Summary of AMERICAN COMMUNITY BANCSHARES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products, and services. There are no pending legal proceedings other than those incurred in the normal course of business to which the Company or subsidiaries are a party, or of which any of their property is the subject.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

Total assets at September 30, 2008 increased by $35.2 million or 7.0% to $540.8 million compared to $505.6 million at December 31, 2007. The Company had earning assets of $499.1 million at September 30, 2008. Gross loans increased by $28.2 million or 7.2% to $421.1 million from $392.9 million at December 31, 2007. Investment securities and other non-marketable equity securities decreased by $2.4 million or 3.0% to $76.5 million from $78.9 million at December 31, 2007. Total deposits as of September 30, 2008 increased by $29.5 million or 7.4% to $429.3 million compared to $399.8 million at December 31, 2007. Total borrowed money as of September 30, 2008 increased $8.4 million or 17.0% to $57.9 million compared to $49.5 million at December 31, 2007. Stockholders' equity was $51.5 million at September 30, 2008 compared to $54.0 million at December 31, 2007 for a decrease of $2.5 million or 4.7%.

The allowance for loan losses increased by $1.6 million or 27.5% to $7.3 million at September 30, 2008 as compared to $5.7 million at December 31, 2007. The increase in the allowance was due to a loan loss provision of $2.2 million and was reduced by net loan and lease charge-offs of $586,000 for the nine months ended September 30, 2008. The allowance for loan losses equaled 1.74% of total loans outstanding at September 30, 2008 as compared to 1.46% at December 31, 2007. The increase in the percentage of the allowance for loan losses to total loans outstanding is due to an increase in non-accrual loans and leases and related reserves. In addition the allowance for loan losses equaled 187% of non-performing loans and leases, which totaled $3.9 million at September 30, 2008 and 333% of non-performing loans and leases at December 31, 2007 which totaled $1.7 million. The increase in non-performing loans and leases is discussed further under "Provision for Loan Losses".

The Company had investment securities available for sale of $71.8 million at September 30, 2008. The portfolio decreased by $3.2 million or 4.3% from the $75.0 million balance at December 31, 2007. The decrease was primarily attributable to the $2.7 million other than temporary impairment charge on FNMA and FHLMC preferred stock. In addition the Company had investment securities held to maturity of $1.8 million at September 30, 2008 and December 31, 2007.

Interest-earning deposits with banks at September 30, 2008 increased by $7.8 million or 837.6% to $8.7 million compared to $930,000 at December 31, 2007. The Company holds funds in interest-earning deposits with banks to provide liquidity for future loan demand and to satisfy fluctuations in deposit levels.

Non-interest earning assets at September 30, 2008 increased by $3.2 million or 8.2% to $41.7 million compared to $38.5 million at December 31, 2007. The increase is primarily attributable to an increase in the cash and due from banks category of $1.6 million to $16.0 million combined with an increase in income taxes receivable of $1.8 million. The cash and due from banks primarily represents customer deposits that are in the process of collection and not available for overnight investment combined with cash on hand in the branches. Bank premises and equipment was $7.3 million at September 30, 2008, a decrease of $1.4 million from December 31, 2007. The decrease in premises and equipment was due to the sale and leaseback of two branch locations during the third quarter. Gains in the amount of $265,388 related to the sale have been deferred over the life of the lease. Accrued interest receivable decreased $467,000 to $2.2 million at September 30, 2008 as a result of the timing in the collection of interest income combined with lower interest rates in the loan portfolio. Other assets increased by $3.4 million primarily as a result of funding the $1.6 million Supplemental Employee Retirement Plan (SERP) combined with an increase in income taxes receivable of $1.8 million.

