		838,658		4.60	%	$	9,504
Cash and due from banks		13,118							13,327
Bank premises and equipment, net		26,335							26,773
Other assets		39,460							34,446
Total assets	$	917,535						$	913,204
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	650,909		1.10	%	$	1,771	$	678,570		1.45	%	$	2,421
Short-term borrowings		28,779		1.14	%		81		13,328		2.10	%		69
Long-term obligations		24,099		2.00	%		119		32,811		2.22	%		180
Total interest- bearing liabilities		703,787		1.14	%		1,971		724,709		1.49	%		2,670
Non-interest-bearing deposits		126,716							101,887
Other liabilities		5,829							5,949
Shareholders’ equity		81,203							80,659
Total liabilities and shareholders’ equity	$	917,535						$	913,204
Net interest income and net interest margin (FTE) (3)				3.22	%	$	6,649				3.30	%	$	6,834
Interest rate spread (FTE) (4)				3.03	%						3.11	%

(1) Average loans include non-accruing loans, net of allowance for loan losses and loans held for sale.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $121 thousand and $66 thousand for periods ended March 31, 2012 and 2011, respectively.

(3) Net interest margin is computed by dividing net interest income by average total earning assets.

(4) Interest rate spread equals the average yield on total earning assets minus the average rate paid on total interest-bearing liabilities.

(5) Annualized

The following table presents the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by us on those assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.

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Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended March 31, 2012 and 2011

Increase (Decrease) in interest income and expense due to changes in:

	2012 compared to 2011
	Volume (1)			Rate (1)			Net
	(Dollars in thousands)
Loans	$	(875	)	$	(113	)	$	(988	)
Taxable securities		355			(408	)		(53	)
Non-taxable securities (2)		257			(95	)		162
Other investments		(5	)		—			(5	)
Interest income		(268	)		(616	)		(884	)
Interest-bearing deposits		(87	)		(563	)		(650	)
Short-term borrowings		62			(50	)		12
Long-term obligations		(45	)		(16	)		(61	)
Interest expense		(70	)		(629	)		(699	)
Net interest income	$	(198	)	$	13		$	(185	)

(1) The combined rate/volume variance for each category has been allocated equally between rate and volume variances.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $121 thousand and $66 thousand for periods ended March 31, 2012 and 2011, respectively.

Provision for Loan Losses

There was no provision for loan losses charged to operations during the three months ended March 31, 2012 compared to $3.9 million charged to operations during the three months ended March 31, 2011. No additional reserve provision was necessary, primarily due to the decrease in total loans outstanding, reduced charge-off levels, and adjustments for loan loss migrations within the portfolio as previously announced. The Bank had net charge-offs of $0.7 million for the quarter ended March 31, 2012 compared to net charge-offs of $2.0 million during the first quarter of 2011. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary.

Noninterest Income

Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the three months ended March 31, 2012 and 2011.

	Three months ended					Percent Change
	March 31, 2012		March 31, 2011
	(Dollars in thousands)
Service charges on deposit accounts	$	857	$	765			12.0	%
Other service charges and fees		329		244			34.8
Mortgage origination fees		406		326			24.5
Net gain on sale of securities		45		26			73.1
Income from bank owned life insurance		101		74			36.5
Other operating income (expense)		1		(4	)		(125.0	)
Total noninterest income	$	1,739	$	1,431			21.5	%

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Noninterest income decreased $0.3 million or 21.5% to $1.7 million for the three months ended March 31, 2012 compared to $1.4 million for the same period in 2011. The increase is mainly due to an increase in service charges on deposit accounts of $92 thousand mainly from an increase in cardholder fees. Other service charges and fees increased $85 thousand or 34.8% in the first quarter of 2012 relative to the same period in 2011 mainly due to an increase in merchant fee income. Net gains on the sale of securities were $45 thousand in the first quarter of 2012 compared to net gains of $26 thousand in the first quarter of 2011. Mortgage origination fees increased $80 thousand or 24.5% in the first quarter 2012 compared to the same period in 2011.

