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EXHIBIT 13

HCSB FINANCIAL CORPORATION

Loris, South Carolina

Annual Report

2010

www.hcsbaccess.com

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HCSB FINANCIAL CORPORATION AND SUBSIDIARY

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Certain statements in this annual report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the future plans and expectations, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  Please see our annual report filed on Form 10-K for further discussion of these risks.

HCSB Financial Corporation will furnish, free of charge, copies of the Annual Report and the Company’s Report to the Securities and Exchange Commission (Form 10-K) upon written request to James R. Clarkson, President and C.E.O., HCSB Financial Corporation, Post Office Box 218, Loris, South Carolina 29569.

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HCSB FINANCIAL CORPORATION AND SUBSIDIARY

MESSAGE TO SHAREHOLDERS

For the first time in the 23-year history of Horry County State Bank, I am having difficulty in writing this letter, as I am very disappointed with our bank’s performance last year.  Our operating results were very poor and unacceptable on an on-going basis.

As you are surely aware, our bank’s real estate market has experienced a steady and very significant demise since 2008 in terms of sales activity and property values.  The rapid ascent that occurred during the first two-thirds of the initial decade of the 21st century has been followed by an even sharper decline from peak levels.  As a result, the Carolinas are recognized as one of our nation’s weakest economies and the coastal areas of the Carolinas are the hardest hit sections of the two states.

Throughout history, real estate has typically been recognized as the best collateral that a bank could obtain to properly secure a loan.  The substantial decline in real estate values, however, has effectively drastically reduced our collateral values.  As a result, what were initially good loan to value ratios have often been turned upside down.

The combination of significant declines in the incomes of many of our customers, sharp reductions in property values to levels below loan balances and a growing attitude among many borrowers that their best way out is to leave the problem to the bank contributed to a much greater default history among our loans in 2010 than we have been accustomed to.  This in turn required us to deploy a large amount of funds to build a reserve for loan losses capable of absorbing potential loan charge offs, and as a result our bank suffered a significant operating loss last year.

Our net loss in 2010 led to, among other things, a reduction in capital ratios to below desired levels.  Therefore, like many other banks in the Southeast and our own market, our bank entered into a legal agreement with the FDIC and the South Carolina State Board of Financial Institutions requiring the bank to address certain issues that have developed as a result of our challenging economy.  The agreement, called a consent order, was signed on February 10, 2011 and establishes a formal action plan to improve our performance.

The consent order requires us to do, among other things, the following:

·                                          achieve and maintain minimum required capital levels;

·                                          reduce our level of classified assets;

·                                          eliminate all assets or portions of assets classified “Loss” and 50 percent of those assets classified “Doubtful” in the bank’s most recent exam report;

·                                          analyze and assess the bank’s management and staffing needs to ensure the bank has qualified management in place as well as the appropriate organizational structure;

·                                          increase Board oversight of the bank;

·                                          limit asset growth;

·                                          eliminate our reliance on brokered deposits;

·                                          ensure the adequacy of our allowance for loan and lease losses;

·                                          formulate and implement a comprehensive financial plan to address profitability, improve income, monitor expenses, and restructure our balance sheet;

·                                          ensure the full implementation of the bank’s revised lending and collection policy to provide effective guidance and control over the bank’s lending function;

·                                          implement a plan addressing liquidity, contingency funding, and overall balance sheet management;

·                                          establish an enhanced internal loan review program;

·                                          correct all violations of law, regulation, and contraventions of policy which are listed in the bank’s most recent exam report;

·                                          not extend any additional credit to any borrower who has a loan or other extension of credit from the bank that has been charged off or classified “Loss” or “Doubtful” and is uncollected;

·                                          not declare or pay dividends or bonuses without the prior written approval of the bank’s regulators;

·                                          reduce any segment of our loan portfolio that is an undue concentration of credit; and

·                                          supply written progress reports to the bank’s supervisory authorities.

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HCSB FINANCIAL CORPORATION AND SUBSIDIARY

MESSAGE TO SHAREHOLDERS - continued

A more detailed discussion of the consent order is included in the accompanying 2010 Annual Report. In addition, a full copy of the consent order is filed with and included in our company’s Current Report on Form 8-K that was filed with the SEC on February 16, 2011, which is available at www.sec.gov.

