Exhibit 13.1

2009 Annual Report

Table of Contents



|                                                                                      |  |   
|------------------------------------------------------------------------------------- |  | --
|Selected Financial Data                                                               |  | 2 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 3 
|Consolidated Balance Sheets                                                           |  | 37
|Consolidated Statements of Operations                                                 |  | 38
|Consolidated Statements of Changes in Shareholders Equity                            |  | 39
|Consolidated Statements of Cash Flows                                                 |  | 40
|Notes to Consolidated Financial Statements                                            |  | 42



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Selected Financial Data

The financial information presented below has been derived from our audited consolidated financial statements. This information is only a
summary and should be read together with our consolidated historical financial statements and managements discussion and analysis appearing elsewhere in this annual report.



|                                                       |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|------------------------------------------------------ |  | ---- | ---------- | -- | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | --------- | -
|(dollars in thousands except share and per share data) |  | 2009 |            |    | 2008 |   |            | 2007 |  |   | 2006       |   |  | 2005 |           
|Operating Results:                                     |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Interest income                                        |  | $    | 149,445    |    |      | $ | 45,177     |      |  | $ | 38,203     |   |  | $    | 30,021     |   |  | $ | 24,558    |  
|Interest expense                                       |  |      | 44,294     |    |      |   | 17,917     |      |  |   | 14,016     |   |  |      | 9,123      |   |  |   | 5,869     |  
|                                                       |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net interest income                                    |  |      | 105,151    |    |      |   | 27,260     |      |  |   | 24,187     |   |  |      | 20,898     |   |  |   | 18,689    |  
|Provision for loan losses                              |  |      | 134,223    |    |      |   | 1,418      |      |  |   | 1,232      |   |  |      | 180        |   |  |   | 486       |  
|Noninterest income                                     |  |      | 22,325     |    |      |   | 5,980      |      |  |   | 3,440      |   |  |      | 3,398      |   |  |   | 3,214     |  
|Noninterest expense                                    |  |      | 170,795    |    |      |   | 20,987     |      |  |   | 15,994     |   |  |      | 14,946     |   |  |   | 13,040    |  
|Income taxes (benefit)                                 |  |      | (32,075    | )  |      |   | 3,660      |      |  |   | 3,590      |   |  |      | 3,134      |   |  |   | 2,870     |  
|                                                       |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net income (loss)                                      |  |      | (145,467   | )  |      |   | 7,175      |      |  |   | 6,811      |   |  |      | 6,036      |   |  |   | 5,507     |  
|Preferred stock dividend and accretion of discount     |  |      | 8,689      |    |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|                                                       |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net income (loss) available to common shareholders     |  | $    | (154,156   | )  |      | $ | 7,175      |      |  | $ | 6,811      |   |  | $    | 6,036      |   |  | $ | 5,507     |  
|                                                       |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|                                                       |  |      |            |    |     
|Per Common Share Data:                                 |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Basic earnings (loss)                                  |  | $    | (7.07      | )  |      | $ | 0.60       |      |  | $ | 0.67       |   |  | $    | 0.66       |   |  | $ | 0.68      |  
|Diluted earnings (loss)                                |  |      | (7.07      | )  |      |   | 0.59       |      |  |   | 0.65       |   |  |      | 0.65       |   |  |   | 0.66      |  
|Book value                                             |  |      | 2.08       |    |      |   | 9.70       |      |  |   | 7.14       |   |  |      | 6.84       |   |  |   | 5.96      |  
|Tangible book value                                    |  |      | 1.50       |    |      |   | 5.18       |      |  |   | 7.14       |   |  |      | 6.84       |   |  |   | 5.96      |  
|Basic weighted average shares outstanding              |  |      | 21,816,407 |    |      |   | 11,960,604 |      |  |   | 10,228,638 |   |  |      | 9,092,980  |   |  |   | 8,137,244 |  
|Diluted weighted average shares outstanding            |  |      | 21,816,407 |    |      |   | 12,074,725 |      |  |   | 10,431,554 |   |  |      | 9,275,788  |   |  |   | 8,407,821 |  
|Shares outstanding at year end                         |  |      | 22,154,320 |    |      |   | 21,777,937 |      |  |   | 10,314,899 |   |  |      | 10,251,336 |   |  |   | 8,242,822 |  
|                                                       |  |      |            |    |     
|Year-End Balances:                                     |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Assets                                                 |  | $    | 2,975,558  |    |      | $ | 3,085,711  |      |  | $ | 563,828    |   |  | $    | 476,299    |   |  | $ | 409,517   |  
|Loans                                                  |  |      | 2,426,692  |    |      |   | 2,599,526  |      |  |   | 477,149    |   |  |      | 375,044    |   |  |   | 285,330   |  
|Investment securities                                  |  |      | 190,841    |    |      |   | 177,432    |      |  |   | 47,081     |   |  |      | 59,545     |   |  |   | 73,826    |  
|Deposits                                               |  |      | 2,495,040  |    |      |   | 2,296,146  |      |  |   | 431,457    |   |  |      | 363,261    |   |  |   | 327,447   |  
|Borrowings                                             |  |      | 277,469    |    |      |   | 429,588    |      |  |   | 53,000     |   |  |      | 38,000     |   |  |   | 30,500    |  
|Shareholders equity                                   |  |      | 180,996    |    |      |   | 344,809    |      |  |   | 73,660     |   |  |      | 70,163     |   |  |   | 49,131    |  
|                                                       |  |      |            |    |     
|Average Balances:                                      |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Assets                                                 |  | $    | 3,072,474  |    |      | $ | 759,264    |      |  | $ | 519,175    |   |  | $    | 432,716    |   |  | $ | 382,821   |  
|Loans                                                  |  |      | 2,561,685  |    |      |   | 646,211    |      |  |   | 428,874    |   |  |      | 325,506    |   |  |   | 287,979   |  
|Investment securities                                  |  |      | 162,298    |    |      |   | 41,711     |      |  |   | 53,946     |   |  |      | 67,130     |   |  |   | 52,706    |  
|Deposits                                               |  |      | 2,325,606  |    |      |   | 562,390    |      |  |   | 389,055    |   |  |      | 333,242    |   |  |   | 302,167   |  
|Borrowings                                             |  |      | 397,616    |    |      |   | 94,101     |      |  |   | 51,336     |   |  |      | 36,968     |   |  |   | 30,944    |  
|Shareholders equity                                   |  |      | 316,381    |    |      |   | 94,030     |      |  |   | 71,545     |   |  |      | 57,640     |   |  |   | 44,855    |  
|                                                       |  |      |            |    |     
|Ratios:                                                |  |      |            |    |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Return on average assets                               |  |      | (4.73      | )% |      |   | 0.95       | %    |  |   | 1.31       | % |  |      | 1.39       | % |  |   | 1.44      | %
|Return on average common equity                        |  |      | (84.93     | )  |      |   | 7.63       |      |  |   | 9.52       |   |  |      | 10.47      |   |  |   | 12.28     |  
|Average equity to average assets                       |  |      | 10.30      |    |      |   | 12.38      |      |  |   | 13.78      |   |  |      | 13.32      |   |  |   | 11.72     |  
|Allowance for loan losses to year end loans            |  |      | 5.47       |    |      |   | 1.97       |      |  |   | 1.06       |   |  |      | 1.04       |   |  |   | 1.26      |  
|Net interest margin                                    |  |      | 3.95       |    |      |   | 3.89       |      |  |   | 4.95       |   |  |      | 5.20       |   |  |   | 5.26      |  
|Dividend payout ratio                                  |  |      | NM         |    |      |   | 73.33      |      |  |   | 64.18      |   |  |      | 75.76      |   |  |   | 52.94     |  
|Efficiency ratio                                       |  |      | 138.63     |    |      |   | 64.02      |      |  |   | 57.89      |   |  |      | 61.52      |   |  |   | 59.54     |  

NM - Not Meaningful



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Managements Discussion and Analysis

of Financial Condition and Results of Operations

Introduction

Hampton Roads Bankshares,
Inc. (the Company) is a bank holding company that was formed in 2001 and is headquartered in Norfolk, Virginia. The Companys primary subsidiaries are Bank of Hampton Roads (BOHR), which opened for business in 1987, and
Shore Bank (Shore), which opened in 1961. The Banks engage in general community and commercial banking business, targeting the needs of individuals and small- to medium-sized businesses. Currently, BOHR operates twenty-eight banking
offices in the Hampton Roads region of southeastern Virginia and twenty-four offices throughout Virginia and North Carolina doing business as Gateway Bank & Trust Co. (Gateway). Shore serves the Eastern Shore of Maryland and
Virginia through eight banking offices. Through various affiliates, the Banks also offer mortgage banking services, insurance, title insurance, and investment products. Unless the context otherwise requires, the terms the Company,
we, us, or our are used to refer to Hampton Roads Bankshares, Inc. and our consolidated subsidiaries on a combined basis.

We acquired Shore Financial Corporation and Subsidiaries (SFC) on June 1, 2008, and therefore, the financial information discussed
throughout the Management Discussion and Analysis includes the operations of Shore and Shore Investments Inc., for the seven months ended December 31, 2008 and throughout 2009. Our acquisition of Gateway Financial Holdings, Inc. and
Subsidiaries (GFH) occurred on December 31, 2008; accordingly, the Companys consolidated financial statements only include ending balance information, excluding GFHs results from operations, during 2008 and a full year
of operations during 2009.

With the acquisition of GFH, the Company acquired non-banking sources of noninterest income. As a result, the
Company has four non-banking subsidiaries: Gateway Insurance Services, Inc., which sells insurance products to businesses and individuals; Gateway Investment Services, Inc., which assists customers with their securities brokerage activities through
an arrangement with an unaffiliated broker-dealer; Gateway Bank Mortgage, Inc., which provides mortgage banking services with products which are primarily sold on the secondary market; and Gateway Title Agency, Inc., which engages in title insurance
and settlement services for real estate transactions.

The following commentary provides information about the major components of our results
of operations, financial condition, liquidity, and capital resources. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this
Annual Report. It should also be read in conjunction with the Caution About Forward Looking Statements section at the end of this discussion.

Executive Overview

In 2009, economic
conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels. The Company reported a significant net loss for
fiscal 2009, primarily a result of a significant adjustment to our provision for loan losses, the complete write-down of our goodwill asset related to our acquisitions of SFC and GFH, and a loss on investments due to other-than-temporary impairment
charges on available-for-sale securities. In light of the current economic environment, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur
significant credit costs in 2010, which would continue to adversely impact our financial condition and results of operations.

As of
December 31, 2009, the Company and BOHR were adequately capitalized under applicable banking regulations; Shore Bank was well-capitalized. As a result, the Company is in the process of attempting to raise the additional
capital necessary to become well-capitalized at all levels.

The acquisition of SFC added approximately $220.5 million in loans
and $208.4 million in deposits to our balance sheet upon acquisition. The acquisition also generated approximately $27.9 million in goodwill. Due primarily to deteriorating economic conditions and in accordance with applicable accounting rules and
guidance, the entire goodwill amount was determined to be impaired and was charged against income in the second quarter of 2009.



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Because the acquisition of GFH was completed at the end of 2008, GFHs results are included in the
income statement, average balances, and related metrics beginning in 2009. GFHs assets and liabilities are included, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in 2008 averages. At the time of
acquisition, GFH added approximately $1.8 billion in loans and $1.7 billion in deposits to the balance sheet. Those amounts represented approximately 69% of loans and 74% of deposits of the consolidated Company at year-end 2008. The acquisition also
generated $56.9 million in goodwill. In the fourth quarter of 2009, it was determined that the GFH goodwill was impaired and the entire amount was charged against income. In addition, as discussed later, our problem loans increased significantly in
2009; loans acquired from GFH have been the primary source of that increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient loan collection resources contributed to the credit quality problems. We have taken
remedial action to address the internal issues, which are addressed in later sections of this report.

Our primary source of revenue is net
interest income earned by our bank subsidiaries. Net interest income represents interest and fees earned from lending and investment activities, less the interest paid on deposits and borrowings. Net interest income may be impacted by variations in
the volume and mix of interest earning assets and interest bearing liabilities, changes in the yields earned and the rates paid, level of non-performing interest earning assets, and the level of noninterest bearing liabilities available to support
earning assets. Our net interest income was negatively impacted by increasing levels of non-performing loans during 2009. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived
primarily from service charges on deposits and fees earned from bank services. With the addition of SFC and GFH, fees earned from investment, mortgage, and insurance activities also represent a significant component of noninterest income. Other
factors that impact net income are the provision for loan losses, noninterest expense, and the provision for income taxes.

The following is a
summary of our condition and financial performance as of December 31, 2009.



| |  | Assets were $3.0 billion. They decreased by $110.2 million or 4% from December 31, 2008. The decrease in assets was primarily associated with a
$172.8 million decrease in loans, an $81.5 million increase in our allowance for loan losses, and a $85.5 million decrease in goodwill and other intangible assets, offset by an increase of $138.7 million in overnight funds sold and due from Federal
Reserve Bank (FRB).
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Investment securities available-for-sale increased $11.4 million to $161.1 million from December 31, 2008. The increase was the result of our
investing some of the funds obtained from the increase in our deposits into pledgable interest earning securities. The investment portfolio was restructured during 2009 to increase regulatory capital ratios by selling higher risk-weighted securities
and reinvesting the proceeds into securities that would favor our regulatory capital ratios.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Loans decreased by $172.8 million or 7% and deposits increased by $198.9 million or 9% for 2009 from December 31, 2008. The decrease in loans was
attributed to pay downs and maturities of loans that exceeded new loans originated during 2009. Additionally, new loan demand was low during this period due to general economic conditions. The increase in deposits was attributed to an increase in
interest bearing demand deposits and time deposits less than $100 thousand. A money market promotional campaign contributed significantly to the increase in interest bearing demand deposits.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net loss available to common shareholders for 2009 was $154.2 million or $7.07 per common diluted share as compared with net income available to common
shareholders of $7.2 million or $0.59 per common diluted share for comparative 2008. The primary reasons for the loss in 2009 were an increase in the allowance for loan losses of $81.5 million due to additional reserves necessary for resolving
problem credits as loan quality has deteriorated due to the slow economy, declining real estate values in some markets, and goodwill impairment charges of $84.8 million in 2009 related to the SFC and GFH acquisitions.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The net interest margin was 3.95% in 2009 compared to 3.89% and 4.95% in 2008 and 2007, respectively. Favorable reductions in interest expense due to
the amortization of fair value adjustments generated in the acquisitions of SFC and GFH affected the 2009 net interest margin.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Net interest income increased $77.9 million to $105.2 million for the year ended December 31, 2009 as compared to the same period 2008. The
increase was due primarily to the increase of net interest income from loans acquired in the SFC and GFH acquisitions in 2008.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Noninterest income for the period ended December 31, 2009 was $22.3 million, a 273% increase over comparative 2008. This was largely due to the
addition of the non-banking subsidiaries through our acquisition of GFH, gain on the sale of investment securities, and the increase in service charges and fees that resulted from the SFC and GFH acquisitions. Noninterest income was reduced during
2009 by an extinguishment of debt charge and other-than-temporary impairment charges to foreclosed real estate and securities.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Noninterest expense was $170.8 million for the period ended December 31, 2009, which was an increase of $149.8 million or 714% over the comparable
period for 2008. The increase was attributed largely to the addition of noninterest expenses in all categories resulting from the SFC and GFH acquisitions, increases in FDIC insurance including a one-time special assessment leveled at all financial
institutions, and goodwill impairment charges of $84.8 million.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our effective tax rate decreased to (18.07%) in 2009 compared to 33.78% for comparative 2008. The change in our effective tax rate for 2009 was
primarily due to the fact that the $84.8 million impairment of goodwill charge is not deductible for income tax purposes, thus our income tax benefit was negatively impacted.
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Material Trends

The global and U.S.
economies continue to experience a protracted slowdown in business activity as a result of disruptions, including a lack of confidence in the worldwide credit markets and in the financial system. Currently, the U.S. economy remains in the midst of
one of its longest economic recessions in recent history. It is not clear at this time what ultimate impact U.S. Government programs such as the Troubled Asset Relief Program (TARP) Capital Purchase Program (TARP CPP or
CPP) and other liquidity and funding initiatives of the Federal Reserve System will have on the financial markets, the U.S. banking and financial industries, the broader U.S. and global economies, and, more importantly, the local
economies in the markets that we serve.