Noninterest Expense

Noninterest expense increased $1.7 million to $7.9 million for the three months ended March 31, 2012 as compared to $6.2 million for the three months ended March 31, 2011. The following table presents the components of noninterest expense for the three months ended March 31, 2012 and 2011.

	Three months ended				Percent Change
	March 31, 2012		March 31, 2011
	(Dollars in thousands)
Salaries	$	2,919	$	2,564		13.8	%
Retirement and other employee benefits		1,103		676		63.2
Occupancy		530		483		9.7
Equipment		590		559		5.7
Professional fees		219		271		(19.2	)
Supplies		74		51		45.1
Communications/data lines		198		169		17.2
FDIC Insurance		204		326		(37.4	)
Data processing and related expenses		396		70		465.7
Other outside services		100		181		(44.8	)
Net cost of real estate and repossessions acquired in settlement of loans		684		18		(3,700.0	)
Other operating expenses		901		876		2.9
Total noninterest expenses	$	7,918	$	6,244		26.8	%

Salary expense for the three months ended March 31, 2012 increased $355 thousand compared to the same prior year period. During 2011, we continued to expand the Bank’s infrastructure to support asset growth as outlined in our five-year strategic plan and implemented several initiatives to improve our customer service delivery. While the following initiatives took place in 2011 their full impact was not reflected in the first quarter of 2011. A portion of the increase in salary expense can be attributed to the successful implementation of a fully staffed and functioning Customer Care Center that manages various communication channels and contact points for the customer. This allows customers to utilize phone, email, website and online banking to receive immediate responses to questions they have regarding their Bank accounts or other services offered by the Bank. The Customer Care Center is part of the Bank’s continued development of its Customer Experience strategy designed to focus on improving the experience customers have, whether it be interacting with a branch or the many “banking channels” offered to maintain their banking relationship with ECB. We also made staff additions to our Agriculture Lending business unit during 2011 as we continue to expand our presence and expertise to capture attractive lending opportunities within our eastern North Carolina footprint. Expansion of our Bank support infrastructure came in several forms during 2011, the Bank added additional staff in the areas of Information Technology, Risk Management, Asset Review, Human Resources, Training, Marketing and Special Assets. As of March 31, 2012, we had 250 full time equivalent employees and operated 25 full service banking offices and one mortgage loan origination office. As of March 31, 2011, we had 238 full time equivalent employees and operated 25 full service banking offices and one mortgage loan origination office.

Employee related benefits expense for the three months ended March 31, 2012 increased $427 thousand over the same prior year period. The increase for the three months ended March 31, 2012 is principally due to an increase in supplemental employee retirement plan expense.

43

Occupancy expense increased $47 thousand or 9.7% to $530 thousand in the first three months of 2012 compared to $483 thousand in the prior year period. The largest components of the increase in the first quarter of 2012 relative to the same period of 2011 were building repair and maintenance expense which increased $19 thousand .

Equipment expense increased during the first three months of 2012 by $31 thousand or 5.5% compared to the first quarter of 2011. The largest component of the increase was equipment and software maintenance expense, which increased $40 thousand.

Professional fees, which include audit, legal and consulting fees, decreased $52 thousand or 19.2% to $219 thousand for the three months ended March 31, 2012 from $271 thousand in the prior year period. The decrease is mainly the result of a decline in audit fees which was offset by an increase in consulting fees. Audit fees decreased approximately $78 thousand and legal fees decreased approximately $10 thousand, while consulting fees increased approximately $36 thousand during the first quarter of 2012 compared to the same period in 2011.

Other outside services expense decreased during the first three months of 2012 by $81 thousand or 44.8% compared to the first quarter of 2011. The increase is the result of additional services contracted for in the first quarter of 2012 as compared to the prior year period.

FDIC insurance expense decreased $ $122 thousand for the three months ended March 31, 2012 compared to the same period last year mainly due to a change made by the FDIC in its assessment calculations.