The consent order will not affect daily operations or any relationships with our customers.  We will continue to remain competitive in our market, and all depositors are insured up to $250,000 per insured account and all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount of the account.  No insured depositor has ever lost a single penny in an FDIC insured bank.

In anticipation of this challenging economy, our Board of Directors and senior leadership team began addressing some of these issues as we adjusted our strategic plan over the past two years.  In fact, many of our previously implemented strategic changes and plans of action mirror the requirements of the consent order.  For instance, we have reduced the size of the bank’s staff by 25 employees, or 15%, and we began the implementation of reductions in operating expenses last year that we project will save us significant cash in 2011.  We are also working diligently to further implement our strategies so that we can expand our areas of compliance with the consent order.

Much of what happens in the near future continues to depend on our local economy, and more specifically, our local real estate market.  However, we believe we have been very proactive to make any necessary changes or implementations to our business plan to ensure that we have the best plan possible to endure this current economic recession.

In summary, the year 2010 was not at all kind to our bank, and it brought us to a point where our Board of Directors and our regulatory agencies agreed that a specific plan was needed to correct our course and return our bank to desired levels of performance.  A consent order is simply a regulatory mandated roadmap to recovery.  Our Board of Directors and management recognize fully the seriousness of our bank’s present situation, and we are totally committed to and actively engaged in the implementation of whatever procedures are necessary in order not only to meet the goals as have been established, but to surpass them.  Our primary focus will be to strengthen the quality of our loan portfolio and return our bank to a level of profitability that will allow us to provide for the generation of adequate capital to sustain us in the future and to improve the value of our shareholders’ investments to the levels you have previously enjoyed.  Our commitment to superior customer service will continue to be of utmost importance to us and truly the foundation for our success.

While I fully understand the concerns that you may have for our bank and your investment herein, I pledge to you our diligence and attention to working through our issues.  There are a lot of unfounded rumors circulating, and so if you have questions of me, please do not hesitate to call me at (843) 716-6400.  We are most appreciative of your continued support.

Most Respectfully,

/s/ James R. Clarkson

James R. Clarkson

President & CEO

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HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Ten Year History

(Dollars in thousands)

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Selected Financial Data

The following table sets forth certain selected financial data concerning the Company. The selected financial data has been derived from the financial statements. This information should be read in conjunction with the financial statements of the Company, including the accompanying notes, included elsewhere herein.

(1)     Adjustments have also been made for the 3% stock dividends declared in February 2008 and January 2009, as well as the two-for-one stock split in the form of a 100% stock dividend declared in January 2007.  There was no stock dividend declared in January 2010 and January 2011.

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Description of Company’s Business

HCSB Financial Corporation (the Company) was incorporated on June 10, 1999 to become a holding company for Horry County State Bank.  The Company’s only significant asset is its wholly owned subsidiary, Horry County State Bank (the Bank).  The Bank is a state-chartered bank incorporated on December 18, 1987 and located at 5201 Broad Street, Loris, South Carolina.  The Company’s primary market includes Horry County in South Carolina and Columbus and Brunswick Counties in North Carolina.  From its 13 branch locations, the Company offers a full range of deposit services, including checking accounts, savings accounts, certificates of deposit, money market accounts, and IRAs, as well as a broad range of non-deposit investment services.

The Company is primarily engaged in the business of attracting deposits from the general public and using these deposits together with other funds to make agricultural, commercial, consumer, and real estate loans.  The Company’s operating results depend to a substantial extent on the difference between interest and fees earned on loans and investments and the Company’s interest expense, consisting principally of interest paid on deposits and borrowings.  Unlike most industrial companies, virtually all of the assets and liabilities of financial institutions are monetary.  As a result, interest rates have a greater effect on the financial institution’s performance.  In addition to competing with other traditional financial institutions, the Company also competes for checking and savings dollars with nontraditional financial intermediaries, such as mutual funds, as well as with investment opportunities available via the internet.  This has resulted in a highly competitive market area.  The Company attempts to compete in this highly competitive market by focusing on providing the highest quality of personal service and attention to its customers.