Partially as a result of the economy and partially due to our credit practices and administration, we
experienced a significant deterioration in credit quality in 2009. Problem loans and non-performing assets rose throughout the year and led us to significantly increase the allowance for loan losses. To bolster our allowance, we increased the
provision for loan losses to $134.2 million from $1.4 million in 2008. The increased expense contributed to a net loss available to common shareholders of $154.2 million in 2009. In light of continued economic weakness, problem credits may continue
to rise and significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs in 2010, which would continue to adversely impact our
financial condition, our results of operations, and the value of our common stock.

Critical Accounting Policies

U.S. generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting, and
disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or
complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from those estimates.



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Allowance for Loan Losses

The allowance for loan losses reflects the estimated losses resulting from the inability of our borrowers to make required loan payments. The allowance
for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collection of the principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.

The allowance is based on two basic principles of accounting: (i) Accounting Standards Codification
(ASC) 450, Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated and (ii) ASC 310-40, Receivables, which requires that losses be accrued based on the
differences between the value of collateral, present value of future cash flows, or values that are observable in the secondary market and the loan balance. The allowance is an amount that management believes will be adequate to absorb estimated
losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes
into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, credit concentrations, trends in historical loss experience, and current economic conditions.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are determined to be impaired. We
evaluate for impairment loans classified with a risk rating of Substandard or worse with balances of $150,000 and greater, loans that are classified as troubled debt restructurings, and nonaccrual loans. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of payments expected to be received using
the historical effective loan rate as the discount rate. Alternatively, the measurement also may be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, the measurement may be based on the net
realizable fair value of the collateral. With regard to housing price depreciation and homeowners loss in the equity of collateral, we rely upon appraisals to substantiate collateral values. In addition, we have developed a matrix to adjust
the value of differing types of properties depending on the length of time since the most recent appraisal was received. The adjustment factors range from 0% to 35% and were based upon published statistics. We also take into consideration the
markets where the properties are located and apply higher or lower range values depending on specific market conditions. In the event that the borrowers financial strength and the collateral are not sufficient to support the loan value, the
loan is treated as impaired and the shortfall is factored into the allowance for loan losses calculation as a specific reserve.

The general
component covers loans not designated for a specific allowance and is based on historical loss experience adjusted for qualitative factors. To arrive at the general component the loan portfolio is grouped by loan type. Each loan type is further
subdivided by risk levels as determined in our loan grading process. A weighted average historical loss rate is computed for each group of loans over the trailing thirty-six months with higher weightings assigned to the most recent months. Beginning
in 2009, the historical loss factor included historical losses of Hampton Roads Bankshares (HRB) and GFH on a combined basis. In addition, an adjustment factor is applied. The adjustment factor represents managements judgment that
inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans. These factors may relate to:



| |  |  | Growth rate factors within the particular loan group;
| | - |  | -----------------------------------------------------



| |  |  | Whether the recent loss history for a particular group of loans differs from its historical loss rate;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reported or observed difficulties that other banks are having with loans in the particular group;
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| |  |  | Changes in the experience, ability, and depth of lending personnel;
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| |  |  | Changes in the nature and volume of the loan portfolio and in the terms of loans; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans.
| | - |  | -------------------------------------------------------------------------------------------------------



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The sum of the historical loss rate and the adjustment factor comprise the estimated annual loss rate. To
adjust for risk levels, a loss allocation factor is estimated based on the segmented risk levels for the loan group and is keyed off of a pass credit rating. The loss allocation factor is applied to the estimated annual loss rate to determine the
expected annual loss amount. Additionally, we apply an economic factor to recognize external forces over which management has no control and to estimate inherent losses that may otherwise be omitted from the allowance calculation. The factors used
in this calculation include published data for the gross domestic product growth rate, interest rate levels, as measured by the prime rate, and regional unemployment statistics.

An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio and represents inherent losses that may not otherwise be captured in the
specific or general components.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances,
such as legal factors, business climate, unanticipated competition, changes in regulatory environment, or loss of key personnel, suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their
estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are periodically reviewed for other-than-temporary impairment.

Financial Accounting Standards Board (FASB) ASC 350, Intangibles  Goodwill and Other, identifies a two-step impairment test that
should be used to test for impairment and measure the amount of the impairment loss to be recognized. The first step involves comparing the fair value of the reporting unit with the carrying value of the reporting unit. The fair value of a reporting
unit is computed using one or a combination of the following three methods: income method, market value, or cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting units capital
structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets and liabilities to
determine fair value. The cost method assumes the net assets of a recent business combination accounted for under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering a decline in the
value. To the extent a reporting units carrying amount exceeds its fair value, an indication exists that the reporting units goodwill may be impaired, and a second step of impairment testing will be performed. In the second step, the
implied fair value of the reporting units goodwill is determined by allocating the reporting units fair value to all its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business
combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited to the
carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

Deferred Income Taxes

Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss
and credit carry forwards, and deferred tax liabilities are measures using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax expense
(benefit) represents the change during the period in the deferred tax assets and deferred tax liabilities.

We use the asset and liability
method in accounting for income taxes. This method recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that
have been recognized in our financial statements or tax returns.



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Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in the future years, and, as such, material changes would
impact our financial condition and results of operations.

Estimates of Fair Value or Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment
securities available-for-sale and derivative loan commitments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans,
foreclosed real estate and repossessed assets, goodwill, 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.

When developing fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use
quoted prices in active markets to measure fair value. If quoted prices in active markets are not available, fair value measurement is based upon quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. However, in certain cases, when market observable inputs for model-based valuation techniques may not be
readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in
active markets or observable market parameters. For financial instruments with quoted market prices or observable market parameters in active markets, there is minimal subjectivity involved in measuring fair value. When quoted prices and observable
data in active markets are not fully available, management judgment is necessary to estimate fair value. Changes in the market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the
availability and reliability of quoted prices or observable data used to determine fair value. When significant adjustments are required to price quotes or inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs.
When an active market for a financial instrument does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, adjusted for an appropriate risk premium, is acceptable.

In connection with the first quarter 2009 adoption of the new fair value measurement guidance included in ASC 820, Fair Value Measurements and
Disclosures,we developed policies and procedures to determine when markets for our financial assets and liabilities are inactive if the level and volume of activity has declined significantly relative to normal conditions. If markets are
determined to be inactive, it may be appropriate to adjust price quotes received. The methodology we use to adjust the quotes generally involves weighing the price quotes and results of internal pricing techniques, such as the net present value of
future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require to arrive at the fair value. The more active and orderly markets for particular security classes are determined to be,
the more weight we assign to price quotes; whereas, the less active and orderly markets are determined to be, the less weight we assign to price quotes.

Significant judgment may be required to determine whether certain assets measured at fair value are included in Level 2 or Level 3. When making this
judgment, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we
use a predetermined percentage to evaluate the impact of fair value adjustments derived from weighing both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Otherwise, the classification
of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to the instruments fair value measurement in its
entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.



8



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Analysis of Results of Operations

During 2009, we incurred a net loss available to common shareholders of $154.2 million, compared with net income available to common shareholders of $7.2
million for 2008. The net loss in 2009 was largely attributable to $84.8 million in goodwill impairment charges related to the SFC and GFH acquisitions and $134.2 million in provision for loan losses expense, which was necessary to increase reserves
for potential loan losses due to the slow economy and declining real estate values. Diluted loss per common share was $7.07 for 2009, a decrease of $7.66 over the diluted earnings per common share of $0.59 for 2008.

Net Interest Income

Net interest
income, a major component of our earnings, is the difference between the income generated by interest-earning assets reduced by the cost of interest-bearing liabilities. The net interest margin, defined as net interest income as a percentage of
average earning assets, was 3.95%, 3.89%, and 4.95% in 2009, 2008, and 2007, respectively. Net interest income and net interest margin may be significantly impacted by variations in the volume and mix of interest earning assets and interest bearing
liabilities, changes in the yields earned and rates paid, and the level of noninterest bearing liabilities available to support earning assets. Our management team strives to maximize net interest income through prudent balance sheet administration,
maintaining appropriate risk levels as determined by our Asset and Liability Committee (ALCO) and the Board of Directors.

Table 1 presents the average interest earning assets and average interest bearing liabilities, the average yields earned on such assets and rates
paid on such liabilities, and the net interest margin for the indicated periods. The variance in interest income and expense caused by differences in average balances and rates is shown in Table 2.



9



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Table 1: Average Balance Sheet and Net Interest Margin Analysis



|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|------------------------------------------ |  | -------------- | --------- | ---------------------- | ---- | ----------------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------------- | - | ------ | -------------- | ---- | ---------------------- |  | ----------------- | ------- |  | - | ------ |  | ---- | -
|                                           |  | 2009           |           |                        | 2008 |                   |  | 2007 |               
|(in thousands)                             |  | AverageBalance |           | InterestIncome/Expense |      | AverageYield/Rate |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageYield/Rate |   |        | AverageBalance |      | InterestIncome/Expense |  | AverageYield/Rate |        
|Assets:                                    |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Interest earning assets                    |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Loans                                      |  | $              | 2,418,983 |                        | $    | 142,969           |  | 5.91 | %              |  | $                      | 646,211 |                   | $ | 43,201 |                | 6.69 | %                      |  | $                 | 428,874 |  | $ | 35,604 |  | 8.30 | %
|Investment securities                      |  |                | 162,298   |                        |      | 6,339             |  | 3.91 | %              |  |                        | 41,711  |                   |   | 1,677  |                | 4.02 | %                      |  |                   | 53,946  |  |   | 2,316  |  | 4.29 | %
|Interest-bearing deposits in other banks   |  |                | 14,104    |                        |      | 38                |  | 0.27 | %              |  |                        | 9,632   |                   |   | 246    |                | 2.55 | %                      |  |                   | 4,870   |  |   | 248    |  | 5.09 | %
|Overnight funds sold and due from FRB      |  |                | 67,962    |                        |      | 99                |  | 0.15 | %              |  |                        | 3,030   |                   |   | 53     |                | 1.75 | %                      |  |                   | 691     |  |   | 35     |  | 5.07 | %
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total interest earning assets              |  |                | 2,663,347 |                        |      | 149,445           |  | 5.61 | %              |  |                        | 700,584 |                   |   | 45,177 |                | 6.45 | %                      |  |                   | 488,381 |  |   | 38,203 |  | 7.82 | %
|Noninterest earning assets                 |  |                | 409,127   |                        |      |                   |  |      |                |  |                        | 58,680  |                   |   |        |                |      |                        |  |                   | 30,794  |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total assets                               |  |                | 3,072,474 |                        |      |                   |  |      |                |  |                        | 759,264 |                   |   |        |                |      |                        |  |                   | 519,175 |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |               
|Liabilities and Shareholders Equity:      |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Interest bearing liabilities               |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Interest bearing demand deposits           |  |                | 666,545   |                        |      | 7,512             |  | 1.13 | %              |  |                        | 81,014  |                   |   | 1,030  |                | 1.27 | %                      |  |                   | 40,863  |  |   | 678    |  | 1.66 | %
|Savings deposits                           |  |                | 111,177   |                        |      | 1,110             |  | 1.00 | %              |  |                        | 88,559  |                   |   | 1,741  |                | 1.97 | %                      |  |                   | 79,994  |  |   | 2,866  |  | 3.58 | %
|Time deposits                              |  |                | 1,289,638 |                        |      | 27,393            |  | 2.12 | %              |  |                        | 282,150 |                   |   | 11,321 |                | 4.01 | %                      |  |                   | 168,886 |  |   | 8,113  |  | 4.80 | %
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total interest bearing deposits            |  |                | 2,067,360 |                        |      | 36,015            |  | 1.74 | %              |  |                        | 451,723 |                   |   | 14,092 |                | 3.12 | %                      |  |                   | 289,743 |  |   | 11,657 |  | 4.02 | %
|Borrowings                                 |  |                | 397,616   |                        |      | 8,279             |  | 2.08 | %              |  |                        | 94,101  |                   |   | 3,825  |                | 4.06 | %                      |  |                   | 51,336  |  |   | 2,359  |  | 4.60 | %
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total interest bearing liabilities         |  |                | 2,464,976 |                        |      | 44,294            |  | 1.80 | %              |  |                        | 545,824 |                   |   | 17,917 |                | 3.28 | %                      |  |                   | 341,079 |  |   | 14,016 |  | 4.11 | %
|Noninterest bearing liabilities            |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Demand deposits                            |  |                | 258,246   |                        |      |                   |  |      |                |  |                        | 110,667 |                   |   |        |                |      |                        |  |                   | 99,312  |  |   |        |  |      |  
|Other liabilities                          |  |                | 32,871    |                        |      |                   |  |      |                |  |                        | 8,743   |                   |   |        |                |      |                        |  |                   | 7,239   |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total noninterest bearing liabilities      |  |                | 291,117   |                        |      |                   |  |      |                |  |                        | 119,410 |                   |   |        |                |      |                        |  |                   | 106,551 |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total liabilities                          |  |                | 2,756,093 |                        |      |                   |  |      |                |  |                        | 665,234 |                   |   |        |                |      |                        |  |                   | 447,630 |  |   |        |  |      |  
|Shareholders equity                       |  |                | 316,381   |                        |      |                   |  |      |                |  |                        | 94,030  |                   |   |        |                |      |                        |  |                   | 71,545  |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Total liabilities and shareholders equity |  | $              | 3,072,474 |                        |      |                   |  |      |                |  | $                      | 759,264 |                   |   |        |                |      |                        |  | $                 | 519,175 |  |   |        |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Net interest income                        |  |                |           |                        | $    | 105,151           |  |      |                |  |                        |         |                   | $ | 27,260 |                |      |                        |  |                   |         |  | $ | 24,187 |  |      |  
|                                           |  |                |           |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                   |         |  |   |        |  |      |  
|Net interest spread                        |  |                |           |                        |      |                   |  | 3.81 | %              |  |                        |         |                   |   |        |                | 3.17 | %                      |  |                   |         |  |   |        |  | 3.71 | %
|Net interest margin                        |  |                |           |                        |      |                   |  | 3.95 | %              |  |                        |         |                   |   |        |                | 3.89 | %                      |  |                   |         |  |   |        |  | 4.95 | %

Note: Interest income from
loans included fees of $1,121 in 2009, $817 in 2008, and $1,414 in 2007. Average nonaccrual loans of $142,702 are excluded from average loans for 2009. Average nonaccrual loans for 2008 and 2007 were not material and are included in average loans
above.