Data processing services expense, which primarily consist of check and deposit item processing, nightly update of loan, deposit and general ledger balances, ATM/ EFT network management and On-line Banking, for the three months ended March 31, 2012 was $396 thousand compared to $70 thousand for the three months ended March 31, 2011. In May of 2011, the Bank outsourced all of its core bank data processing under agreement with InfoTech Alliance Bank Services (“ITA”) using the FIS integrated HORIZON banking system. Prior to the core system conversion in May, the Bank only outsourced its item processing through ITA while maintaining an in-house core processing system, ATM/EFT network and On-line Banking package. During the first quarter of 2011, expense related to our On-line Banking totaled approximately $55 thousand and was included in Other Outside Services. Our first quarter 2011 expense for our ATM/EFT network management totaled approximately $66 thousand and was included in Other Operating Expense. In addition, the Bank implemented a number of ancillary systems including an advanced data reporting interface, customer relationship management system, fraud monitoring system, teller system, and real-time online banking among others. These additional systems also added to the increase in data processing services expense in the first quarter of 2012 when compared to 2011.

Net cost of real estate and repossessions acquired in settlement of loans expense increased $666 thousand to $684 thousand in the first quarter of 2012 compared to $18 thousand in the same period in 2011. The increase is mainly attributable to impairments of real estate and repossessions acquired in settlement of loans of $446 thousand during the first quarter of 2012.

Income Taxes

Income tax benefit for the three months ended March 31, 2012 and 2011 was $28 thousand and $891 thousand, respectively, resulting in effective tax rates of (8.0%) and 45.1%, respectively. Deferred tax assets are recognized for temporary deductible differences and operating loss and tax credit carryforwards. A valuation allowance is established when it is more likely than not that all or some portion of the deferred tax asset will not be realized. Evaluating the need for and amount of a valuation allowance requires judgment and analysis of the positive and negative evidence. Included in our analysis, which receives significant weight,is the 3-year cumulative loss test. The cumulative loss test calculates the cumulative pre-tax income (loss) over the preceding twelve quarter period. If the Company is in a cumulative loss position, management performs an evaluation of the positive and negative evidence to determine whether a valuation allowance is necessary. As of March 31, 2012, the Company did not pass the cumulative loss test by $2.7 million. Management has evaluated, among other factors, projected future earnings, credit quality trends, taxable temporary differences and the cause and probability of recurrence of those circumstances leading to current taxable losses in evaluating the need for a valuation allowance.

As of March 31, 2012, our recorded net deferred tax asset was $7.0 million and at this time management has concluded that the net deferred tax asset is fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset and need for valuation allowance. Significant negative trends in credit quality, losses from operations, or significant deviations from forecasted future financial results could impact our ability to realize the deferred tax asset in the future.

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Financial Condition

Balance Sheet

Our total assets were $916.3 million at March 31, 2012, $921.3 million at December 31, 2011 and $916.6 million at March 31, 2011. For the twelve months ended March 31, 2012, our loans declined $55.2 million and our deposits declined by approximately $14.2 million. Year-over-year, our earning assets declined but this minimized mainly through an increase in available-for-sale investment securities as these securities increased by approximately $43.8 million. For the three months ended March 31, 2012, our loans declined $5.1 million or 1.0% and our deposits declined $25.0 million or 3.1%.

Loans

As of March 31, 2012, total loans declined $5.1 million to $491.4 million, from total loans of $496.5 million at December 31, 2011 and down $55.2 million or 10.1% from total loans of $546.6 million at March 31, 2011. The decline in loans year over year and for the three months ending March 31, 2012 can be attributed to continued weak economic conditions.

Asset Quality

At March 31, 2012, our allowance for loan losses as a percentage of loans was 2.32%, down from 2.78% at March 31, 2011. The decrease can be attributable to a significant decline in the outstanding balance of construction and land development as well as commercial and industrial loans. Additionally, the overall risk grade of the remaining loans within these segments has improved. Given the significance of historical loss rates attributable to these loan segments, the declining loan balances and improved average risk grades had a substantial impact on our general reserves. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Bank’s allowance for loan losses is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While we believe that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Unsecured loans are charged-off in full against the Bank’s allowance for loan losses as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.