Total deposits increased $29.5 million or 7.4% from $399.8 million at December 31, 2007 to $429.3 million at September 30, 2008. The composition of the deposit base, by category, at September 30, 2008 is as follows: 12% non-interest bearing demand deposits, 4% savings deposits, 17% money market and NOW accounts and 67% time deposits. The non-interest bearing demand deposits and savings experienced decreases over the nine-month period. Dollar and percentage decreases were as follows: non-interest bearing demand deposits, $3.7 million or

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6.9% and savings, $7.6 million or 31.3%. The money and NOW category experienced an increase over the nine-month period of $4.4 million or 6.4%. The time deposits experienced an increase of $36.5 million or 14.4%. Time deposits of $100,000 or more totaled $184.7 million, or 43.0% of total deposits at September 30, 2008. The composition of deposits at December 31, 2007 was 14% non-interest bearing demand deposits, 6% savings deposits, 17% money market and NOW accounts and 63% time deposits.

From time to time the Company also utilizes brokered deposits as a funding source. Brokered deposit balances at September 30, 2008 were $45.9 million as compared to $12.0 million at December 31, 2007, a $33.9 million or 282.5% increase. Deposit rates in our markets remain at higher levels despite a 325 basis point drop in short-term interest rates since the third quarter of 2007. Certain banks experiencing liquidity issues have offered well above market rates to attract retail deposits. As a result in some cases brokered deposit funding was a more efficient and cost effective funding source than local retail deposits.

Short-term borrowings consist of securities sold under agreement to repurchase and federal funds purchased. Total securities sold under agreement to repurchase and federal funds purchased, secured by certain of the Company's investment securities, decreased $11.6 million or 36.8% from $31.5 million at December 31, 2007 to $19.9 million at September 30, 2008. Long-term borrowings consist of advances from the Federal Home Loan Bank of Atlanta, subordinated debentures, and capital lease obligations. The Company had advances from the Federal Home Loan Bank of Atlanta at September 30, 2008 of $26.0 million with maturity dates ranging from July 2012 through February 2018. At December 31, 2007 the Company had advances from the Federal Home Loan Bank of Atlanta of $6.0 million with maturity dates ranging from July 2012 through February 2013. These advances are secured by a blanket lien on 1-4 family real estate loans, certain commercial real estate loans and certain securities available for sale. The Company also maintained the capital lease for its main office. The recorded obligation under this capital lease at September 30, 2008 and December 31, 2007 was $1.7 million. In addition, the Company carried subordinated debentures in the amount of $10.3 million at September 30, 2008 and December 31, 2007. The maturity date of the subordinated debentures is December 2033 and they are redeemable on or after December 2008.

Other liabilities decreased $131,000 or 5.8% to $2.1 million at September 30, 2008 from $2.3 million at December 31, 2007. The decrease is primarily attributable to a decrease in income taxes payable.

Stockholders' equity decreased $2.5 million or 4.7% to $51.5 million at September 30, 2008 compared to $54.0 million at December 31, 2007. The decrease was attributable to an after tax loss of $1.7 million combined with dividend payments in the amount of $981,000 for the nine months ended September 30, 2008.

Comparison of Results of Operations for the Three Months Ended September 30, 2008 and 2007

Net Income. The Company generated a net loss for the three months ended September 30, 2008 of $3.2 million compared to net income for the three months ended September 30, 2007 of $1.4 million. On a fully diluted per share basis earnings (losses) per share were $(.48) for the quarter ended September 30, 2008 compared to $.21 for the quarter ended September 30, 2007. For the three months ended September 30, 2008 and 2007, respectively annualized return (loss) on average assets was (2.40)% and 1.11% and annualized return (loss) on average equity was (23.53)% and 10.28%.

Net Interest Income. Net interest income decreased $841,000 from $4.8 million for the three months ended September 30, 2007 to $4.0 million for the three months ended September 30, 2008. Net interest income decreased due to compression in net interest margin partially offset by growth in average earning assets.