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Table 2: Effect of Changes in Rate and Volume on Net Interest Income



|                                         |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------ | ------- | --------------------- | ------------------------ | - | ------------------------ | ------ |  | ------------------------ | ------- |  | ---- | ----- | - | ------ | - | ------ | - |  | - | ------ | -
|                                         |  | 2009 Compared to 2008    |         | 2008 Compared to 2007 |                         
|                                         |  | Interest
Income/
Expense |         |                       | VarianceAttributable 
to |   | Interest
Income/
Expense |        |  | VarianceAttributable 
to |        
|(in thousands)                           |  | Variance                 |         |                       | Rate                     |   |                          | Volume |  | Variance                 |         |  | Rate |       |   | Volume |  
|Interest Earning Assets:                 |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|Loans                                    |  | $                        | 99,768  |                       |                          | $ | (4,427                   | )      |  | $                        | 104,195 |  | $    | 7,597 |   |        | $ | (4,741 | ) |  | $ | 12,338 |  
|Investment securities                    |  |                          | 4,662   |                       |                          |   | (46                      | )      |  |                          | 4,708   |  |      | (639  | ) |        |   | (140   | ) |  |   | (499   | )
|Interest-bearing deposits in other banks |  |                          | (208    | )                     |                          |   | (433                     | )      |  |                          | 225     |  |      | (2    | ) |        |   | 1      |   |  |   | (3     | )
|Overnight funds sold and due from FRB    |  |                          | 46      |                       |                          |   | (2                       | )      |  |                          | 48      |  |      | 18    |   |        |   | (4     | ) |  |   | 22     |  
|                                         |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|Total interest earning assets            |  |                          | 104,268 |                       |                          |   | (4,908                   | )      |  |                          | 109,176 |  |      | 6,974 |   |        |   | (4,884 | ) |  |   | 11,858 |  
|Interest Bearing Liabilities:            |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|Deposits                                 |  |                          | 21,923  |                       |                          |   | (3,088                   | )      |  |                          | 25,011  |  |      | 2,435 |   |        |   | (1,636 | ) |  |   | 4,071  |  
|Borrowings                               |  |                          | 4,454   |                       |                          |   | (792                     | )      |  |                          | 5,246   |  |      | 1,466 |   |        |   | (236   | ) |  |   | 1,702  |  
|                                         |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|Total interest bearing liabilities       |  |                          | 26,377  |                       |                          |   | (3,880                   | )      |  |                          | 30,257  |  |      | 3,901 |   |        |   | (1,872 | ) |  |   | 5,773  |  
|                                         |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  
|Net interest income                      |  | $                        | 77,891  |                       |                          | $ | (1,028                   | )      |  | $                        | 78,919  |  | $    | 3,073 |   |        | $ | (3,012 | ) |  | $ | 6,085  |  
|                                         |  |                          |         |                       |                          |   |                          |        |  |                          |         |  |      |       |   |        |   |        |   |  |   |        |  

Note: The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance
attributable to volume in proportion to the relationship for the absolute amounts of change in each.

2009 Compared to 2008

Net interest income was $105.2 million during the year ended December 31, 2009, representing an increase of $77.9 million or 286% as compared with
2008. The 2009 increase in net interest income resulted from growth in average loans of $1.8 billion from 2008 to 2009, largely the result of loans acquired in the GFH merger. Additionally, we benefited from a 148 basis point decrease in the average
rate paid on interest bearing liabilities from 3.28% in 2008 to 1.80% in 2009. Also, favorable reductions in interest expense due to the amortization of fair value adjustments generated in the acquisitions of SFC and GFH in the amount of $13.3
million impacted 2009 net interest income. Net interest income was negatively affected by a decline in the average yield on interest earning assets from 6.45% in 2008 to 5.61% in 2009. These changes in average yield and rate produced a net interest
spread which increased from 3.17% in 2008 to 3.81% in 2009.

The net interest margin, which is calculated by expressing net interest income as
a percentage of average interest earning assets, is an indicator of effectiveness in generating income from earning assets. Our net interest margin was 3.95% in 2009 compared to 3.89% in 2008. In calculating net interest margin for the year ended
2009, average nonaccrual loans of $142.7 million were excluded from interest earning assets.

Our interest earning assets consist primarily of
loans, investment securities, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Interest income on loans, including fees, increased $99.8 million to $143.0 million for the year ended December 31, 2009 compared
to the same time period during 2008. This increase resulted from a $1.8 billion increase in average interest earning loans and was partially offset by a 78 basis point decline in the average yield on loans. Interest income on investment securities
increased $4.7 million to $6.3 million for the year ended December 31, 2009, compared to the same time period during 2008. This increase was due to a $120.6 million increase in average investment securities, largely attributable to the GFH
acquisition. The increase was partially offset by an 11 basis point reduction in the average yield on investment securities from 2008 to 2009. Interest income on interest-bearing deposits in other banks decreased $208 thousand from 2008 to 2009.
This decrease was primarily the result of a 228 basis point decrease in the average interest yield. Interest income on overnight funds sold increased $46 thousand for the year ended December 31, 2009 compared to the same period ended 2008. This
decrease was largely due to a 160 basis point decrease experienced in the average interest yield of average overnight funds sold.



11



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Our interest bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits
increased $21.9 million to $36.0 million for the year ended December 31, 2009 compared to the same time period during 2008. This increase resulted from a $1.6 billion increase in average interest bearing deposits, largely due to the GFH
acquisition, offset by a 138 basis point decrease in the average interest rate on deposits. This decrease in our average deposit rates resulted in large part from declining rates on certificates of deposits and other deposits coupled with reductions
in interest expense due to the amortization of fair value adjustments generated in the acquisitions of SFC and GFH. These factors contributed significantly toward a reduction of our average rate on time deposits from 4.01% in 2008 to 2.12% in 2009.
Interest expense on borrowings, which consisted of Federal Home Loan Bank (FHLB) borrowings, other borrowings, and overnight funds purchased increased $4.5 million to $8.3 million for the year ended December 31, 2009 compared to the
same time period during 2008. The $303.5 million increase in average borrowings netted against a 198 basis point decrease in the average interest rate on borrowings produced this result.

2008 Compared to 2007

Net interest
income was $27.3 million during the year ended December 31, 2008, representing an increase of $3.1 million or 13% as compared with 2007. The 2008 increase in net interest income resulted from growth in interest earning assets during the period,
primarily due to the SFC merger. Additionally, we benefited from an 83 basis point decrease in the average rate paid on interest bearing liabilities from 4.11% in 2007 to 3.28% in 2008. Net interest income was negatively affected by a decline in the
average yield on interest earning assets from 7.82% in 2007 to 6.45% in 2008. These changes in average yield and rate produced a net interest spread which compressed from 3.71% in 2007 to 3.17% in 2008.

The net interest margin was 3.89% in 2008, compared to 4.95% in 2007. The Federal Open Market Committees 500 - 525 basis point reduction in the
target federal funds rate since September 2007 put continued downward pressure on interest rates which negatively impacted our asset sensitive balance sheet, resulting in the decline in the net interest margin.

Interest income on loans, including fees, increased $7.6 million to $43.2 million for the year ended December 31, 2008 compared to the same time
period during 2007. This increase resulted from a $217.3 million increase in average loans and was partially offset by a 161 basis point decline in the average yield on loans. The merger valuation adjustment of SFCs loan portfolio, which is
being amortized over approximately thirty-eight months beginning in June 2008, reduced interest income on loans by $221 thousand in 2008. Interest income on investment securities decreased $639 thousand to $1.7 million for the year ended
December 31, 2008 compared to the same time period during 2007. We experienced a $12.2 million decline in average investment securities, primarily resulting from maturing investments used to fund other liquidity needs and the existence of a
relatively unfavorable investment security market during the year. Interest income on interest-bearing deposits in other banks and overnight funds sold had a nominal impact on our interest income during 2008 and 2007.

Interest expense from deposits increased $2.4 million to $14.1 million for the year ended December 31, 2008 compared to the same time period during
2007. This increase resulted from the $162.0 million increase in average interest bearing deposits offset by a 90 basis point decrease in the average interest rate on deposit liabilities. The merger valuation adjustment of certain SFC deposits,
being amortized over eleven months beginning June 2008, decreased interest expense on deposits by $341 thousand in 2008. Interest expense from borrowings increased $1.5 million to $3.8 million for the year ended December 31, 2008 compared to
the same time period during 2007. The $42.8 million increase in average borrowings netted against the 54 basis point decrease in the average interest rate on borrowings produced this result. The merger valuation adjustment of SFCs borrowings,
being amortized over fourteen months beginning in June 2008, decreased interest expense on borrowings by $173 thousand in 2008.



12



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Noninterest Income

Table 3: Noninterest Income



|                                              |      |   |        |      |  |   |       |   |   |                       |       |   |                       |        |   |  |      |    |  |   |       |   |  |      |  
|--------------------------------------------- | ---- | - | ------ | ---- |  | - | ----- | - | - | --------------------- | ----- | - | --------------------- | ------ | - |  | ---- | -- |  | - | ----- | - |  | ---- | -
|(in thousands)                                |      |   |        |      |  |   |       |   |   | 2009 Compared to 2008 |       |   | 2008 Compared to 2007 |       
|                                              | 2009 |   |        | 2008 |  |   | 2007  |   | $ |                       |       | % |                       |        | $ |  |      | %  | 
|Service charges on deposit accounts           |      | $ | 8,117  |      |  | $ | 3,379 |   |   | $                     | 1,996 |   | $                     | 4,738  |   |  | 140  | %  |  | $ | 1,383 |   |  | 69   | %
|Mortgage banking revenue                      |      |   | 4,642  |      |  |   |      |   |   |                       |      |   |                       | 4,642  |   |  |     |    |  |   |      |   |  |     |  
|Gain on sale of investment securities         |      |   | 4,274  |      |  |   | 457   |   |   |                       |      |   |                       | 3,817  |   |  | 835  | %  |  |   | 457   |   |  |     |  
|Gain (loss) on sale of premises and equipment |      |   | (29    | )    |  |   | 519   |   |   |                       | 11    |   |                       | (548   | ) |  | (106 | )% |  |   | 508   |   |  | 4618 | %
|Extinguishment of debt charge                 |      |   | (1,962 | )    |  |   |      |   |   |                       |      |   |                       | (1,962 | ) |  |     |    |  |   |      |   |  |     |  
|Other-than-temporary impairment               |      |   |        |      |  |   |       |   |   |                       |       |   |                       |        |   |  |      |    |  |   |       |   |  |      |  
|of foreclosed real estate                     |      |   | (1,043 | )    |  |   |      |   |   |                       |      |   |                       | (1,043 | ) |  |     |    |  |   |      |   |  |     |  
|of securities                                 |      |   | (2,469 | )    |  |   | (561  | ) |   |                       |      |   |                       | (1,908 | ) |  | 340  | %  |  |   | (561  | ) |  |     |  
|Insurance revenue                             |      |   | 4,901  |      |  |   |      |   |   |                       |      |   |                       | 4,901  |   |  |     |    |  |   |      |   |  |     |  
|Brokerage revenue                             |      |   | 354    |      |  |   |      |   |   |                       |      |   |                       | 354    |   |  |     |    |  |   |      |   |  |     |  
|Income from bank owned life insurance         |      |   | 1,658  |      |  |   |      |   |   |                       |      |   |                       | 1,658  |   |  |     |    |  |   |      |   |  |     |  
|Visa check card income                        |      |   | 1,810  |      |  |   | 541   |   |   |                       | 285   |   |                       | 1,269  |   |  | 235  | %  |  |   | 256   |   |  | 90   | %
|ATM surcharge fees                            |      |   | 406    |      |  |   | 213   |   |   |                       | 210   |   |                       | 193    |   |  | 91   | %  |  |   | 3     |   |  | 1    | %
|Other                                         |      |   | 1,666  |      |  |   | 1,432 |   |   |                       | 938   |   |                       | 234    |   |  | 16   | %  |  |   | 494   |   |  | 53   | %
|                                              |      |   |        |      |  |   |       |   |   |                       |       |   |                       |        |   |  |      |    |  |   |       |   |  |      |  
|Total noninterest income                      |      | $ | 22,325 |      |  | $ | 5,980 |   |   | $                     | 3,440 |   | $                     | 16,345 |   |  | 273  | %  |  | $ | 2,540 |   |  | 74   | %
|                                              |      |   |        |      |  |   |       |   |   |                       |       |   |                       |        |   |  |      |    |  |   |       |   |  |      |  

2009 Compared to 2008

As shown in Table 3, we reported an increase in total noninterest income of $16.3 million or 273% in 2009 over 2008. Noninterest income comprised
13% of total revenue in 2009 and 12% in 2008. Our largest source of noninterest income is service charges on deposit accounts which increased $4.7 million or 140% to $8.1 million for the year ended December 31, 2009 compared to the same period
in 2008. The increase was primarily attributed to service charges on the accounts acquired with the SFC and GFH mergers. Additionally, as part of the GFH merger, we acquired mortgage, insurance, and brokerage subsidiaries; revenue from these
operations was $4.6 million, $4.9 million, and $354 thousand, respectively. We had no such income during 2008. We incurred an extinguishment of debt charge during 2009 of $2.0 million on the early payoff of two FHLB advances. In order to restructure
our investment portfolio to lower our risk weighted assets for regulatory capital ratio purposes during 2009, we sold securities with higher risk weights and reinvested in securities with lower risk weights. We generated gains on sales of investment
securities of $4.3 million in 2009 and $457 thousand in 2008. The deteriorating economy during 2009 caused other-than-temporary impairments in our foreclosed real estate and investment securities portfolios and impairment charges of $1.0 million and
$2.5 million, respectively, were incurred during 2009 and included as a reduction to noninterest income. Other-than-temporary impairment of securities of $561 thousand was incurred during 2008.

2008 Compared to 2007

We reported an
increase in total noninterest income of $2.5 million or 74% in 2008 over 2007. Service charges on deposit accounts increased $1.4 million or 69% to $3.4 million for the year ended December 31, 2008 compared to the same period in 2007. The
addition of SFC represented $1.2 million of the increase to service charges on deposit accounts. During the first and third quarters of 2008, we sold investment securities available-for-sale and recorded a gain of $457 thousand. Gain on sale of
premises and equipment primarily consisted of a gain recorded on the sale of a property originally intended for expansion prior to relocating the corporate headquarters. During 2008, equity securities originally owned by SFC were deemed to be
other-than-temporarily impaired and an impairment loss of $561 thousand was recognized through noninterest income. Other service charges and fees increased $494 thousand or 53% during 2008 compared to 2007. Contributing to this increase was a gain
from the sale of our credit card portfolio as well as the introduction of a non sufficient funds (NSF) protection product that generates fees in return for honoring NSF checks up to a predetermined limit.