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Net charge-offs for the first quarter of 2012 totaled $0.7 million compared to net charge-offs of $2.0 million during the first quarter of 2011. There was no provision for loan losses charged to operations for the three months ended March 31, 2012 and $3.9 million for the three months ended March 31, 2011. The following table presents an analysis of the changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011.

Analysis of Changes in Allowance for Loan Losses

	For the three months Ended March 31,
	2012			2011
	(Dollars in thousands)
Total loans outstanding at end of period-gross	$	491,453		$	546,641
Average loans outstanding-gross	$	491,333		$	558,264
Allowance for loan losses at beginning of period	$	12,092		$	13,247
Loans charged-off:
Real estate		559			1,722
Installment loans		41			9
Credit cards and related plans		3			9
Commercial and all other loans		409			320
Total charge-offs		1,012			2,060
Recoveries of loans previously charged-off:
Real estate		254			1
Installment loans		1			2
Credit cards and related plans		—			—
Commercial and all other loans		50			99
Total recoveries		305			102
Net charge-offs		707			1,958
Provision for loan losses		—			3,930
Allowance for loan losses at end of period	$	11,385		$	15,219
Ratios
Annualized net charge-offs to average loans during the period		0.58	%		1.40	%
Allowance for loan losses to loans at period end		2.32	%		2.78	%
Allowance for loan losses to nonperforming loans at period end		38	%		69	%

The ratio of annualized net charge-offs to average loans decreased to 0.58% at March 31, 2012 from 1.40% at March 31, 2011 mainly due to a decrease in real estate related charge-offs. The decrease in the allowance for loan losses to loans to 2.32% at March 31, 2012 from 2.78% at March 31, 2011 reflects the decrease in our historical loss rate as our charge-offs have decreased during the most recent quarter. The ratio of our allowance for loan losses to nonperforming loans decreased to 38% as of March 31, 2012 compared to 69% at March 31, 2011.

Construction, land and development (“CLD”) loans make up 13.6% of the Bank’s loan portfolio. This sector of the economy has been particularly impacted by declines in housing activity, and has had a disproportionate impact on the Bank’s credit quality. The table below shows trends of CLD loans, along with ratios relating to their relative credit quality.

	CLD Loans						All Other Loans						Total Loans
	Balance			% of Total			Balance			% of Total
	(Dollars in thousands)
Balances at March 31, 2012	$	66,820			13.6	%	$	424,563			86.4	%	$	491,383
Impaired loans		9,175			27.7	%		23,980			72.3	%		33,155
Allocated Reserves		3,100			38.6	%		4,939			61.4	%		8,039
YTD Net Charge-offs		(7	)		(1.0	)%		714			101.0	%		707
Nonperforming loans (NPL)		7,893			26.1	%		22,405			73.9	%		30,298
NPL as % of loans		11.8	%					5.3	%					6.2	%

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While balances of CLD loans make up 13.6% of the Bank’s loan portfolio, they represent 27.7% of the Bank’s impaired loans . CLD loans represent 26.1% of the Bank’s nonperforming loans and 38.6% of the Bank’s allocated reserves are allocated to CLD loans.

Nonperforming Assets

The following table summarizes our nonperforming assets at the dates indicated.

	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Non-accrual loans	$	19,406	$	15,973
Loans past due 90 days or more still accruing		—		—
Restructured loans		10,892		9,596
Other real estate owned & repossessions		7,906		6,573
Other nonperforming assets (1)		1,427		1,427
Total	$	39,631	$	33,569

(1) The other nonperforming asset of $1.4 million represents the movement of a foreclosed participation loan into a separate LLC for liability purposes. It is a single purpose LLC set up specifically by the lending group to handle the disposition of the property. Proper approvals for this arrangement had to be obtained in advance from the NC Commissioner of Banks.