In 1995, the Company opened its first branch office in the Mt. Olive community of Horry County and has since expanded its branch network to 13 banking offices located throughout Horry County, as well as an Operations Center in Loris, South Carolina which houses the Company’s executive offices and support services.  This expansion of its branch system has enabled the Company to more effectively compete for deposits and loans.  By expanding into different communities, the Company has been able to substantially diversify its market place from one of a predominantly agricultural flavor to one which blends residential developments of retirees and others, tourism, major employment areas, central county government and the market’s most active overall growth areas.  In so doing, the Company has reduced considerably the seasonality in its loan portfolio.  At the same time the coastal markets have proven to offer primarily commercial real estate lending opportunities, and commercial real estate has been significantly adversely impacted by the current economic recession.

In order to support this growth in its branch network, the Company has undertaken several secondary common stock offerings.  Prior to its reorganization from a bank into the holding company, Horry County State Bank undertook three such secondary offerings of its common stock in efforts to strengthen the Bank’s regulatory capital position to support projected future growth in assets.  Since the reorganization was consummated in 1999, the Company committed to another secondary offering in 2002 whereby the Company issued an additional 365,712 shares of common stock at a price per share of $22.00, resulting in over $8,000,000 in added capital.

In December 2004, the Company participated in the issuance of $6,000,000 of trust preferred securities through its non-consolidated subsidiary HCSB Financial Trust I (the Trust) to enable the Company to pursue its growth goals and yet maintain a “well-capitalized” status as defined by banking regulatory agencies.

On March 6, 2009, the Company issued 12,985 shares of preferred stock, having $0.01 par value per share and a liquidation preference of $1,000 per share, in connection with the United States Treasury’s Capital Purchase Program.  The dividend rate of 5% per annum will be payable for the first five years, increasing to 9% per annum in 2014.  The Company also issued 91,714 warrants to purchase common stock at a strike price of $21.09 per share.  The warrants expire 10 years from the issue date.  The Company plans to redeem all shares of this series of preferred stock within five years.

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DESCRIPTION OF BUSINESS - continued

On July 31, 2010, the Company completed a private placement of subordinated promissory notes that totaled $12,062,011.  The notes bear interest at the rate of 9% per annum payable semiannually on April 5th and October 5th.  Thereafter and until their maturity ten years from the date of issuance, interest will accrue on the unpaid principal amount of the notes at the current Prime Rate, as published by the Wall Street Journal, plus 300 basis points; provided, that the rate shall not be less than 8.00% per annum or more than 12.00% per annum.

Market for Common Shares and Dividends

As of December 31, 2010, there were 3,780,845 shares of our common stock outstanding held by approximately 2,400 shareholders of record.  There is currently no established public trading market in our common stock and trading and quotations of our common stock have been limited and sporadic.  Most of the trades of which the Company is aware have been privately negotiated by local buyers and sellers.  In addition to these trades, the Company is aware of a number of trades reported on Yahoo! that occurred on the OTC Bulletin Board between January 1, 2010 and December 31, 2010.  These trades ranged from $2.25 to $11.50.  We have included these trades in the following table which sets forth the high and low closing prices for our common stock of which we are aware for the periods indicated.  Private trading of our common stock has been limited but has been conducted through the Private Trading System, which was implemented on our website (www.hcsbaccess.com) on April 1, 2010.  The Private Trading System is a passive mechanism created to assist buyers and sellers in facilitating trades in our common stock.  Because there has not been an established market for our common stock, we may not be aware of all prices at which our common stock has been traded.  We have not determined whether the trades of which we are aware were the result of arm’s-length negotiations between the parties.  Based on information available to us, we believe transactions in our common stock can be fairly summarized as follows for the periods indicated:

All share and per share data in this report has been adjusted to reflect all stock dividends and splits declared by the Company.