13



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Noninterest Expense

Table 4: Noninterest Expense



|                                          |      |   |         |  |      |        |   |                       |        |   |                       |         |   |  |      |   |  |   |       |  |     |  
|----------------------------------------- | ---- | - | ------- |  | ---- | ------ | - | --------------------- | ------ | - | --------------------- | ------- | - |  | ---- | - |  | - | ----- |  | --- | -
|(in thousands)                            |      |   |         |  |      |        |   | 2009 Compared to 2008 |        |   | 2008 Compared to 2007 |        
|                                          | 2009 |   | 2008    |  | 2007 |        | $ |                       |        | % |                       |         | $ |  | %    |  
|Salaries and employee benefits            |      | $ | 42,285  |  | $    | 11,518 |   | $                     | 9,954  |   | $                     | 30,767  |   |  | 267  | % |  | $ | 1,564 |  | 16  | %
|Occupancy                                 |      |   | 9,044   |  |      | 2,261  |   |                       | 1,668  |   |                       | 6,783   |   |  | 300  | % |  |   | 593   |  | 36  | %
|Data processing                           |      |   | 5,368   |  |      | 1,189  |   |                       | 612    |   |                       | 4,179   |   |  | 351  | % |  |   | 577   |  | 94  | %
|Impairment of goodwill                    |      |   | 84,837  |  |      |       |   |                       |       |   |                       | 84,837  |   |  |     |   |  |   |      |  |    |  
|FDIC insurance                            |      |   | 5,661   |  |      | 262    |   |                       | 42     |   |                       | 5,399   |   |  | 2061 | % |  |   | 220   |  | 524 | %
|Equipment                                 |      |   | 4,735   |  |      | 663    |   |                       | 343    |   |                       | 4,072   |   |  | 614  | % |  |   | 320   |  | 93  | %
|Professional fees                         |      |   | 2,883   |  |      | 383    |   |                       | 279    |   |                       | 2,500   |   |  | 653  | % |  |   | 104   |  | 37  | %
|Amortization of intangible assets         |      |   | 2,546   |  |      | 365    |   |                       |       |   |                       | 2,181   |   |  | 598  | % |  |   | 365   |  |    |  
|Bank franchise tax                        |      |   | 1,922   |  |      | 621    |   |                       | 464    |   |                       | 1,301   |   |  | 210  | % |  |   | 157   |  | 34  | %
|Telephone and postage                     |      |   | 1,599   |  |      | 481    |   |                       | 305    |   |                       | 1,118   |   |  | 232  | % |  |   | 176   |  | 58  | %
|Directors and regional board fees        |      |   | 1,020   |  |      | 443    |   |                       | 307    |   |                       | 577     |   |  | 130  | % |  |   | 136   |  | 44  | %
|Stationery, printing, and office supplies |      |   | 894     |  |      | 229    |   |                       | 168    |   |                       | 665     |   |  | 290  | % |  |   | 61    |  | 36  | %
|Advertising and marketing                 |      |   | 888     |  |      | 412    |   |                       | 326    |   |                       | 476     |   |  | 116  | % |  |   | 86    |  | 26  | %
|ATM and VISA check card                   |      |   | 293     |  |      | 551    |   |                       | 500    |   |                       | (258    | ) |  | 47   | % |  |   | 51    |  | 10  | %
|Other                                     |      |   | 6,820   |  |      | 1,609  |   |                       | 1,026  |   |                       | 5,211   |   |  | 324  | % |  |   | 583   |  | 57  | %
|                                          |      |   |         |  |      |        |   |                       |        |   |                       |         |   |  |      |   |  |   |       |  |     |  
|Total noninterest expense                 |      | $ | 170,795 |  | $    | 20,987 |   | $                     | 15,994 |   | $                     | 149,808 |   |  | 714  | % |  | $ | 4,993 |  | 31  | %
|                                          |      |   |         |  |      |        |   |                       |        |   |                       |         |   |  |      |   |  |   |       |  |     |  

2009 Compared to 2008

Noninterest expense represents our overhead expenses. As stated previously, only seven months of SFCs expenses were included in our total 2008
operations. Similarly, none of GFHs expenses were included in our 2008 operations. A full year of expenses for both SFC and GFH were included in our 2009 operations. The efficiency ratio, calculated by dividing noninterest expense by the sum
of net interest income and noninterest income excluding securities gains was 139% in 2009 compared to 64% in 2008. The addition of SFC and GFH as well as the impairment of goodwill impacted our efficiency ratio during 2009 and would have been
approximately 70% if impairment of goodwill was excluded from the calculation.

As shown in Table 4, total noninterest expense
increased $149.8 million or 714% during the year ended December 31, 2009 compared to the same period of 2008. Of this increase, $84.8 million was attributed to non-cash goodwill impairment charges incurred during 2009. The impairment charges
were associated with the goodwill created from the SFC and GFH acquisitions and the subsequent drop in market valuation. For additional information regarding goodwill and its impairments, refer to Note 8, Goodwill and Intangible Assets,of
the Notes to the Consolidated Financial Statements.Salaries and employee benefits expense increased 267% to $42.3 million for the year ended December 31, 2009 compared to the same period in 2008 as a direct result of the mergers with
SFC and GFH. We experienced a 300% increase in occupancy expense related to the increased number of properties obtained as a result of the acquisitions. Data processing expense posted an increase of $4.2 million for 2009 over the $1.2 million for
2008, resulting primarily from the cost of SFC and GFHs outsourced data processing functions. FDIC insurance was $5.7 million for the year ended December 31, 2009 as compared with $262 thousand for the same period in 2008. This was
directly a result of the increase in required insurance due to the larger amount of deposits that resulted from the acquisitions, FDIC insurance rates approximately doubling in 2009 as compared with 2008, and a special FDIC insurance assessment
incurred during the second quarter that resulted in an approximate one-time cost of $1.4 million. For the year ended December 31, 2009, equipment expenses were $4.7 million compared to $663 thousand for comparative 2008. This increase was
related primarily to the acquisitions of SFC and GFH.



14



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2008 Compared to 2007

The efficiency ratio was 63% in 2008 compared to 58% in 2007. The acquisition of SFC and related merger integration costs impacted our efficiency ratio
during 2008.

Total noninterest expense increased $5.0 million or 31% during the year ended December 31, 2008 compared to the same period
of 2007, primarily resulting from the acquisition of SFC in June which contributed $5.3 million in noninterest expense during the year. Salaries and employee benefits increased $1.6 million to $11.5 million during 2008 compared with the same period
in 2007, primarily related to the addition of SFCs employee costs. The change in noninterest expense included a 36% increase in occupancy expense which resulted from the opening of our new branch location in the Edinburgh section of
Chesapeake, the relocation of Shores Cape Charles and Salisbury, Maryland locations, and expenses related to SFCs operations since the acquisition in June 2008. Data processing expense realized an increase of $577 thousand for the year
compared to 2007, resulting from an upgrade to imaged file capture cash letter processing and the addition of SFC for seven months of 2008. There was an increase in our FDIC assessment of $220 thousand. All other noninterest expenses posted an
increase of 55% to $5.8 million for the year ended December 31, 2008 compared to the same period of 2007, greatly a result of the SFC acquisition.

Provision for Income Taxes

Income tax benefit for 2009 was $32.1 million compared to an income tax expense for 2008 and 2007 of $3.7 million and $3.6 million, respectively. Our
effective tax rate for the years ended December 31, 2009, 2008, and 2007 was (18.07%), 33.78%, and 34.52%, respectively. The effective tax rate related to the 2009 income tax benefit was much lower than the effective rates related to income tax
expense in 2008 and 2007 largely because the $84.8 million goodwill impairment charge recorded in 2009 is not deductable for income tax purposes, thus lowering the overall tax benefit as a percentage of the pre-tax loss. Also affecting the provision
for income taxes and the effective tax rate in 2009 was the establishment of a valuation reserve in the amount of $1.0 million related to $2.8 million in capital loss carryforwards. Additional information regarding the valuation allowance can be
found in Note 23 - Income Taxes in the Notes to Consolidated Financial Statements. The 2008 effective tax rates are more representative of future expected tax rates.

Analysis of Financial Condition

Total
assets at December 31, 2009 were $3.0 billion, a decrease of $110.2 million or 4% over December 31, 2008 total assets. This decrease was primarily associated with a $172.8 million decrease in loans, an $81.5 million increase in our
allowance for loan losses, and an $85.5 million decrease in goodwill and other intangible assets (the majority of which was $84.8 million in goodwill impairment charges related to the SFC and GFH acquisitions). These decreases were partially offset
by a $138.7 million increase in overnight funds sold and due from FRB.

Investment Securities

Our investment portfolio at December 31, 2009 primarily consisted of available-for-sale U.S. Agency mortgage-backed securities. The mortgage-backed
securities at December 31, 2009 consisted of Government National Mortgage Association pass through securities or collateralized mortgage obligations. Our available-for-sale securities are reported at estimated fair value. They are used
primarily for liquidity, pledging, earnings, and asset / liability management purposes and are reviewed quarterly for possible impairment. At year-end 2009, the estimated fair value of our available-for-sale investment securities was $161.1 million,
an increase of 8% over 2008. The estimated fair value at December 31, 2008 was $149.6 million, an increase of 253% over the $42.4 million at year-end 2007. The increase between 2008 and 2009 was primarily the result of partially utilizing the
increase in deposits to purchase interest-earning investment securities. Our investment portfolio was also restructured during 2009 to increase regulatory capital ratios by selling high risk-weighted securities and reinvesting the proceeds into
securities that would favor our regulatory capital ratios. The average balance for 2009 was $162.3 million compared to $41.7 million at December 31, 2008. The increase in average balances was largely the result of acquiring $117.7 million of
investment securities as part of the GFH acquisition.

Table 5 displays the contractual maturities and weighted average yields from
investment securities at year-end 2009. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



15



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Table 5: Investment Maturities and Yields



|                                               |  |               |         |                    |   |                      |  |      |  
|---------------------------------------------- |  | ------------- | ------- | ------------------ | - | -------------------- |  | ---- | -
|(in thousands)                                 |  | AmortizedCost |         | EstimatedFairValue |   | WeightedAverageYield | 
|U.S. agency securities:                        |  |               |         |                    |   |                      |  |      |  
|Within 1 year                                  |  | $             | 999     |                    | $ | 1,025                |  | 4.22 | %
|After 1 year but within 5 years                |  |               | 1,017   |                    |   | 1,088                |  | 4.96 | %
|After 5 years but within 10 years              |  |               | 9,360   |                    |   | 9,331                |  | 3.44 | %
|                                               |  |               |         |                    |   |                      |  |      |  
|Total U.S. agency securities                   |  |               | 11,376  |                    |   | 11,444               |  | 3.65 | %
|                                               |  |               |        
|State and municipal securities:                |  |               |         |                    |   |                      |  |      |  
|After 10 years                                 |  |               | 1,279   |                    |   | 1,306                |  | 4.88 | %
|                                               |  |               |         |                    |   |                      |  |      |  
|Total state and municipal securities           |  |               | 1,279   |                    |   | 1,306                |  | 4.88 | %
|                                               |  |               |        
|Mortgage-backed securities:                    |  |               |         |                    |   |                      |  |      |  
|After 5 years but within 10 years              |  |               | 216     |                    |   | 226                  |  | 4.60 | %
|After 10 years                                 |  |               | 146,367 |                    |   | 145,501              |  | 3.49 | %
|                                               |  |               |         |                    |   |                      |  |      |  
|Total mortgage-backed securities               |  |               | 146,583 |                    |   | 145,726              |  | 3.49 | %
|                                               |  |               |        
|Equity securities                              |  |               | 2,966   |                    |   | 2,586                |  |     |  
|                                               |  |               |         |                    |   |                      |  |      |  
|Total investment securities available-for-sale |  | $             | 162,204 |                    | $ | 161,062              |  | 3.51 | %
|                                               |  |               |         |                    |   |                      |  |      |  

Table 6 provides information regarding the composition of our securities portfolio showing selected maturities and
yields. For more information on securities, refer to Note 3, Investment Securities, of the Notes to the Consolidated Financial Statements.

Table 6: Composition of Securities Portfolio



|                                   |  |               |         |                      |      |                      |  |      |               |  |                      |         |                      |   |         |               |      |                      |  |                      |        |  |   |        |  |      |  
|---------------------------------- |  | ------------- | ------- | -------------------- | ---- | -------------------- |  | ---- | ------------- |  | -------------------- | ------- | -------------------- | - | ------- | ------------- | ---- | -------------------- |  | -------------------- | ------ |  | - | ------ |  | ---- | -
|                                   |  | December 31,  |        
|                                   |  | 2009          |         |                      | 2008 |                      |  | 2007 |              
|(in thousands)                     |  | AmortizedCost |         | EstimatedFair 
Value |      | WeightedAverageYield |  |      | AmortizedCost |  | EstimatedFair 
Value |         | WeightedAverageYield |   |         | AmortizedCost |      | EstimatedFair 
Value |  | WeightedAverageYield |       
|Securities available-for-sale:     |  |               |         |                      |      |                      |  |      |               |  |                      |         |                      |   |         |               |      |                      |  |                      |        |  |   |        |  |      |  
|U.S. agency                        |  | $             | 11,376  |                      | $    | 11,444               |  | 3.65 | %             |  | $                    | 24,584  |                      | $ | 24,999  |               | 4.32 | %                    |  | $                    | 40,944 |  | $ | 41,273 |  | 4.23 | %
|State and municipal                |  |               | 1,279   |                      |      | 1,306                |  | 4.88 | %             |  |                      | 18,186  |                      |   | 18,217  |               | 5.53 | %                    |  |                      | 244    |  |   | 250    |  | 5.34 | %
|Mortgage-backed                    |  |               | 146,583 |                      |      | 145,726              |  | 3.49 | %             |  |                      | 95,202  |                      |   | 95,248  |               | 5.49 | %                    |  |                      | 642    |  |   | 641    |  | 4.74 | %
|Corporate                          |  |               |        |                      |      |                     |  |     |               |  |                      | 5,093   |                      |   | 5,093   |               | 5.15 | %                    |  |                      |       |  |   |       |  |     |  
|Equity                             |  |               | 2,966   |                      |      | 2,586                |  |     |               |  |                      | 6,747   |                      |   | 6,080   |               |     |                      |  |                      | 472    |  |   | 213    |  |     |  
|                                   |  |               |         |                      |      |                      |  |      |               |  |                      |         |                      |   |         |               |      |                      |  |                      |        |  |   |        |  |      |  
|Total securitiesavailable-for-sale |  | $             | 162,204 |                      | $    | 161,062              |  | 3.51 | %             |  | $                    | 149,812 |                      | $ | 149,637 |               | 5.04 | %                    |  | $                    | 42,302 |  | $ | 42,377 |  | 4.25 | %
|                                   |  |               |         |                      |      |                      |  |      |               |  |                      |         |                      |   |         |               |      |                      |  |                      |        |  |   |        |  |      |  

We do not use derivatives or other off-balance sheet transactions, such as futures contracts, forward obligations, interest
rate swaps, or options.



16



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Overnight Funds Sold and Due From FRB

Overnight funds sold and due from FRB are temporary investments used primarily for daily cash management purposes and, as a result, daily balances vary.
As of year-end 2009, overnight funds sold and due from FRB were $139.2 million compared to $510 thousand as of year-end 2008, with the increase primarily resulting from the increase in deposits during 2009. For liquidity purposes, the funds received
from the increase in deposits were placed at the FRB where they were immediately accessible. Overnight funds are comprised of federal funds sold.

Loans

As a holding company of
two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality can be met. Our loan portfolio is comprised of
commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. All lending decisions are based upon evaluation of the repayment capacity, financial strength, and credit history of
the borrower, the quality and value of the collateral securing each loan, and the financial strength of guarantors. With few exceptions, personal guarantees are required on loans.

As shown in Table 7, the overall loan portfolio decreased $172.8 million or 7% from year-end 2008 to year-end 2009. During 2009, management
reduced the percentage of construction and development loans from 34% of the loan portfolio to 31%. Management intends to continue reducing the percentage of construction and development loans to lower its risk exposure to this type of lending and
to capitalize on other lending opportunities available in our markets.