Nonperforming assets consist of loans not accruing interest, loans past due ninety days and still accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on non-accrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. Nonperforming assets were $39.6 million and $33.6 million, or 4.33% and 3.64% of total assets at March 31, 2012 and December 31, 2011, respectively. On March 31, 2012 and December 31, 2011 our nonperforming loans (consisting of non-accruing loans, loans past due ninety days and still accruing interest and restructured loans) amounted to approximately $30.3 million and $25.6 million, respectively. We had $7.9 million in other real estate owned and repossessions at March 31, 2012 compared to $6.6 million at December 31, 2011. We also had $1.4 million in other nonperforming assets at both March 31, 2012 and December 31, 2011 as described above.

Loans Considered Impaired

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At March 31, 2012, we had loans totaling $33.1 million (which includes $29.3 million in nonperforming loans) which were considered to be impaired compared to $31.3 million at December 31, 2011. As discussed under the caption “Asset Quality”, loans are considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is probable on a non-collateral dependent impaired loan, a portion of our reserve is allocated to that probable loss. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on a current independent appraisal.

The following table sets forth the number and volume of loans, net of previous charge-offs, that were considered impaired, and their associated reserve allocation, if any, at March 31, 2012. Eighteen non-accrual loans with a total balance of approximately $1.0 million were not removed from their homogeneous group and individually analyzed for impairment because their individual loan balances were less than $100 thousand.

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	Number of Loans		Loan Balances Outstanding		Allocated Reserves
	(Dollars in millions)
Non-accrual loans		42	$	18.5	$	0.6
Restructured loans		16		10.8		1.1
Total nonperforming loans		58	$	29.3	$	1.7
Other impaired loans with allocated reserves		5		1.7		0.1
Impaired loans without allocated reserves		6		2.1		—
Total impaired loans		69	$	33.1	$	1.8

Investment Securities and Other Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: “held-to-maturity” and “available-for-sale.” Currently, none of our investments are classified as held-to-maturity. While we have no plans to liquidate a significant amount of our securities, the securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our best interest.

Our investment securities totaled $348.8 million at March 31, 2012, $339.5 million at December 31, 2011 and $305.0 million at March 31, 2011. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

At March 31, 2012, the securities portfolio had unrealized net gains of approximately $1.7 million, which are reported in accumulated other comprehensive income (loss) on the consolidated statement of changes in shareholders’ equity, net of tax. Our securities portfolio at March 31, 2012 consisted of U.S. government sponsored agencies, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), corporate bonds, and municipal securities.

We currently have the ability to hold our available-for-sale investment securities to maturity except for equity securities. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of March 31, 2012, we owned securities from issuers as to which our aggregate amortized cost exceeded 10% of our common shareholders’ equity. As of March 31, 2012 the amortized cost and fair value of the securities from those issuers were as follows:

	Amortized Cost		Fair Value
	(Dollars in thousands)
Federal National Mortgage Corporation	$	77,075	$	77,737
Federal Home Loan Mortgage Corporation		35,081		35,312
Government National Mortgage Association		12,629		12,864
Goldman Sachs Group		7,354		7,241
Morgan Stanley		7,440		7,170
Small Business Administration		151,877		152,335
Wake County, North Carolina		8,238		8,189

At March 31, 2012 we held $11.9 million in bank owned life insurance compared to $11.8 million on December 31, 2011 and compared to $9.0 million at March 31, 2011.

Deposits and Other Borrowings

Deposits

Deposits totaled $772.6 million as of March 31, 2012, down 3.1% compared to deposits of $797.6 million at December 31, 2011 and down 1.8% compared to deposits of $786.8 million at March 31, 2011. We attribute our deposit decline during the twelve months ended March 31, 2012 to allowing higher priced Time deposits to roll off while focusing on core transaction accounts. We believe that we can improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us.

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Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) having maturities of one year or less, Federal Funds purchased, repurchase agreements and other borrowings to be repaid this year. Our short-term borrowings totaled $39.2 million at March 31, 2012, compared to $11.7 million on December 31, 2011, an increase of $27.5 million. The increase is mainly the result of management’s decision to allow higher priced time deposits to roll off without being replaced.

The following table details the maturities and rates of our borrowings from the FHLB, as of March 31, 2011.