Total average earning assets increased $27.6 million or 5.5% from an average of $460.6 million during the third quarter of 2007 to an average of $488.2 million during the third quarter of 2008. The Company experienced good loan growth with average loan balances increasing by $35.6 million, while average balances for investment securities and interest-earning deposits decreased $8.0 million. Average interest-bearing liabilities increased by $36.3 million during the three months ended September 30, 2008. Average interest-bearing deposits increased $14.6 million and average borrowings increased $21.7 million.

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FOMC lowered rates. Due to the longer term maturity structure of our deposits and borrowings, the costs of those liabilities were slower to decrease. The average yield on the Company's interest bearing assets decreased 153 basis points from 7.81% for the quarter ended September 30, 2007 to 6.28% for the same quarter in 2008. At the same time the average cost on interest earning liabilities only decreased 99 basis points from 4.33% for the quarter ended September 30, 2007 to 3.34% for the same quarter in 2008. The interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds, decreased 55 basis points from 3.49% in the quarter ended September 30, 2007 to 2.94% for the same quarter in 2008.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. The Company's provision for loan losses for the quarter ended September 30, 2008 was $1.4 million representing a $1.3 million or 823.7% increase from the $156,000 recorded for the quarter ended September 30, 2007. The increase in the provision was primarily related to a increase in non-performing loans and leases of $2.5 million or 178.8% from $1.4 million at September 30, 2007 to $3.9 million at June 30, 2008. Non-performing loans and leases are defined as non-accrual loans and leases plus loans and leases 90 days past due and still accruing. Non-performing loans and leases consisted of the following at September 30, 2008: approximately $279,000 in 1-4 family construction loans, $635,000 in loans secured by raw land, $414,000 in commercial real estate loans, $260,000 in commercial loans collateralized by equipment and inventory, $812,000 in residential 1-4 family permanent loans, home equity lines in the amount of $600,000, $75,000 in personal loans and $833,000 in commercial leases. Reserves related to these non-performing loans and leases were $1.9 million at quarter end.

Non-interest Income. Non-interest income decreased by $675,000 or 70.2% to $286,000 for the three months ended September 30, 2008 compared with $961,000 for the same period in the prior year. Non-interest income as a percentage of total revenue (defined as net interest income plus non-interest income) decreased to 6.7% for the three months ended September 30, 2008 from 16.6% for the same period in the prior year. The largest components of non-interest income were service charges on deposit accounts of $593,000 for the quarter ended September 30, 2008, compared to $617,000 in 2007 and fees from mortgage banking operations of $43,000 in 2008 as compared to $70,000 in 2007. Other components of non-interest income include changes in fair value of interest rate floors and the SERP investment. The floor valuation adjustment decreased $142,000 from a gain of $138,000 for the three months ended September 30, 2007 to a loss of $4,000 for the three months ended September 30, 2008. The value of the SERP investment also decreased $397,000 due to market fluctuations.

Non-interest Expense. Total non-interest expense increased $3.3 million or 94.3% from $3.4 million for the three months ended September 30, 2007 to $6.7 million for the same period in 2008. The increase was primarily due to the other than temporary impairment charges of $2.8 million on investments combined with $399,000 in merger related expenses.

Provision for Income Taxes. The Company's provision (benefit) for income taxes, as a percentage of income before income taxes, was (17.0%) and 36.4% for the three months ended September 30, 2008 and 2007, respectively. The effective tax rate in 2008 resulted from the tax treatment on the other than temporary impairment of investments and the SERP investment write-downs as capital losses. Capital losses can only be offset with capital gains which resulted in a deferred tax valuation allowance of $584,000 in 2008. As a result of recent legislation, this valuation allowance will reverse in the fourth quarter of 2008 resulting in an estimated credit to income taxes of $584,000.