Table 7: Loans by Classification



|                                     |         |              |           |      |  |     |         |  |   |           |   |  |         |   |  |   |         |   |         |     |   |   |   |         |         |  |     |   |  |   |         |   |  |     |  
|------------------------------------ | ------- | ------------ | --------- | ---- |  | --- | ------- |  | - | --------- | - |  | ------- | - |  | - | ------- | - | ------- | --- | - | - | - | ------- | ------- |  | --- | - |  | - | ------- | - |  | --- | -
|(in thousands)                       |         | December 31, |          
|                                     | 2009    |              |           | 2008 |  |     | 2007    |  |   | 2006      |   |  | 2005    |  
|                                     | Balance |              |           | %    |  |     | Balance |  |   | %         |   |  | Balance |   |  | % |         |   | Balance |     |   | % |   |         | Balance |  |     | % | 
|Loan Classification:                 |         |              |           |      |  |     |         |  |   |           |   |  |         |   |  |   |         |   |         |     |   |   |   |         |         |  |     |   |  |   |         |   |  |     |  
|Commercial                           |         | $            | 361,256   |      |  | 15  | %       |  | $ | 451,426   |   |  | 17      | % |  | $ | 109,783 |   |         | 23  | % |   | $ | 72,133  |         |  | 19  | % |  | $ | 60,972  |   |  | 21  | %
|Construction                         |         |              | 757,702   |      |  | 31  | %       |  |   | 897,288   |   |  | 34      | % |  |   | 165,469 |   |         | 35  | % |   |   | 116,812 |         |  | 31  | % |  |   | 85,205  |   |  | 30  | %
|Real estate - commercial mortgage    |         |              | 740,570   |      |  | 30  | %       |  |   | 673,351   |   |  | 26      | % |  |   | 151,601 |   |         | 32  | % |   |   | 140,260 |         |  | 37  | % |  |   | 104,313 |   |  | 37  | %
|Real estate - residential mortgage   |         |              | 524,853   |      |  | 22  | %       |  |   | 528,760   |   |  | 21      | % |  |   | 38,523  |   |         | 8   | % |   |   | 25,523  |         |  | 7   | % |  |   | 20,011  |   |  | 7   | %
|Installment loans to individuals     |         |              | 42,858    |      |  | 2   | %       |  |   | 50,085    |   |  | 2       | % |  |   | 11,976  |   |         | 2   | % |   |   | 20,599  |         |  | 6   | % |  |   | 15,107  |   |  | 5   | %
|Deferred loan fees and related costs |         |              | (547      | )    |  |    |         |  |   | (1,384    | ) |  |        |   |  |   | (203    | ) |         |    |   |   |   | (283    | )       |  |    |   |  |   | (278    | ) |  |    |  
|                                     |         |              |           |      |  |     |         |  |   |           |   |  |         |   |  |   |         |   |         |     |   |   |   |         |         |  |     |   |  |   |         |   |  |     |  
|Total loans                          |         | $            | 2,426,692 |      |  | 100 | %       |  | $ | 2,599,526 |   |  | 100     | % |  | $ | 477,149 |   |         | 100 | % |   | $ | 375,044 |         |  | 100 | % |  | $ | 285,330 |   |  | 100 | %
|                                     |         |              |           |      |  |     |         |  |   |           |   |  |         |   |  |   |         |   |         |     |   |   |   |         |         |  |     |   |  |   |         |   |  |     |  

Commercial loans consist of loans to businesses which typically are not collateralized by real estate. Generally, the
purpose of commercial loans is for the financing of accounts receivable, inventory, or equipment and machinery. Our commercial loan portfolio decreased $90.2 million from the 2008 year-end balance of $451.4 million to the 2009 year-end balance of
$361.3 million. The commercial loan category grew 311% from year-end 2007 to year-end 2008 due primarily to the acquisitions of SFC and GFH.

Construction loans decreased $139.6 million from the year-end 2008 balance of $897.3 million to the year-end 2009 balance of $757.7 million, thus
lowering the concentration of construction loans to 31% of the total loan portfolio at December 31, 2009 compared with 34% at December 31, 2008. Our specialization in construction lending has resulted in a loan concentration, defined as
10% of the total loan portfolio, in loans to real estate developers. These loans are usually collateralized by the underlying real estate. Our construction loans at December 31, 2009 included $164.4 million of interest reserve loans. The
interest on these loans is paid out of an interest reserve, where interest costs are funded out of the proceeds of the construction loan. Construction and development loans are made to individuals and businesses for the purpose of construction of
single family residential properties, multi-family properties, and commercial projects, as well as the development of residential neighborhoods and commercial office parks. The construction loan category grew 442% from year-end 2007 to year-end 2008
due to the acquisitions of SFC and GFH.



17



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We make real estate-commercial mortgage loans for the purchase and refinancing of owner occupied commercial
properties as well as non-owner occupied income producing properties. These loans are secured by various types of commercial real estate including office, retail, warehouse, industrial, storage facilities, and other non-residential types of
properties. Our real estate-commercial mortgage loan portfolio increased $67.2 million from the 2008 year-end balance of $673.4 million to the 2009 year-end balance of $740.6 million. Our real estate - commercial mortgage loan category increased
344% from year-end 2007 to year-end 2008 largely due to the acquisitions of SFC and GFH.

The real estate-residential mortgage portfolio
includes first and second mortgage loans, home equity lines of credit, and other term loans secured by first and second mortgages. First mortgage loans are generally for the purchase of primary residences, second homes, or residential investment
property. Second mortgages and home equity loans are generally for personal, family, and household purposes such as home improvements, major purchases, education, and other personal needs. The real estate - residential mortgage loan portfolio
increased $3.9 million from the 2008 year-end balance of $528.8 million to the 2009 year-end balance of $524.9 million. The real estate - residential mortgage loan category increased 1273% from year-end 2007 to year-end 2008. The acquisitions of SFC
and GFH accounted for the majority of the increase in real estate-residential mortgages.

Installment loans to individuals are made primarily
for personal, family, and general household purposes. More specifically, we make automobile loans, home improvement loans, loans for vacations, and debt consolidation loans. The installment loan portfolio decreased $7.2 million from the 2008
year-end balance of $50.1 million to the 2009 year-end balance of $42.9 million. The installment loan category increased 318% from year-end 2007 to year-end 2008.

Our long-range objective continues to be profitable growth in the loan portfolio, while our short-term focus will be on absorbing the acquired
companies loan portfolios and managing the entire loan portfolio through the current challenging economic conditions. Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed
in making lending decisions in order to manage exposure to loan losses.

Table 8 indicates our loans by geographic area as of
December 31, 2009.

Table 8: Loans by Geographic Location



|               |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|-------------- |  | ---------- | ------- | ------------ | - | -------------- |  | --------------- | ------- | ----------- | - | ------- |  | - | ------ |  | - | ---------
|(in thousands) |  | Commercial |         | Construction |   | R/E Commercial |  | R/E Residential |         | Installment |   | Total  
|Hampton Roads  |  | $          | 251,576 |              | $ | 262,637        |  | $               | 319,183 |             | $ | 124,677 |  | $ | 28,193 |  | $ | 986,266  
|Triangle       |  |            | 33,172  |              |   | 120,781        |  |                 | 114,212 |             |   | 100,977 |  |   | 896    |  |   | 370,038  
|Richmond       |  |            | 19,379  |              |   | 102,374        |  |                 | 87,726  |             |   | 35,213  |  |   | 190    |  |   | 244,882  
|Outer Banks    |  |            | 15,781  |              |   | 72,695         |  |                 | 86,243  |             |   | 64,063  |  |   | 3,172  |  |   | 241,954  
|Eastern Shore  |  |            | 11,116  |              |   | 37,852         |  |                 | 40,384  |             |   | 131,328 |  |   | 4,867  |  |   | 225,547  
|Northeast NC   |  |            | 24,529  |              |   | 61,614         |  |                 | 48,768  |             |   | 55,035  |  |   | 5,264  |  |   | 195,210  
|Wilmington     |  |            | 5,703   |              |   | 99,749         |  |                 | 44,054  |             |   | 13,560  |  |   | 276    |  |   | 163,342  
|               |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Total loans    |  | $          | 361,256 |              | $ | 757,702        |  | $               | 740,570 |             | $ | 524,853 |  | $ | 42,858 |  | $ | 2,427,239
|               |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          

Note: This table does not include deferred loan fees.



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Table 9 sets forth the maturity periods of our loan portfolio as of December 31, 2009. Demand
loans are reported as due within one year. Variable rate loans with interest rate floors are considered fixed rate loans for the purpose of this report once the floors have been reached. Since the majority of our loan portfolio is short-term, we can
re-price our portfolio frequently to adjust the portfolio to current market rates.

Table 9: Loan Maturities Schedule



|                    |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|------------------- |  | ---------- | ------- | ------------ | - | -------------- |  | --------------- | ------- | ----------- | - | ------- |  | - | ------ |  | - | ---------
|(in thousands)      |  | Commercial |         | Construction |   | R/E Commercial |  | R/E Residential |         | Installment |   | Total  
|Variable Rate:      |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Within 1 year       |  | $          | 42,139  |              | $ | 216,294        |  | $               | 105,092 |             | $ | 143,242 |  | $ | 10,519 |  | $ | 517,286  
|1 to 5 years        |  |            | 5,351   |              |   | 7,660          |  |                 | 41,878  |             |   | 61,554  |  |   | 200    |  |   | 116,643  
|After 5 years       |  |            | 1,274   |              |   | 11,789         |  |                 | 16,216  |             |   | 92,820  |  |   | 235    |  |   | 122,334  
|                    |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Total variable rate |  |            | 48,764  |              |   | 235,743        |  |                 | 163,186 |             |   | 297,616 |  |   | 10,954 |  |   | 756,263  
|                    |  |            |         |              |   |               
|Fixed Rate:         |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Within 1 year       |  |            | 141,832 |              |   | 419,408        |  |                 | 194,579 |             |   | 70,230  |  |   | 3,646  |  |   | 829,695  
|1 to 5 years        |  |            | 159,920 |              |   | 91,528         |  |                 | 348,929 |             |   | 108,280 |  |   | 27,823 |  |   | 736,480  
|5 years             |  |            | 10,740  |              |   | 11,023         |  |                 | 33,876  |             |   | 48,727  |  |   | 435    |  |   | 104,801  
|                    |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Total fixed rate    |  |            | 312,492 |              |   | 521,959        |  |                 | 577,384 |             |   | 227,237 |  |   | 31,904 |  |   | 1,670,976
|                    |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          
|Total maturities    |  | $          | 361,256 |              | $ | 757,702        |  | $               | 740,570 |             | $ | 524,853 |  | $ | 42,858 |  | $ | 2,427,239
|                    |  |            |         |              |   |                |  |                 |         |             |   |         |  |   |        |  |   |          

Note: This table does not include deferred loan fees.

Allowance for Loan Losses and Provision for Loan Losses

The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management regularly reviews the loan
portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and review of current economic conditions that may affect the borrowers ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports,
collateral valuations, cash flow analyses of borrowers, and risk ratings of loans. In addition to the review of credit quality through ongoing credit review processes, we construct a comprehensive allowance analysis for our loan portfolio at least
quarterly. This analysis includes specific allowances for individual loans, general allowances for loan pools which factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions, and unallocated allowances
predicated upon both internal and external factors.

We began the year 2009 using the methodology for loan loss allowance calculation
previously employed by HRB. It was in the second quarter of 2009 when significant deterioration in credit quality became evident, through increased delinquencies, nonaccrual loans, and charge-offs. That deteriorating trend continued in the third and
fourth quarters of 2009. We employed both internal resources as well as the resources of an independent third party credit consultant in order to arrive at a process we believe would work well on an on-going basis for the combined institution.

In the process of consolidating the internal credit review process for the acquired companies, a variety of initiatives were undertaken to
bolster the loan grading function and the determination of the allowance for loan losses. Initiatives and procedures which augmented the loan function included acquisition and development loan reviews, interest reserve loan reviews, past due loan
reviews, forecasting reviews, standard loan reviews, loans presented for approval and renewal, relationship reviews, and cash flow analyses. We also conformed and refined risk grades. In addition to the internal review of credit quality, the
independent credit consulting firm assisted us with the establishment of fair values for the GFH loan portfolio. Based upon evidence of rapid deterioration in credit quality affecting a significant volume of loans and continued weakening of economic
conditions, we made additional modifications to our model of recalculating the loan loss allowance. We conformed the application of risk grades in the allowance calculation, changed the time for impairment factor from a variable period to one year,
and made upward adjustments to the factors applied to loans with real estate collateral in those markets that were experiencing



19



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the most significant rates of decline. We subsequently modified our historical loss factor from a three year annual average to a weighted three year quarterly average to place greater emphasis on
current conditions. On a net basis, these changes resulted in a higher volume of impaired loans, and consequently, an increase to our allowance for loan losses. In our opinion, changes made to the credit measurement standards made adjustments
necessary to accurately reflect the risk of loss inherent in the loan portfolio as a result of the serious economic downturn and rapid deterioration in the credit quality. As a result of the magnitude and the rate of change in the credit quality of
the loan portfolio, we are unable to quantify with reasonable certainty the amount of the loans that would have become impaired under the original criteria from those that were impaired solely due to the change in criteria. Upon review of the impact
of the changes made to the allowance methodology compared with the deterioration in credit quality, we are confident that the credit quality issue was the dominant factor that led to an increase in impaired loans and in the resultant increase in the
loan loss allowance. Additional information about the allowance for loan losses can be found in Note 1, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial
Statements.

As part of the loan loss reserve methodology, loans are categorized into one of five categories: commercial, construction,
commercial real estate, residential real estate, and consumer installment. These categories are further subdivided by assigned asset quality. Loss factors are calculated using qualitative data and then are applied to each of the loan pools to
determine a reserve level for each of the five pools of loans. In addition, special allocations may be assigned to nonaccrual or other problem credits.

Primarily as a result of the increase in impaired loans, the allowance for loan losses increased significantly during 2009, both in dollars and as a
percentage of total loans. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. As shown in Table 10, the allowance for loan losses was $132.7
million or 5.47% of outstanding loans as of December 31, 2009 compared with $51.2 million or 1.97% of outstanding loans as of December 31, 2008. We increased the allowance for loan losses $81.5 million (net of charge-offs and recoveries)
during 2009 as a result of our recognition of deterioration in loan credit quality, continued softening in the economy, decreases in real estate values, increases in charge-offs and non-performing assets, and the results of the independent review of
the portfolio. Net charge-offs were $52.7 million for the year ended December 31, 2009 compared with the $235 thousand on December 31, 2008. Our provision for loan losses in 2009 was $134.2 million compared to $1.4 million in 2008 and $1.2
million in 2007. The increased provision for loan losses during 2009 was attributable to the current economic environment. Management will continue to adjust the allowance for loan losses in 2010 as the portfolio performance dictates. In addition,
any new initiatives the U.S. government implements that may offer relief to our borrowers will be reviewed.