Management does not expect the Company to pay cash dividends in the foreseeable future.  The Company’s ability to pay dividends depends on the ability of its subsidiary, Horry County State Bank, to pay dividends to the Company.  As a South Carolina state bank, the Bank may only pay dividends out of its net profits, after deducting expenses, including losses and bad debts.  Subject to the restrictions under our Consent Order described below, the Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions (the “State Board”), provided that the Bank received a

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MARKET FOR COMMON SHARES AND DIVIDENDS - continued

composite rating of one or two at the last federal or state regulatory examination. In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized.  On February 10, 2011, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the State Board.  Under the terms of the Consent Order, the Bank is prohibited from declaring a dividend on its shares of common stock unless it receives approval from the FDIC and State Board.  For a more detailed discussion of the Consent Order, please see “Management’s Discussion of Financial Condition and Results of Operation” below.

As of February, 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulatory, has required the Company to defer dividend payments on the 12,895 shares of preferred stock issued to the U.S. Treasury in March 2009 pursuant to the Capital Purchase Program and interest payments on the $6,000,000 of trust preferred securities issued in December 2004.  Therefore, in February, 2011, the Company notified the U.S. Treasury of our deferral of a quarterly dividend payment on the 12,895 shares of preferred stock and also informed the Trustee of the $6,000,000 of trust preferred securities of our deferral of a quarterly interest payment.  Because we have deferred these two payments, we are prohibited from paying any dividends on our common stock until all deferred payments have been made in full.  Prior to March 6, 2012, so long as the Treasury owns the 12,895 shares of preferred stock issued pursuant to the Capital Purchase Program, we are not permitted to increase cash dividends on our common stock without the Treasury’s consent.  As a result of these restrictions on the Company, including the restrictions on our Bank’s ability to pay dividends to the Company, there was no stock dividend declared in January 2010 and January 2011.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion describes our results of operations for 2010 as compared to 2009 and also analyzes our financial condition as of December 31, 2010 as compared to December 31, 2009.  Like most community banks, we derive most of our income from interest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is our deposits, both interest-bearing and noninterest-bearing.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowed funds.  In order to maximize our net interest income, we must not only manage the volume of these balance sheet items, but also the yields that we earn on our interest-earning assets and the rates that we pay on interest-bearing liabilities.

We have included a number of tables to assist in our description of these measures.  For example, the “Average Balances” table shows the average balance during 2010, 2009, and 2008 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category.  A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio.  Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown.  We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included an “Interest Rate Sensitivity Analysis” table to help explain this.  Finally, we have included a number of tables that provide details about our investment securities, our loans, and our deposits and other borrowings.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.  In the Loan Portfolio section we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

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In addition to earning interest on our loans and investments, we earn income through fees that we charge to our customers. Likewise, we incur other operating expenses as well.  We describe the various components of this noninterest income, as well as our noninterest expense, in the Other Income and Other Expense section.

GENERAL

Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than two years.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry with falling home prices and increasing foreclosures and unemployment have created strains on financial institutions.  Across the country many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.  The following discussion and analysis describes our performance in this challenging economic environment.

The Company continued to grow throughout 2010.  Total assets increased by $27,082,000, or 3.56%, and net loans decreased by $68,079,000, or 14.06%.  Much of this growth is attributable to the success of our branch network.

Profitability, however, decreased in 2010 by 1,181.08%, from net losses of $1,348,000 in 2009 to a net loss of $17,269,000 in 2010, primarily as a result of an increase in provision for loan losses of $12,723,000, or 122.80%.  The decrease of the loan portfolio resulted in a loan to deposit ratio of 68.45% compared to 85.02% in 2009.