Comparison of Results of Operations for the Nine Months Ended September 30, 2008 and 2007

Net Income. The Company generated a net loss for the nine months ended September 30, 2008 of $1.7 million compared to net income for the nine months ended September 30, 2007 of $3.9 million. On a per share basis, basic earnings
(loss) were $(.26) for the nine months of 2008 compared to $.57 for 2007, and diluted earnings were $(.26) for 2008 compared to $.56 for 2007. For the nine months ended September 30, 2008 and 2007, respectively annualized return (loss) on average assets was (.47)% and 1.06% and annualized return (loss) on average equity was (4.21)% and 9.47%.

Net Interest Income. Net interest income decreased $2.3 million from $14.6 million for the nine months ended September 30, 2007 to $12.3 million for the nine months ended September 30, 2008. The net interest income decrease was a result of the compression in net interest margin and was partially offset by an increase in average earning assets.

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Total average earning assets increased $27.8 million or 6.1% from an average of $453.2 million during the first nine months of 2007 to an average of $481.0 during the first nine months of 2008. The Company experienced solid loan growth with average loan balances increasing by $29.8 million. Average balances for investment securities and interest-earning deposits decreased $2.0 million. Average interest-bearing liabilities increased by $36.3 million for the nine months ended September 30, 2008. Average deposits increased $18.0 million while average borrowings increased by $18.3 million.

Net interest margin is interest income earned on loans, securities and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the nine months ended September 30, 2008 was 3.41% compared to 4.30% for the nine months ended September 30, 2007. The decrease in net interest margin is primarily a result of deposit and borrowings costs decreasing slower than the yield on earning assets. The Federal Open Market Committee (FOMC) decreased short-term rates seven times for a total of 325 basis points beginning September 18, 2007 and ending April 30, 2008. Since the majority of our loans (approximately 60%) float with the prime lending rate, the yield on our loans decreased immediately as the FOMC lowered rates. Due to the longer term maturity structure of our deposits and borrowings, the costs of those liabilities were slower to decrease. The yield on our interest earning assets decreased 130 basis points from 7.87% for the nine months ended September 30, 2007 to 6.48% for the nine months ended September 30, 2008. During the same time period, the cost of our interest bearing liabilities decreased 4.28% to 3.56% or 72 basis points. The interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds, decreased 68 basis points from 3.60% for the nine months ended September 30, 2007 to 2.92% for the same period in 2008.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. The Company's provision for loan losses for the nine months ended September 30, 2008 was $2.2 million, representing a $1.6 million or 279.5% increase over the $570,000 recorded for the nine months ended September 30, 2007. The increase in the provision was primarily related to an increase in non-performing loans and leases of $2.5 million or 183.4% from $1.4 million at September 30, 2007 to $3.9 million at September 30, 2008. Non-performing loans and leases are defined as non-accrual loans and leases plus loans and leases 90 days past due and still accruing. Non-performing loans increased from $797,000 at September 30, 2007 to $3.1 million at September 30, 2008. In addition non-performing leases increased from $582,000 at September 30, 2007 to $833,000 at September 30, 2008. Non-performing loans and leases consisted of the following at September 30, 2008: approximately $279,000 in 1-4 family construction loans, $635,000 in loans secured by raw land, $414,000 in commercial real estate loans, $260,000 in commercial loans collateralized by equipment and inventory, $812,000 in residential 1-4 family permanent loans, home equity lines in the amount of $600,000, $75,000 in personal loans and $833,000 in commercial leases. Reserves related to these non-performing loans and leases were $1.9 million at quarter end.

Non-Interest Income. Non-interest income decreased by $645,000 or 25.9% to $1.8 million for the nine months ended September 30, 2008. Non-interest income as a percentage of total revenue (defined as net interest income plus non-interest income) decreased to 13.1% for the quarter ended September 30, 2008 from 14.6% for the quarter ended September 30, 2007. The largest components of non-interest income were service charges on deposit accounts of $1.8 million for the nine months ended September 30, 2008, a slight decrease of $14,000 from the nine months ended September 30, 2007 and fees from mortgage banking operations of $224,000 in 2008 as compared to $243,000 in 2007, a 7.8% decrease. Other components of non-interest income include changes in fair value of interest rate floors and the SERP investment. The value of the 7.75% interest rate floor increased $120,000 while the value of the SERP investment decreased $487,000 due to market fluctuations.