20



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Table 10: Allowance for Loan Losses Analysis



|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|------------------------------------------------------ |  | ---- | ------- | -- | ---- | - | ------ | ---- |  | - | ----- | -- |  | ---- | ----- | - |  | - | ----- | -
|(in thousands)                                         |  | 2009 |         |    | 2008 |   |        | 2007 |  |   | 2006  |    |  | 2005 |      
|Allowance for Loan Losses:                             |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Balance at beginning of year                           |  | $    | 51,218  |    |      | $ | 5,043  |      |  | $ | 3,911 |    |  | $    | 3,597 |   |  | $ | 3,071 |  
|Acquired through SFC acquisition                       |  |      |        |    |      |   | 2,932  |      |  |   |      |    |  |      |      |   |  |   |      |  
|Acquired through GFH acquisition                       |  |      |        |    |      |   | 42,060 |      |  |   |      |    |  |      |      |   |  |   |      |  
|Charge-offs:                                           |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Commercial                                             |  |      | (11,975 | )  |      |   | (37    | )    |  |   |      |    |  |      |      |   |  |   | (24   | )
|Construction                                           |  |      | (22,900 | )  |      |   |       |      |  |   | (91   | )  |  |      |      |   |  |   |      |  
|Real estate - commercial mortgage                      |  |      | (10,882 | )  |      |   |       |      |  |   |      |    |  |      |      |   |  |   |      |  
|Real estate - residential mortgage                     |  |      | (6,587  | )  |      |   | (157   | )    |  |   |      |    |  |      |      |   |  |   |      |  
|Installment loans to individuals                       |  |      | (1,192  | )  |      |   | (143   | )    |  |   | (18   | )  |  |      | (59   | ) |  |   | (75   | )
|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Total charge-offs                                      |  |      | (53,536 | )  |      |   | (337   | )    |  |   | (109  | )  |  |      | (59   | ) |  |   | (99   | )
|Recoveries:                                            |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Commercial                                             |  |      | 291     |    |      |   |       |      |  |   |      |    |  |      | 166   |   |  |   | 119   |  
|Construction                                           |  |      | 29      |    |      |   | 4      |      |  |   |      |    |  |      |      |   |  |   |      |  
|Real estate - commercial mortgage                      |  |      | 108     |    |      |   |       |      |  |   |      |    |  |      |      |   |  |   |      |  
|Real estate - residential mortgage                     |  |      | 169     |    |      |   |       |      |  |   |      |    |  |      |      |   |  |   |      |  
|Installment loans to individuals                       |  |      | 195     |    |      |   | 98     |      |  |   | 9     |    |  |      | 27    |   |  |   | 20    |  
|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Total recoveries                                       |  |      | 792     |    |      |   | 102    |      |  |   | 9     |    |  |      | 193   |   |  |   | 139   |  
|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Net (charge-offs) recoveries                           |  |      | (52,744 | )  |      |   | (235   | )    |  |   | (100  | )  |  |      | 134   |   |  |   | 40    |  
|Provision for loan losses                              |  |      | 134,223 |    |      |   | 1,418  |      |  |   | 1,232 |    |  |      | 180   |   |  |   | 486   |  
|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Balance at end of year                                 |  | $    | 132,697 |    |      | $ | 51,218 |      |  | $ | 5,043 |    |  | $    | 3,911 |   |  | $ | 3,597 |  
|                                                       |  |      |         |    |      |   |        |      |  |   |       |    |  |      |       |   |  |   |       |  
|Allowance for loan losses to year-end loans            |  |      | 5.47    | %  |      |   | 1.97   | %    |  |   | 1.06  | %  |  |      | 1.04  | % |  |   | 1.26  | %
|Ratio of net (charge-offs) recoveries to average loans |  |      | (2.06   | )% |      |   | (0.04  | )%   |  |   | (0.02 | )% |  |      | 0.04  | % |  |   | 0.01  | %

The allowance consists of specific,
general, and unallocated components. Table 11 provides a breakdown of the allowance for loan losses and other related information at December 31, 2009 and 2008.



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Table 11: Allowance for Loan Losses Components and Related Data



|                                            |  |              |           |   |      |   |           |  
|------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                            |  | December 31, |          
|(dollars in thousands)                      |  | 2009         |           |   | 2008 |  
|Allowance for loan losses:                  |  |              |           |   |      |   |           |  
|Pooled component                            |  | $            | 34,050    |   |      | $ | 47,832    |  
|Specific component                          |  |              | 91,488    |   |      |   | 545       |  
|Unallocated component                       |  |              | 7,159     |   |      |   | 2,841     |  
|                                            |  |              |           |   |      |   |           |  
|Total                                       |  | $            | 132,697   |   |      | $ | 51,218    |  
|                                            |  |              |           |   |      |   |           |  
|                                            |  |             
|Impaired loans                              |  | $            | 469,068   |   |      | $ | 4,291     |  
|Non-impaired loans                          |  |              | 1,957,624 |   |      |   | 2,595,235 |  
|                                            |  |              |           |   |      |   |           |  
|Total loans                                 |  | $            | 2,426,692 |   |      | $ | 2,599,526 |  
|                                            |  |              |           |   |      |   |           |  
|                                            |  |             
|Pooled component as % of non-impaired loans |  |              | 1.74      | % |      |   | 1.84      | %
|Specific component as % of impaired loans   |  |              | 19.50     | % |      |   | 12.70     | %
|                                            |  |             
|Allowance as of % of loans                  |  |              | 5.47      | % |      |   | 1.97      | %
|Allowance as of % of nonaccrual loans       |  |              | 53.44     | % |      |   | 155.75    | %

The ASC 450 (pooled) component of the
allowance declined beginning in the second quarter of 2009. General allocations decreased by $13.7 million to $34.1 million at December 31, 2009 from $47.8 million at December 31, 2008. The general component of the allowance is based on
several factors, including historical loan loss experience as well as economic and other qualitative considerations. This decrease is related to several factors. Loan demand weakened during 2009, as evidenced by the decline in total loans.
Additionally, as loans migrated into impaired loan status, the amount of loans accounted for under ASC 450 declined. Furthermore, as we continued to analyze the GFH portfolio and experience migration of loans from ASC 450 to ASC 310-40, management
no longer considered necessary the additional qualitative factor it established as of December 31, 2008. The general component increased in the fourth quarter of 2009, due largely to higher levels of charge-offs experienced in the second half
of the year.

The ASC 310-40 (specific) component of our allowance for loan losses increased significantly beginning with the second quarter
of 2009. During 2009, loan credit quality declined as evidenced by the significant increases in nonaccrual and impaired loans. Additionally, during the second quarter, as nonperforming assets became more significant, we reviewed our methodology of
calculating estimated losses on impaired loans, which resulted in a much more conservative calculation and, therefore, a much higher, specific component for the allowance calculation. Specific loan loss allocations increased $90.9 million to $91.5
million at December 31, 2009 from $545 thousand at December 31, 2008. The increase was attributable to a significant increase in impaired loan from $4.3 million as of December 31, 2008 to $469.1 million as of December 31, 2009.
Of these loans, $248.3 million were on nonaccrual status at December 31, 2009.

The specific allowance for loan losses necessary for
these loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the level of collateral. As a result, the ratio of allowance for loan losses to nonaccrual loans is not sufficient for measuring the adequacy of the
allowance for loan losses. Table 12 provides additional ratios that measure our allowance for loan losses.



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Table 12: Adequacy of Loan Loss Allowance



|                                                                                                             |  |                   |  
|------------------------------------------------------------------------------------------------------------ |  | ----------------- | -
|                                                                                                             |  | December 31, 2009 |  
|Non-performing loans for which full loss has been charged off to total loans                                 |  | 0.91              | %
|                                                                                                             | 
|Non-performing loans for which full loss has been charged off to non-performing loans                        |  | 8.91              | %
|                                                                                                             | 
|Charge off rate for nonperforming loans which the full loss has been charged off                             |  | 42.46             | %
|                                                                                                             | 
|Coverage ratio net of nonperforming loans for which the full loss has been charged off                       |  | 58.67             | %
|                                                                                                             | 
|Total allowance divided by total loans less nonperforming loans for which the full loss has been charged off |  | 5.52              | %
|                                                                                                             | 
|Allowance for individually impaired loans divided by total loans that are individually impaired              |  | 19.50             | %

The unallocated portion of the
loan loss allowance increased $4.3 million to $7.1 million at December 31, 2009 from $2.8 million at December 31, 2008. Given the inherent risk embedded within this profile, the Company believes that the increased unallocated reserve is
warranted to offset any potential credit risk that has yet to be identified.

We allocated the allowance for loan losses to the categories as
shown in Table 13. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category.

Table 13: Allocation of Allowance for Loan Losses



|                                   |  |      |         |      |   |        |  |      |       |      |   |       |  |   |      
|---------------------------------- |  | ---- | ------- | ---- | - | ------ |  | ---- | ----- | ---- | - | ----- |  | - | -----
|(in thousands)                     |  | 2009 |         | 2008 |   | 2007   |  | 2006 |       | 2005
|Commercial                         |  | $    | 23,819  |      | $ | 10,374 |  | $    | 1,447 |      | $ | 1,058 |  | $ | 1,068
|Construction                       |  |      | 57,958  |      |   | 18,529 |  |      | 1,522 |      |   | 993   |  |   | 767  
|Real estate - commercial mortgage  |  |      | 29,700  |      |   | 10,959 |  |      | 1,395 |      |   | 1,192 |  |   | 978  
|Real estate - residential mortgage |  |      | 12,589  |      |   | 8,009  |  |      | 264   |      |   | 160   |  |   | 130  
|Installment loans to individuals   |  |      | 1,473   |      |   | 506    |  |      | 166   |      |   | 290   |  |   | 307  
|Unallocated                        |  |      | 7,159   |      |   | 2,841  |  |      | 249   |      |   | 218   |  |   | 347  
|                                   |  |      |         |      |   |        |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses    |  | $    | 132,697 |      | $ | 51,218 |  | $    | 5,043 |      | $ | 3,911 |  | $ | 3,597
|                                   |  |      |         |      |   |        |  |      |       |      |   |       |  |   |      

If a loan is considered impaired, it is measured based on the present
value of expected future cash flows discounted at the loans effective interest rate or at the loans observable market price or the net realizable fair value of the collateral if the loan is collateral dependent. When a loan is determined
to be a collateral dependent impaired loan, the Company may order an updated appraisal unless a current appraisal is already on hand. The appraised value, adjusted for estimated selling costs, is used to determine net realizable value. As of
December 31, 2009, the Company also maintained a valuation matrix which was used to discount appraised values greater than three months old. This matrix was also used in cases where there was a delay in obtaining an updated appraisal.
Occasionally, valuations are appropriately adjusted based on facts known to the Company, such as list prices or property condition. For example, an appraisal may assume the collateral is in good condition, but the Companys credit
administration area subsequently learns that repairs are necessary to bring the property into saleable condition. Another example would be when the Company maintains an appraisal of a lot in a subdivision, and credit administration learns of a
subsequent sale of similarly situated lots in the same area at lower prices. In both cases, downward adjustments in



23



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value are appropriately made to reflect our understanding of current conditions. When appraisals were not required at inception, various valuation methods include, but are not limited to, current
tax assessments by the city or county, discounted purchase price, or current listing price as verified by a reputable market agent.

Prior to
any foreclosure proceedings relative to real estate secured credits, a current appraised value is obtained. Total impaired loans were $469.1 million at December 31, 2009, an increase of $464.8 million over December 31, 2008. Of these
loans, $248.3 million were in nonaccrual status at December 31, 2009. During 2009, the allowance as a percentage of non-accrual loans declined to 53.44% at December 31, 2009 from 155.75% at December 31, 2008.

At year-end 2009, management believed the allowance for loan losses is commensurate with the risk existing in our loan portfolio and is directionally
consistent with the change in the quality of our loan portfolio. However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the
allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the
time of the examinations.

Non-Performing Assets

Total non-performing assets were $257.2 million or 9% of total assets at year-end 2009 as compared to $41.2 million or 1% of total assets at year-end
2008. Management classifies non-performing assets as those loans in nonaccrual status; those loans on which payments have been delinquent 90 days or more, but are still accruing interest; and foreclosed real estate and repossessed assets. At
December 31, 2009 we had no loans categorized as 90 days or more past due and still accruing interest, and on December 31, 2008, we had $3.2 million. We had $8.9 million and $5.1 million of foreclosed real estate and repossessed assets at
December 31, 2009 and 2008, respectively. Management closely reviews the composition of non-performing assets and related collateral values.

As shown in Table 14, nonaccrual loans were $248.3 million at December 31, 2009 compared to $32.9 million at December 31, 2008. As a
general rule, loans are placed in nonaccrual status when principal or interest is 90 days or more past due. If income on nonaccrual loans had been recorded under original terms, $44.2 million and $99 thousand of additional interest income would have
been recorded in 2009 and 2008, respectively.

Table 14: Nonaccrual Loans



|                                   |  |              |         |      |   |       
|---------------------------------- |  | ------------ | ------- | ---- | - | ------
|                                   |  | December 31,
|(in thousands)                     |  | 2009         |         | 2008
|Commercial                         |  | $            | 24,803  |      | $ | 2,465 
|Construction                       |  |              | 150,325 |      |   | 19,103
|Real estate-commercial mortgage    |  |              | 50,858  |      |   | 6,298 
|Real estate-residential mortgage   |  |              | 22,146  |      |   | 5,008 
|Installment loans (to individuals) |  |              | 171     |      |   | 11    
|                                   |  |              |         |      |   |       
|Total nonaccrual loans             |  | $            | 248,303 |      | $ | 32,885
|                                   |  |              |         |      |   |       

Loans Acquired with Deteriorated Credit Quality

Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will
be unable to collect all contractually required payments are accounted for under ASC 310-30, Receivables  Loans and Debt Securities Acquired with Deteriorated Credit Quality. Evidence of credit quality deterioration as of the purchase
date may include statistics such as past due status and refreshed borrower credit scores, some of which were not immediately available as of the purchase date. ASC 310-30 addresses accounting for differences between contractual and expected cash
flows to be collected from our initial investment in loans if those differences are attributable, at least in part, to credit quality. ASC 310-30 requires that acquired impaired loans be recorded at fair value and prohibits carrying over
or the creation of valuation allowances in the initial accounting for loans acquired that are within the scope of ASC 310-30.



24



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In accordance with ASC 310-30, certain acquired loans of GFH that were considered impaired were written down
to fair value at the acquisition date. As a result, there were no reported net charge-offs in 2008 on these loans as the initial fair value at acquisition date would have already considered the estimated credit losses on these loans. As of
December 31, 2009, the carrying value was $78.2 million and the unpaid balance on these loans was $88.0 million. ASC 310-30 does not apply to loans GFH previously securitized as they are not held on our balance sheet. Given that the problem
loans of the GFH portfolio were recorded at estimated fair value, and the GFH loans comprised a majority of the Companys loan portfolio, impaired loans were minimal as of December 31, 2008. As a result, the ASC 310-30 portion of the
allowance for loan losses at December 31, 2008 was also minimal. During 2009, the ASC 310-30 portfolio experienced further credit deterioration due to weakness in the housing markets and the impacts of a slowing economy. For further information
regarding loans accounted for in accordance with ASC 310-30, see Note 5, Accounting for Certain Loans Acquired in a Transfer, of the Notes to the Consolidated Financial Statements.

Deposits

Deposits are the
primary source of our funds for use in lending and general business purposes. Our balance sheet growth is largely determined by the availability of deposits in our markets and the prospects of profitably utilizing the available deposits by
increasing the loan or investment portfolios. Total deposits at December 31, 2009 were $2.5 billion, an increase of $198.9 million or 9% over December 31, 2008. Total brokered deposits were $386.4 million or 15% of deposits at
December 31, 2009, which was a decrease of $98.4 million from total brokered deposits of $484.8 million at December 31, 2008. In 2009, average deposits increased $1.8 billion or 314% primarily resulting from the acquisition of GFH.

As shown in Table 15, we have experienced a shift in the composition of deposits in recent years resulting from the strong competition
for deposit accounts within the local market. At December 31, 2009, noninterest bearing demand deposits were $248.7 million, an increase of $7.9 million over the $240.8 million at December 31, 2008.