Recent Regulatory Development

On February 10, 2011, the Bank entered into the Consent Order with the FDIC and the State Board.  The Consent Order requires the Bank to, among other things, take the following actions: achieve and maintain, within 150 days from the effective date of the Consent Order, Total Risk-Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets; reduce the level of the Bank’s classified assets; eliminate all assets or portions of assets classified “Loss” and 50% of those assets classified “Doubtful” in the Bank’s most recent examination report; analyze and assess the Bank’s management and staffing needs to ensure the Bank has qualified management in place as well as the appropriate organizational structure; increase Board oversight of the Bank; limit asset growth; eliminate the Bank’s reliance on brokered deposits; ensure the adequacy of the Bank’s allowance for loan and lease losses; formulate and implement a comprehensive financial plan to address profitability, improve income, monitor expenses, and restructure the Bank’s balance sheet; ensure the full implementation of the Bank’s written lending and collection policy to provide effective guidance and control over the Bank’s lending function; implement a plan addressing liquidity, contingency funding, and overall balance sheet management; establish an enhanced internal loan review program; correct all violations of law, regulation, and contraventions of policy which are listed in the Bank’s most recent examination report; not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified “Loss” or “Doubtful” and is uncollected; not declare or pay dividends or bonuses without the prior written approval of the FDIC and the State Board; reduce any segment of the Bank’s loan portfolio that is an undue concentration of credit; and supply written progress reports to the FDIC and the State Board.

Prior to receipt of the Consent Order, the Bank’s Board of Directors and management adopted and began executing a proactive and aggressive strategic plan to address the matters described in the Consent Order.  The Bank’s Board of Directors and management have been, and continue to be, keenly focused on executing this plan and have already complied with a number of the requirements of the Consent Order.  As of December 31, 2010 the Bank met the

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requirements to be classified as “adequately capitalized”.  Due to the impact of the current economic environment on the Bank, in accordance with the Consent Order, we have developed a capital plan through which we intend to achieve the “well-capitalized” designation and continue operating with a plan of slow growth.  Our capital plan outlines how we intend to achieve this goal through a combination of targeted asset reductions coupled with raising additional capital.  We are currently exploring a number of likely financing alternatives to strengthen the capital level of the Bank.

The Company is working diligently to improve asset quality and to reduce its investment in commercial real estate loans as a percentage of Tier 1 capital.  The Company is reducing its reliance on brokered deposits and is committed to improving the Bank’s capital position.

A more detailed discussion of the factors contributing to growth and challenges is presented below.

RESULTS OF OPERATIONS

The Company experienced an increase of $154,000, or 0.59%, in interest income on loans and related fees for the year ended December 31, 2010.  The Company experienced a decrease in the interest income on taxable securities, which decreased $1,832,000 or 23.46%, due mainly to the repricing of the securities portfolio to lower yields.  This contributed to a decrease in total interest income of $1,551,000, or 4.55%, over the course of 2010.  Despite the increase in growth in interest-bearing deposits and other borrowings, total interest expense decreased $1,026,000, or 6.58%, to $14,567,000, due mainly to a decrease in rates charged on deposits.  This resulted in a $525,000, or 2.84%, decrease in net interest income in 2010.  The Company also experienced decreases in non-interest income.  Non-interest income decreased $3,515,000, or 46.22%, due to the realization of fewer gains on sale of available-for-sale securities of $3,896,000.  Non-interest expenses increased $2,613,000, or 14.57%, during 2010 due to the loss on the sale or writedown experienced on our foreclosed properties.  Overall, the Company had a net loss for the year ended December 31, 2010 of $17,269,000, compared to a net loss of $1,348,000 for the year ended December 31, 2009.  This represents a decrease in net income of $15,921,000, or 1,181.08%.  The net loss was driven by the increase in provision for loan losses of $12,723,000, or 122.80%, from $10,361,000 at December 31, 2009 to $23,084,000 at December 31, 2010.

ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

During the twelve months ended December 31, 2010, total assets increased $27,082,000, or 3.56%, when compared to December 31, 2009.  The primary reason for the increase in total assets was an increase in our securities portfolio of $95,727,000, or 56.49%, during 2010 from $169,463,000 at December 31, 2009.  Total deposits increased $50,669,000, or 8.76%, from the December 31, 2009 amount of $578,292,000.  Interest-bearing deposits increased $44,075,000, or 8.06%, and noninterest-bearing deposits increased $6,594,000, or 20.83%, during 2010.  The increase in deposits was primarily due to the increase in our money market savings accounts, which increased $44,514,000, or 29.18%, from $152,553,000 at December 31, 2009 to $197,067,000 at December 31, 2010.