Borrow Date	Type		Principal		Term		Rate		Maturity
(Dollars in thousands)
March 12, 2008		Fixed rate		7,500		5 years		3.54	March 12, 2013
August 17, 2010		Fixed rate		3,000		4 years		1.49	August 18, 2014
August 17, 2010		Fixed rate		4,500		5 years		1.85	August 17, 2015
August 17, 2010		Fixed rate		2,500		6 years		2.21	August 17, 2016
August 20, 2010		Fixed rate		2,000		3 years		1.09	August 20, 2013
August 20, 2010		Fixed rate		3,000		4 years		1.48	August 20, 2014
August 20, 2010		Fixed rate		3,000		5 years		1.83	August 20, 2015
September 1, 2010		Fixed rate		2,000		2 years		0.66	September 4, 2012
March 12, 2012		Fixed rate		21,000		1 month		0.21	April 11, 2012
March 29, 2012		Fixed rate		5,000		1 month		0.20	April 30, 2012
Total Borrowings: $ 53,500						Composite rate: 1.19%

Long-Term Obligations

Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowing from the FHLB totaled $18.0 million on March 31, 2012, compared to $25.5 million in FHLB advances on December 31, 2011 and $27.5 million on March 31, 2011. The decrease of $7.5 million in long-term FHLB advances as of March 31, 2012, compared to December 31, 2011 is the result of FHLB advances being reclassed to short-term borrowing because the current time to maturity is less than a year.

Liquidity

Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) lines for the purchase of federal funds from other banks; (d) lines of credit established at the FHLB, less existing advances; and (e) our investment securities portfolio. All our debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using local core deposits, retail repurchase agreements and the Bank’s capital position. To date, these core funds, supplemented by FHLB advances, institutional deposits obtained through the internet and brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and institutional deposits obtained through the Internet.

We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $183.3 million and $184.3 million of advances from the FHLB at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 we had outstanding FHLB advances totaling $53.5 million compared to $34.5 million and $36.0 million at December 31, 2011 and March 31, 2011, respectively.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At March 31, 2012, we owned 42,792 shares of the FHLB’s $100 par value capital stock, compared to 34,558 and 45,708 shares at December 31, 2011 and March 31, 2011, respectively. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $36.0 million available to us at March 31, 2012 under which we can borrow funds to meet short-term liquidity needs. At March 31, 2012, we had no advances outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.

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Net cash provided by operations during the three months ended March 31, 2012 totaled $0.7 million, compared to net cash provided by operations of $7.5 million for the same period in 2011. Net cash used in investing activities decreased to $8.1 million for the three months ended March 31, 2012, as compared to net cash used in investing activities of $16.8 million for the same period in 2011 primarily due to decrease in the purchases of investment securities in the first quarter of 2012 as compared to the first quarter of 2011. Net cash used by financing activities was $5.2 million for the first three months of 2012, compared to net cash used of $0.7 million for the same period in 2011 due primarily to a decrease in deposits during the first quarter of 2012 as compared to the same period in 2011. Cash and cash equivalents at March 31, 2012 was $12.1 million compared to $10.2 million at March 31, 2011.

As discussed in Note 11, during April 2011, the Bank’s Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that, among other things, the Bank will not pay any cash dividend to us without the approval of the FDIC and N.C. Commissioner of Banks. Dividends we receive from the Bank is our primary source of funds with which we can pay dividends on our outstanding common and preferred stock. As a result, if the Bank’s regulators declined to permit the Bank to dividend funds to us, we would be unable to pay dividends on our common and preferred stock.

Capital Resources

Shareholders’ Equity

As of March 31, 2012, our total shareholders’ equity was $81.2 million (consisting of common shareholders’ equity of $63.7 million and preferred stock of $17.5 million) compared with total shareholders’ equity of $80.4 million as of December 31, 2011 (consisting of common shareholders’ equity of $62.9 million and preferred stock of $17.5 million). Common shareholders’ equity increased by approximately $0.8 million to $63.7 million at March 31, 2012 from $62.9 million at December 31, 2011. We had net income of $0.4 million, experienced an increase in net unrealized gains on available-for-sale securities of $0.6 million and recognized stock based compensation of $2 thousand on incentive stock awards. We declared dividends and accretion of discount of $265 thousand on preferred shares.