Table 15: Deposits by Classification



|                             |  |              |           |   |      |   |         |      |           |  |     |         |  |   |         |  |     |  
|---------------------------- |  | ------------ | --------- | - | ---- | - | ------- | ---- | --------- |  | --- | ------- |  | - | ------- |  | --- | -
|                             |  | December 31, |          
|                             |  | 2009         |           |   | 2008 |   |         | 2007 |          
|(dollars in thousands)       |  | Balance      |           | % |      |   | Balance |      | %         |  |     | Balance |  | % |        
|Deposit Classifications:     |  |              |           |   |      |   |         |      |           |  |     |         |  |   |         |  |     |  
|Noninterest bearing demand   |  | $            | 248,682   |   | 10   | % |         | $    | 240,813   |  | 11  | %       |  | $ | 100,553 |  | 23  | %
|Interest bearing demand      |  |              | 916,865   |   | 37   | % |         |      | 684,009   |  | 30  | %       |  |   | 40,299  |  | 9   | %
|Savings                      |  |              | 82,860    |   | 3    | % |         |      | 118,001   |  | 5   | %       |  |   | 82,093  |  | 19  | %
|Time deposits less than $100 |  |              | 889,788   |   | 36   | % |         |      | 858,787   |  | 37  | %       |  |   | 114,833 |  | 27  | %
|Time deposits $100 or more   |  |              | 356,845   |   | 14   | % |         |      | 394,536   |  | 17  | %       |  |   | 93,679  |  | 22  | %
|                             |  |              |           |   |      |   |         |      |           |  |     |         |  |   |         |  |     |  
|Total deposits               |  | $            | 2,495,040 |   | 100  | % |         | $    | 2,296,146 |  | 100 | %       |  | $ | 431,457 |  | 100 | %
|                             |  |              |           |   |      |   |         |      |           |  |     |         |  |   |         |  |     |  

Interest bearing demand deposits at year-end 2009 were $916.9 million, an increase of $232.9 million over comparative 2008.
Interest bearing demand deposits included $47.6 million of brokered money market funds at December 31, 2009, which was $197.7 million lower than the balance of brokered money market funds of $245.3 million outstanding at December 31, 2008.
Therefore, core bank interest bearing demand deposits increased by $430.6 million over the last year. This increase was primarily attributed to a promotional interest-bearing money market account instituted during 2009.

At year-end 2009 savings accounts were $82.9 million, a decrease of $35.1 million over 2008. The decrease was due to internal transfers of accounts to
the new promotional interest-bearing money market account.

Time deposits with balances less than $100 thousand increased $31.0 million or 4%
during 2009 over 2008 while time deposits with balances of $100 thousand or more decreased $37.7 million or 10% during 2009 over 2008. Brokered CDs represented $338.8 million or 14% of the December 31, 2009 total deposits, which was an increase
of $99.3 million over the $239.5 million of brokered CDs outstanding at December 31, 2008. Therefore, customer CDs decreased $185.2 million over the last year, which was also due to internal transfers of accounts to the new high
interest-bearing money market account.



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We will continue to focus on core deposit growth as our primary source of funding. Core deposits typically
are non-brokered and consist of noninterest bearing demand accounts, interest bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.8 billion or 70% of total
deposits at year-end 2009 and $1.5 billion or 65% of total deposits at year-end 2008.

Borrowings

Additional sources of funds are short-term and long-term borrowings from various sources including the FRB discount window, FHLB, purchased funds from
correspondent banks, reverse repurchase accounts, and trust preferred securities. At December 31, 2009 and 2008, we had loans from the FHLB totaling $228.2 million and $279.1 million, respectively. As shown in Table 16, maturities of
FHLB borrowings at December 31, 2009 were as follows:

Table 16: FHLB Borrowings



|     |  |                        |        
|---- |  | ---------------------- | -------
|     |  | Balance(in 
thousands)
|2010 |  | $                      | 11,685 
|2011 |  |                        | 15,000 
|2012 |  |                        | 196,247
|2013 |  |                        |       
|2014 |  |                        | 5,283  
|     |  |                        |        
|     |  | $                      | 228,215
|     |  |                        |        

FHLB borrowings carry a weighted average interest rate of 4.06% as of
December 31, 2009 (excluding the impact of purchase accounting adjustments) and are all convertible at FHLBs option on the interest payment dates to either one or three month LIBOR except for five fixed rate advances that total $32.5
million. The FHLB borrowings were collateralized with residential real estate loans, commercial real estate loans, and investment securities.

We acquired two reverse repurchase agreements in the GFH merger. Each repurchase agreement has an original principal balance of $10.0 million and is
collateralized with mortgage-backed securities with a similar fair market value. The first repurchase agreement has a five-year term with an interest rate fixed at 4.99% until it is repurchased by the counterparty on August 1, 2011. The second
repurchase agreement has a seven-year term with a repurchase date of August 1, 2013 (the 2013 Agreement). The interest rate of this agreement is a variable rate of 9.85% minus three-month LIBOR (0.25% at December 31, 2009), not
to exceed 5.85%. The applicable interest rate in effect at December 31, 2009 was 5.85%. Both agreements are callable by the counterparty on a quarterly basis and the 2013 Agreement became immediately callable as a result of BOHR not maintaining
well-capitalized status with the FDIC. The estimated carrying value of these agreements as of December 31, 2009 was $21.0 million.



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As part of the GFH acquisition, we acquired four placements of trust preferred securities, as shown in
Table 17.

Table 17: Trust Preferred Securities



|                                    |  |                      |        |              |              |   |                       |                    |                     |                   
|----------------------------------- |  | -------------------- | ------ | ------------ | ------------ | - | --------------------- | ------------------ | ------------------- | ------------------
|                                    |  | Amount(in thousands) |        | InterestRate |              |   | RedeemableOn Or After |                    | MandatoryRedemption
|Gateway Capital Statutory Trust I   |  | $                    | 8,000  |              | LIBOR + 3.10 | % |                       | September 17, 2008 |                     | September 17, 2033
|Gateway Capital Statutory Trust II  |  |                      | 7,000  |              | LIBOR + 2.65 | % |                       | July 17, 2009      |                     | June 17, 2034     
|Gateway Capital Statutory Trust III |  |                      | 15,000 |              | LIBOR + 1.50 | % |                       | May 30, 2011       |                     | May 30, 2036      
|Gateway Capital Statutory Trust IV  |  |                      | 25,000 |              | LIBOR + 1.55 | % |                       | July 30, 2012      |                     | July 30, 2037     

LIBOR in the table above
refers to 3-month LIBOR. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company. The trust preferred securities
pay cumulative cash distributions quarterly at an annual rate, reset quarterly. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. We have fully and
unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. Our obligation under the guarantee is unsecured and subordinate to our senior and subordinated indebtedness. The
carrying value of these debentures as of December 31, 2009 was $28.3 million. We have suspended the payment of dividends on all four issues of trust preferred securities, however, at year-end 2009 all payments had been made in accordance with
contractual terms.

We borrowed $28.0 million from another bank in 2008. This borrowing had a variable interest rate of prime minus 1% with a
floor of 4% (4% at December 31, 2008) and was paid in full during 2009.

Capital Resources and Liquidity

Capital Resources. Total shareholders equity decreased $163.8 million or 48% to $181.0 million at December 31, 2009. This decrease in
shareholders equity was primarily a result of the $145.5 million net loss for the period ended December 31, 2009 and common and preferred dividends (including amortization of preferred stock discount) of approximately $13.5 million.

On December 31, 2008, as part of the Capital Purchase Program established by the Treasury under the Emergency Economic Stabilization Act
of 2008 (EESA), we entered into a Letter Agreement and Securities Purchase AgreementStandard Terms (collectively, the Purchase Agreement) with the Treasury, pursuant to which we sold (i) 80,347 shares of our Fixed
Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share, having a liquidation preference of $1,000 per share (the Series C Preferred Stock) and (ii) a warrant (the Warrant) to purchase 1,325,858
shares of our Common Stock, $0.625 par value per share (the Common Stock), at an initial exercise price of $9.09 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of approximately $80.3
million in cash.

The Warrant is immediately exercisable at a price of $9.09 per share. The Warrant provides for the adjustment of the
exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distribution of securities or other assets to holders of common stock, and upon certain
issuances of common stock at or below a specified price relative to the then-current market price of common stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise
voting power with respect to any shares of common stock issued upon exercise of the Warrant.

The Series C Preferred Stock qualifies as Tier 1
capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and thereafter, at a rate of 9% per annum. The Series C Preferred Stock is generally non-voting. Prior to December 31, 2011, unless we redeemed
the Series C Preferred Stock or the Treasury has transferred the Series C Preferred Stock to a third party, the consent of the Treasury will be required for us to increase our common stock dividend or repurchase the common stock or other equity or
capital securities, other than certain circumstances specified in the Purchase Agreement.



27



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Upon the request of the Treasury at any time, we have agreed to promptly enter into a deposit arrangement to
which the Series C Preferred Stock may be deposited and depositary shares (Depositary Shares), representing fractional shares of Series C Preferred Stock, may be issued. We have registered the Series C Preferred Stock, the Warrant, the
shares of common stock underlying the Warrant and Depositary Shares.

During 2009, we repurchased 69,820 shares of our common stock in the
open market and privately negotiated transactions at prices ranging from $1.75 to $8.95. During 2008, we repurchased 131,406 shares of our common stock in the open market and privately negotiated transactions at prices ranging from $9.51 to $13.13.

In the third quarter of 2009, we registered 32.5 million shares of common stock and attempted to raise additional capital from the sale
of these securities. We did not raise the desired capital.

During 2009, we paid two quarterly cash dividends of $0.11 per share on our common
stock to shareholders of record as of February 27, 2009 and May 15, 2009. To preserve capital, on July 30, 2009 the Board of Directors voted to suspend the quarterly dividends on our common stock. Our ability to distribute cash
dividends in the future may be limited by financial performance, regulatory restrictions, and the need to maintain sufficient consolidated capital.

We took additional actions during the fourth quarter that were intended to preserve capital. On October 30, 2009, we announced suspension of
dividend payments on our Series A and B Preferred Stock. On November 17, 2009, we notified the U.S. Department of the Treasury (Treasury) of our intent to defer the payment of our quarterly cash dividend on our Fixed Rate Cumulative
Perpetual Preferred Stock Series C issued to the Treasury in connection with our participation in the TARP CPP. On December 10, 2009, at a special meeting of the shareholders, the number of authorized common shares was increased to
100 million from 70 million.

We are subject to regulatory risk-based capital guidelines that measure capital relative to risk-weighted
assets and off-balance sheet financial instruments. Tier I capital is comprised of shareholders equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain
debt instruments and qualifying allowances for loan losses. As of December 31, 2009, our consolidated regulatory capital ratios are Tier 1 Leverage Ratio of 5.19%, Tier 1 Risk-Based Capital Ratio of 6.80%, and Total Risk-Based Capital of 8.10%.

Because our total risk-based capital ratio was below 10% as of December 31, 2009, we are considered to be only adequately
capitalized under the regulatory framework for prompt corrective action. BOHR is also considered to be adequately capitalized under applicable regulations and Shore is considered to be well capitalized. Although there
can be no assurance that we will be successful, the Board and management will make their utmost efforts to raise sufficient capital to regain well-capitalized status at all levels, and we are continuing to explore options for raising
additional capital.

Liquidity.Liquidity represents an institutions ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. At December 31, 2009, cash and due from banks, overnight funds sold and due from FRB, interest-bearing deposits in other
banks, and investment securities were $361.1 million or 12% of total assets.

At December 31, 2009, our Banks had credit lines in the
amount of $286.0 million at the FHLB. These lines may be utilized for short- and/or long-term borrowing. At December 31, 2009, the Banks had not utilized these credit lines for short-term borrowing purposes, while we had $34.3 million of
short-term FHLB borrowings outstanding at December 31, 2008.

We also possess additional sources of liquidity through a variety of
borrowing arrangements. The Banks maintain federal funds lines with large regional and national banking institutions and through the FRB Discount Window. These available lines totaled approximately $165.0 million at December 31, 2009. These
short-term lines were not utilized for short-term borrowing purposes at December 31, 2009. The Banks had $73.3 million in short-term loans outstanding under these borrowing arrangements at December 31, 2008.



28



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Total brokered deposits were $386.4 million or 15% of deposits at December 31, 2009. Under the
regulatory framework for prompt corrective action, we are unlikely to retain these brokered deposits at BOHR due to the adequately capitalized status as of December 31, 2009. Section 29 of the Federal Deposit Insurance Act
limits the use of brokered deposits by institutions that are less than well-capitalized and allows the FDIC to place restrictions on interest rates that institutions may pay.

Under normal conditions, our liquid assets and the ability to generate liquidity through normal operations and various liability funding mechanisms
should be sufficient to satisfy our depositors requirements, meet our customers credit needs, and supply adequate funding for our other business needs. As demonstrated by some of the nations largest financial institutions,
liquidity may be adversely affected if the sources of liquidity suddenly become unavailable. Such a situation may occur when the financial condition of an institution deteriorates as the result of operating losses and rising levels of credit
problems. In such circumstances, credit availability and other funding sources may diminish significantly. We sustained a significant operating loss in 2009 and we may experience another operating loss in 2010. Our problem assets are at high levels
and may rise further. We face the possibility of entering into an agreement with regulatory authorities that may affect our business operations. We unsuccessfully tried to raise capital in 2009. Although we are continuing to attempt to raise
capital, there is no assurance that we will be successful. We have concerns about our liquidity position and plan to monitor it carefully and to take actions available to us to protect our position.

On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not
well-capitalized. The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. On
December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well-capitalized to request a determination from the FDIC whether they are operating in an area where rates paid on deposits
are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be
operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010. The interest rate restrictions described
above apply to BOHR due to its regulatory capital status as of December 31, 2009.

In anticipation of some of these restrictions that are now
limiting our borrowing capacity, we implemented a risk-weighted capital and liquidity plan in the third quarter to improve our regulatory capital ratios and increase our liquid cash assets. At December 31, 2009, we had approximately $200
million in cash and due from banks including the FRB. The plan was comprised largely of a core deposit growth campaign, highlighted by a promotional money market account with highly competitive rates of interest that are generally committed through
June 30, 2010. The plan included a restructuring of the investment securities portfolio, whereby the portfolio is now comprised primarily of investment securities which are zero percent risk-weighted under regulatory capital guidelines. The
plan also included sales of certain equity securities, including preferred stock holdings of the Federal National Mortgage Corporation and Government National Mortgage Corporation, which were previously owned by GFH.

Maturities of brokered certificates of deposit (in thousands), as of December 31, 2009, are shown in Table 18. Due to its regulatory capital
status, BOHR is currently prohibited from originating or renewing brokered funds without the appropriate waivers.

Table 18: Maturities of
Brokered Certificates of Deposit



|                        |  |       |         |                       |   |            |  |   |      
|----------------------- |  | ----- | ------- | --------------------- | - | ---------- |  | - | -----
|Maturity Date           |  | Total |         | Bank of Hampton Roads |   | Shore Bank
|January - March 2010    |  | $     | 160,207 |                       | $ | 159,606    |  | $ | 601  
|April - June 2010       |  |       | 83,149  |                       |   | 83,149     |  |   |      
|July - September 2010   |  |       | 38,107  |                       |   | 38,107     |  |   |      
|October - December 2010 |  |       | 30,252  |                       |   | 30,252     |  |   |      
|2011                    |  |       | 27,131  |                       |   | 26,222     |  |   | 909  
|                        |  |       |         |                       |   |            |  |   |      
|                        |  | $     | 338,846 |                       | $ | 337,336    |  | $ | 1,510
|                        |  |       |         |                       |   |            |  |   |      

Given the restrictions placed upon BOHR, we plan to monitor our
liquidity position regularly and carefully and to take actions available to us to protect our position.