Non-Interest Expenses. Total non-interest expense increased from $10.3 million for the nine months ended September 30, 2007 to $13.5 million for the same period in 2008, a $3.2 million or 30.3% increase. The increase was primarily due to an other than temporary loss of $2.7 million on Fannie Mae and Freddie Mac preferred securities. In addition, the Company recorded $399,000 in merger costs related to the proposed merger.

Provision for Income Taxes. The Company's provision for income taxes, as a percentage of income before income taxes, was 9.6% and 36.5% for the nine months ended September 30, 2008 and 2007, respectively. The effective tax rate in 2008 resulted from the tax treatment on the other than temporary impairment of investments and SERP investment write-downs as capital losses. Capital losses can only be offset with capital gains which resulted in a deferred tax valuation allowance of $584,000 in 2008. As a result of recent legislation, this valuation allowance will reverse in the fourth quarter of 2008 resulting in an estimated credit to income taxes of $584,000.

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Liquidity and Capital Resources

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

As of September 30, 2008, liquid assets (cash and due from banks, interest-earning deposits with banks, and investment securities available for sale) were approximately $96.5 million, which represents 17.8% of total assets and 19.8% of total deposits and borrowings. Supplementing this liquidity, the Company has available lines of credit from correspondent banks of approximately $35.5 million and an additional line of credit with the FHLB equal to 15% of assets (subject to available qualified collateral, with borrowings of $26.0 million outstanding from the FHLB at September 30, 2008). At September 30, 2008, outstanding commitments to extend credit were $12.2 million and available line of credit balances totaled $81.0 million. Management believes that the combined aggregate liquidity position of the Company is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Certificates of deposit represented 67.5% of the Company's total deposits at September 30, 2008, and 63.4% at December 31, 2007. The Company's growth strategy will include efforts focused at increasing the relative volume of transaction deposit accounts. Certificates of deposit of $100,000 or more represented 43.0% of the Company's total deposits at September 30, 2008. These deposits are generally considered rate sensitive, but management believes most of them are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine the Company's continued retention of those deposits.

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The FDIC and the Federal Reserve, the primary regulators of the Bank and the Company, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with these guidelines. At September 30, 2008, the Company maintained capital levels exceeding the minimum levels for "well capitalized" bank holding companies and banks.

The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October 3, 2008. The purpose of this law is to restore liquidity and stability to the financial system, while minimizing any potential long term negative impact on taxpayers. The law authorizes the United States Secretary of Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. The program under which the asset purchase will be administered is referred to as the Troubled Asset Relief Program (TARP).

The law also temporarily raises the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The higher insurance limits took effect immediately and will be in effect through December 31, 2009. Additionally, the Federal Deposit Insurance Corporation (FDIC) announced on October 14, 2008, a new program aimed at strengthening consumer confidence and encouraging liquidity in the banking system.

The Temporary Liquidity Guarantee Program (TLGP) guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and provides full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. The program provides a three year guarantee of newly issued debt and increased insurance coverage through December 31, 2009. This two-pronged program will be funded through special fees paid by the financial institutions participating. The Company must decide whether to participate in one, both or none of these phases of the program by November 12, 2008.

Also on October 14, 2008, the US Department of Treasury announced a voluntary Capital Purchase Program (CPP) to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Treasury will purchase up to $250 billion of senior preferred stock. The program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate on November 14, 2008. Treasury will determine eligibility and allocations for interested parties after consultation with the appropriate federal banking agency. The minimum subscription amount available to a participating institution is 1 percent of

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risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury will fund the senior preferred shares purchased under the program by year-end 2008.

The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 . . .