We are subject to various regulatory capital requirements administered by our federal banking regulators. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by these regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines involving quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of March 31, 2012, we and the Bank met all capital adequacy requirements to which we are subject.

As of March 31, 2012, we experienced a decrease in our capital ratios when compared to the December 31, 2011 and March 31, 2011 periods. This decrease is primarily due to a decrease in Tier 1 and total capital.

Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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Our and the Bank’s actual capital ratios for purposes of bank regulatory capital guidelines are presented in the following table:

	Ratio required to be well capitalized under prompt corrective action provisions			Minimum ratio required for capital adequacy purposes			Our Ratio			Bank’s Ratio
As of March 31, 2012:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.23	%		8.23	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		12.39			12.39
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.65			13.65
As of December 31, 2011:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.25	%		8.25	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		12.59			12.59
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.85			13.85
As of March 31, 2011:
Tier 1 Capital (to Average Assets)		³ 5.00	%		³ 3.00	%		8.42	%		8.42	%
Tier 1 Capital (to Risk Weighted Assets)		³ 6.00	%		³ 4.00	%		11.97			11.97
Total Capital (to Risk Weighted Assets)		³ 10.00	%		³ 8.00	%		13.24			13.24

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Termination of Material Definitive Agreements

On February 8, 2012, the Company, and FIE I LLC, an affiliate of PIMCO BRAVO Fund, L.P. , Patriot Financial Partners, L.P., an affiliate of Endicott Management Company and three other institutional investors the “Investors”) mutually agreed to terminate their previously announced Securities Purchase Agreement, as amended and restated (the “Agreement”). As previously disclosed, the Company and each of the Investors had entered into the Agreement under which the Company would issue $79.7 million in Company common stock in a private placement offering at a price of $16.00 per share. Pursuant to the terms of the Agreement, the Company had also agreed to issue to the Investors warrants to purchase shares of either voting common stock or a new class of the Company’s mandatorily convertible non-voting common stock at a purchase price of $8.00 per share and in an amount equal to 25% of the number of shares of common stock each Investor would purchase in the Offering. The Agreement was terminated on February 8, 2012 because not all the required regulatory approvals necessary to complete the transaction had been received by all of the Investors as of the termination date.

On March 14, 2012, the Bank and The Bank of Hampton Roads (“Hampton Roads”) mutually agreed to terminate their previously announced Purchase and Assumption Agreement dated as of July 14, 2011 (the “P & A Agreement”). As previously disclosed, pursuant to the terms of the P & A Agreement, the Bank had agreed to purchase all deposits and selected assets associated with seven Gateway Bank branches in North Carolina.

The termination of the P & A Agreement was a direct result of the Company’s termination of the Securities Purchase Agreement. Pursuant to the terms of the Securities Purchase Agreement, the Company had agreed to issue $79.7 million in Company common stock to the investors in a private placement offering. The Company had planned to consummate the transaction contemplated by the P & A Agreement with a portion of the capital raised in the private placement offering.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.

Our market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of our asset/liability management function.

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.

We review our disclosure controls and procedures, including our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the quarterly period ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K above are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

An Exhibit Index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ECB BANCORP, INC.
	(Registrant)
Date: May 15, 2012	By:	/s/ A. Dwight Utz
		A. Dwight Utz
		(President & CEO)
Date: May 15, 2012	By:	/s/ Thomas M. Crowder
		Thomas M. Crowder
		(Executive Vice President & CFO)

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EXHIBIT INDEX

Exhibit Number	Description
31.01	Certification of Chief Executive Officer required by Rule 13a-14(a) (furnished herewith)
31.02	Certification of Chief Financial Officer required by Rule 13a-14(a) (furnished herewith)
32.01	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
32.02	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Results of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text. *

* Furnished, not filed.

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