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DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

The Company has sought to maintain a conservative approach in determining the distribution of its assets and liabilities. The following table presents the percentage relationships of significant components of the Company’s average balance sheets for the last three fiscal years.

Balance Sheet Categories as a Percent of Average Total Assets

NET INTEREST INCOME

Earnings are dependent to a large degree on net interest income.  Net interest income represents the difference between gross interest earned on earning assets, primarily loans and investment securities, and interest paid on deposits and borrowed funds. Net interest income is affected by the interest rates earned or paid and by volume changes in loans, investment securities, deposits, and borrowed funds.  The interest rate spread and the net yield on earning assets are two significant elements in analyzing the Company’s net interest income.  The interest rate spread is the difference between the yield on average earning assets and the rate on average interest-bearing liabilities.  The net yield on earning assets is computed by dividing net interest income by the average earning assets.

For the year ended December 31, 2010, net interest income was $17,983,000, a decrease of $525,000, or 2.84%, from net interest income of $18,508,000 in 2009.  Interest income from loans, including fees, was $26,151,000, an

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NET INTEREST INCOME - continued

increase of $154,000, or 0.59%, from 2009 to 2010.  Interest expense for the year ended December 31, 2010 was $14,567,000, compared to $15,593,000 for 2009.  This represents a decrease of $1,026,000, or 6.58%, compared to the prior year.  The interest rate spread and net yield on earning assets reflected the pressure created by the lower interest rate environment when compared to the previous year as our customers began to invest more of their monies into higher yielding deposit products, such as money market deposit accounts, which increased $44,514,000, or 29.18%, throughout 2010.  The net yield realized on earning assets was 2.44% for 2010, compared to 2.71% in 2009.  The interest rate spread was 2.37% and 2.58% in 2010 and 2009, respectively.

The following table sets forth, for the periods indicated, the weighted-average yields earned, the weighted-average yields paid, the interest rate spread, and the net yield on earning assets.  The table also indicates the average daily balance and the interest income or expense by specific categories.

Average Balances, Income and Expenses, and Rates

(1)   The effects of loans in nonaccrual status and fees collected are not significant to the computations.

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RATE/VOLUME ANALYSIS

Net interest income can also be analyzed in terms of the impact of changing rates and changing volume.  The following table describes the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume), and (iii) changes in rate and volume (change in rate multiplied by the change in volume) is provided as follows:

(1)  Volume-rate changes have been allocated to each category based on a consistent basis between rate and volume.

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RATE SENSITIVITY

Interest rates paid on deposits and borrowed funds and interest rates earned on loans and investments have generally followed the fluctuations in market rates in 2010 and 2009.  However, fluctuations in market interest rates do not necessarily have a significant impact on net interest income, depending on the Company’s interest rate sensitivity position. A rate-sensitive asset or liability is one that can be repriced either up or down in interest rate within a certain time interval. When a proper balance exists between rate-sensitive assets and rate-sensitive liabilities, market interest rate fluctuations should not have a significant impact on liquidity and earnings.  The larger the imbalance, the greater the interest rate risk assumed and the greater the positive or negative impact of interest fluctuations on liquidity and earnings.

Interest rate sensitivity management is concerned with the management of both the timing and the magnitude of repricing characteristics of interest-earning assets and interest-bearing liabilities and is an important part of asset/liability management.  The objectives of interest rate sensitivity management are to ensure the adequacy of net interest income and to control the risks to net interest income associated with movements in interest rates.  The following table, “Interest Rate Sensitivity Analysis,” indicates that, on a cumulative basis, after three through twelve months, rate-sensitive liabilities exceeded rate-sensitive assets, resulting in a twelve-month liability sensitive position.  For a bank with a liability-sensitive position, or negative gap, falling interest rates would generally be expected to have a positive effect on net interest income, and rising interest rates would generally be expected to have the opposite effect.  The following table presents the Company’s rate sensitivity at each of the time intervals indicated as of December 31, 2010 and may not be indicative of the Company’s rate-sensitivity position at other points in time:

Interest Rate Sensitivity Analysis