29



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Contractual Obligations

We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into
contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. Table 19 shows payment detail
(in thousands) for these contractual obligations as of December 31, 2009.

Table 19: Contractual Obligations



|                              |  |                 |         |             |   |             |  |             |        |       |   |        |  |   |          
|----------------------------- |  | --------------- | ------- | ----------- | - | ----------- |  | ----------- | ------ | ----- | - | ------ |  | - | ---------
|                              |  | Less than1 Year |         | 1 - 3 Years |   | 3 - 5 Years |  | Over5 Years |        | Total
|Time deposits                 |  | $               | 932,118 |             | $ | 283,649     |  | $           | 29,171 |       | $ | 1,695  |  | $ | 1,246,633
|FHLB borrowings               |  |                 | 11,685  |             |   | 211,247     |  |             | 5,283  |       |   |       |  |   | 228,215  
|Other borrowings              |  |                 |        |             |   | 10,624      |  |             | 10,382 |       |   | 28,248 |  |   | 49,254   
|Operating lease obligations   |  |                 | 2,963   |             |   | 5,079       |  |             | 4,638  |       |   | 18,979 |  |   | 31,659   
|                              |  |                 |         |             |   |             |  |             |        |       |   |        |  |   |          
|Total contractual obligations |  | $               | 946,766 |             | $ | 510,599     |  | $           | 49,474 |       | $ | 48,922 |  | $ | 1,555,761
|                              |  |                 |         |             |   |             |  |             |        |       |   |        |  |   |          

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. For
more information on our off-balance sheet arrangements, see Note 13, Financial Instruments with Off-Balance-Sheet Risk,of the Notes to the Consolidated Financial Statements.

Legal Contingencies

Various
legal actions arise from time to time in the normal course of our business. There were no significant asserted claims or assessments as of December 31, 2009. Management was not aware of any unasserted claims or assessments that may be probable
of assertion at December 31, 2009.

Interest Rate Sensitivity

Our primary market risk is exposure to interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest
expense and the market value of our interest earning assets and interest bearing liabilities.

The primary goal of our asset/liability
management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. Our ability to manage our interest rate risk depends generally on our ability to match the maturities
and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

Our management, guided by the Asset/Liability Committee (ALCO), determines the overall magnitude of interest sensitivity risk and then
formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on managements expectations regarding future interest rate movements, the state of the
national and regional economy, and other financial and business risk factors.

The primary method that we use to quantify and manage interest
rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net
interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate
environments.



30



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Table 20 illustrates the expected effect on net interest income for the twelve months following each
of the two year-ends 2009 and 2008 due to an immediate change in interest rates. Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.

Table 20: Effect on Net Interest Income



|                          |        |                               |        |   |                               |       |        |  |   |        |   |  |       |   
|------------------------- | ------ | ----------------------------- | ------ | - | ----------------------------- | ----- | ------ |  | - | ------ | - |  | ----- | --
|                          |        | 2009                          |        |   | 2008                          |      
|(dollars in thousands)    |        | Change in Net Interest Income |        |   | Change in Net Interest Income |      
|                          | Amount |                               |        | % |                               |       | Amount |  |   | %      |  
|Change in Interest Rates: |        |                               |        |   |                               |       |        |  |   |        |   |  |       |   
|+200 basis points         |        | $                             | (4,861 | ) |                               | (5.07 | )%     |  | $ | (4,338 | ) |  | (4.08 | )%
|+100 basis points         |        |                               | (2,129 | ) |                               | (2.22 | )%     |  |   | (2,382 | ) |  | (2.24 | )%
|-100 basis points         |        |                               | N/A    |   |                               | N/A   |        |  |   | N/A    |   |  | N/A   |   
|-200 basis points         |        |                               | N/A    |   |                               | N/A   |        |  |   | N/A    |   |  | N/A   |   

As of both December 31,
2009 and 2008, we were liability-sensitive, meaning that we project a decrease in net interest income assuming an immediate increase in interest rates.

It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and
liabilities. In normal operating conditions, interest rate changes rarely occur in such a uniform manner. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, management may deploy strategies
that offset some of the impact of changes in interest rates. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis. Management maintains a simulation model where it is
assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate
increases for interest-earning assets. In this model, we project an increase in net interest income due to rising rates during the twelve months following December 31, 2009.

Caution About Forward-Looking Statements

Where appropriate, statements in this report may contain the insights of management into known events and trends that have or may be expected to have a
material effect on our operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and which involve various risks and
uncertainties.

When or if used in any Securities and Exchange Commission filings, or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words or phrases: anticipate, would be, will allow, intends to, will likely result, are expected to,
will continue, is anticipated, is estimated, is projected, or similar expressions are intended to identify forward-looking statements.

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review
the risk factors summarized below and the more detailed discussions in the Risk Factors and Business sections in the 2009 Form 10-K. Our risks include, without limitation, the following:



| |  | We incurred significant losses in 2009 and may continue to do so in the future, and we can make no assurances as to when we will be profitable;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | We need to raise additional capital that may not be available to us;
|- |  | --------------------------------------------------------------------



| |  | We may not be able to successfully maintain our regulatory capital, which may adversely affect our results of operations and financial condition;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | BOHR is restricted from accepting brokered deposits and offering interest rates on deposits that are substantially higher than the prevailing rates in
our market;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We expect to enter into a written agreement with the Federal Reserve, which will require us to designate a significant amount of resources to complying
with the agreement;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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| |  | We may become subject to additional regulatory restrictions in the event that our regulatory capital levels continue to decline;
|- |  | --------------------------------------------------------------------------------------------------------------------------------



| |  | Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely
affected;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses
related to loans;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our lack of eligibility to continue to use a short form registration statement on Form S-3 may affect our short-term ability to access the capital
markets;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We did not undergo a stress test under the Federal Reserves Supervisory Capital Assessment Program; our self-administered stress test
differed from the Supervisory Capital Assessment Program and the results of our test may be inaccurate;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  | We have had a significant turnover in our senior management team;
|- |  | -----------------------------------------------------------------



| |  | Governmental regulation and regulatory actions against us may impair our operations or restrict our growth;
|- |  | -----------------------------------------------------------------------------------------------------------



| |  | If the value of real estate in our core market areas were to decline materially, a significant portion of our loan portfolio could become
under-collateralized;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our construction and land development, commercial real estate, and equity line lending may expose us to a greater risk of loss and hurt our earnings
and profitability;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on operations;
|- |  | ----------------------------------------------------------------------------------------------------------------



| |  | Difficult market conditions have adversely affected our industry;
|- |  | -----------------------------------------------------------------



| |  | A significant part of Gateways loan portfolio is unseasoned;
|- |  | -------------------------------------------------------------



| |  | We are not paying dividends on our preferred stock or Common Stock and are deferring distributions on our trust preferred securities, and we are
prevented in otherwise paying cash dividends on our Common Stock. The failure to resume paying dividends on our Series C Preferred Stock and trust preferred securities may adversely affect us;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company can give no assurance that its deferred tax asset will not become impaired in the future because it is based on projections of future
earnings, which are subject to uncertainty and estimates that may change based on economic conditions.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to maintain adequate sources of funding may be negatively impacted by the current economic environment which may, among other things,
impact our ability to pay dividends or satisfy our obligations;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to maintain adequate sources of liquidity may be negatively impacted by the current economic environment which may, among other things,
impact our ability to pay dividends or satisfy our obligations;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The current economic environment may negatively impact our financial condition, required capital levels or otherwise negatively impact our financial
condition, which may, among other things, limit our access to certain sources of funding and liquidity;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;
|- |  | ----------------------------------------------------------------------------------------------------------



| |  | We may incur additional losses if we are unable to successfully manage interest rate risk;
|- |  | ------------------------------------------------------------------------------------------



| |  | Certain built-in losses could be limited if we experience an ownership change as defined in the Internal Revenue Code;
|- |  | ----------------------------------------------------------------------------------------------------------------------



| |  | A substantial decline in the value of our equity investments including our FHLB Common Stock may result in an other-than-temporary impairment charge;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;
|- |  | -----------------------------------------------------------------------------------------------------------------



| |  | Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | We face a variety of threats from technology based frauds and scams;
|- |  | --------------------------------------------------------------------



| |  | Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of our
Common Stock that would be willing to pay you a premium for your shares of our Common Stock;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our directors and officers have significant voting power;
|- |  | ---------------------------------------------------------



| |  | Our management has identified a material weakness in our internal control over financial reporting which if not properly remediated could result in
material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition, and results of operations and the price of our common stock.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may be unable to recruit, motivate, and retain qualified employees.
|- |  | ----------------------------------------------------------------------



| |  | Current levels of market volatility are unprecedented;
|- |  | ------------------------------------------------------



| |  | The Company has issued three series of preferred stock that have rights that are senior to those of its common shareholders;
|- |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | If we are unable to redeem the Series C Preferred Stock prior to January 1, 2014, the cost of this capital to us will increase substantially;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | Because of our participation in TARP, we are subject to several restrictions including restrictions on compensation paid to our executives;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Because of our financial condition and the compensation restrictions due to our participation in TARP, we have had and may continue to have
difficulties recruiting and retaining qualified employees;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by
the manner in which such regulations are applied by regulatory authorities;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



---

| |  | Current and future increases in FDIC insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease
our earnings. In addition, FDIC insurance assessments for BOHR will likely increase from not maintaining a well capitalized status, which would further decrease earnings;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors;
|- |  | -------------------------------------------------------------------------------------------------------------------



| |  | The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of
operations;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There can be no assurance that recently enacted legislation will stabilize the U.S. financial system;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | The impact on us of recently enacted legislation, in particular EESA and ARRA and their implementing regulations, and actions by the FDIC, cannot be
predicted at this time;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The soundness of other financial institutions could adversely affect us; and
|- |  | ----------------------------------------------------------------------------

Our forward-looking statements could be wrong in light of these and other risks, uncertainties, and assumptions. The future events, developments, or
results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.



33



---

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Hampton Roads Bankshares, Inc.

Norfolk,
Virginia

We have audited Hampton Roads Bankshares, Inc. and subsidiaries (the Company) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in managements
assessment.



---

| |  | Inadequate controls over the accounting for income taxes. The Company lacked sufficient personnel with adequate technical skills related to accounting
for income taxes.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Ineffective controls over the accounting for certain loan transactions. Specifically, the Company lacked adequate controls over accounting for loans or
partial loans sold to other institutions and accounting for payments and accrual of interest on nonaccrual loans.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Ineffective controls and procedures related to certain information technology applications and general computer controls. The Company did not maintain
adequate controls to prevent unauthorized access to certain programs and data, and provide for periodic review and monitoring of access including analysis of segregation of duties conflicts.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Weaknesses within the area of Human Resources were identified including inadequate controls over access to payroll data and a lack of procedures to
review payroll changes and reconcile payroll data to supporting documentation.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit of the 2009 financial statements, and this report does not affect our report dated April 22, 2010, on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Hampton
Roads Bankshares, Inc. has not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for each of the three years in the period ended
December 31, 2009 of Hampton Roads Bankshares, Inc. and subsidiaries and our report dated April 22, 2010, expressed an unqualified opinion.

LOGO

Winchester, Virginia

April 22, 2010



---

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Hampton Roads Bankshares, Inc.

Norfolk,
Virginia

We have audited the accompanying consolidated balance sheets of Hampton Roads Bankshares, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hampton Roads Bankshares, Inc. and subsidiaries internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our report dated April 22, 2010, expressed an opinion that Hampton Roads Bankshares, Inc. had not maintained effective internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

LOGO

Winchester, Virginia

April 22, 2010



---

Consolidated Balance Sheets

December 31, 2009 and 2008



|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|(in thousands, except share and per share data)                                                                                                                                                                                             |  | 2009 |           |   | 2008 |  
|Assets:                                                                                                                                                                                                                                     |  |      |           |   |      |   |           |  
|Cash and due from banks                                                                                                                                                                                                                     |  | $    | 16,995    |   |      | $ | 42,827    |  
|Interest-bearing deposits in other banks                                                                                                                                                                                                    |  |      | 43,821    |   |      |   | 4,975     |  
|Overnight funds sold and due from Federal Reserve Bank                                                                                                                                                                                      |  |      | 139,228   |   |      |   | 510       |  
|Investment securities available-for-sale, at fair value                                                                                                                                                                                     |  |      | 161,062   |   |      |   | 149,637   |  
|Restricted equity securities, at cost                                                                                                                                                                                                       |  |      | 29,779    |   |      |   | 27,795    |  
|                                                                                                                                                                                                                                            |  |     
|Loans held for sale                                                                                                                                                                                                                         |  |      | 12,615    |   |      |   | 5,064     |  
|                                                                                                                                                                                                                                            |  |     
|Loans                                                                                                                                                                                                                                       |  |      | 2,426,692 |   |      |   | 2,599,526 |  
|Allowance for loan losses                                                                                                                                                                                                                   |  |      | (132,697  | ) |      |   | (51,218   | )
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Net loans                                                                                                                                                                                                                                   |  |      | 2,293,995 |   |      |   | 2,548,308 |  
|                                                                                                                                                                                                                                            |  |     
|Premises and equipment, net                                                                                                                                                                                                                 |  |      | 97,512    |   |      |   | 101,335   |  
|Interest receivable                                                                                                                                                                                                                         |  |      | 8,788     |   |      |   | 12,272    |  
|Foreclosed real estate and repossessed assets, net of valuation allowance                                                                                                                                                                   |  |      | 8,867     |   |      |   | 5,092     |  
|Deferred tax assets, net                                                                                                                                                                                                                    |  |      | 56,380    |   |      |   | 32,616    |  
|Intangible assets, net                                                                                                                                                                                                                      |  |      | 12,839    |   |      |   | 98,367    |  
|Bank owned life insurance                                                                                                                                                                                                                   |  |      | 48,354    |   |      |   | 46,603    |  
|Other assets                                                                                                                                                                                                                                |  |      | 45,323    |   |      |   | 10,310    |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Total assets                                                                                                                                                                                                                                |  | $    | 2,975,558 |   |      | $ | 3,085,711 |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Liabilities and Shareholders Equity:                                                                                                                                                                                                       |  |      |           |   |      |   |           |  
|Deposits:                                                                                                                                                                                                                                   |  |      |           |   |      |   |           |  
|Noninterest bearing demand                                                                                                                                                                                                                  |  | $    | 248,682   |   |      | $ | 240,813   |  
|Interest bearing:                                                                                                                                                                                                                           |  |      |           |   |      |   |           |  
|Demand                                                                                                                                                                                                                                      |  |      | 916,865   |   |      |   | 684,009   |  
|Savings                                                                                                                                                                                                                                     |  |      | 82,860    |   |      |   | 118,001   |  
|Time deposits:                                                                                                                                                                                                                              |  |      |           |   |      |   |           |  
|Less than $100                                                                                                                                                                                                                              |  |      | 889,788   |   |      |   | 858,787   |  
|$100 or more                                                                                                                                                                                                                                |  |      | 356,845   |   |      |   | 394,536   |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Total deposits                                                                                                                                                                                                                              |  |      | 2,495,040 |   |      |   | 2,296,146 |  
|                                                                                                                                                                                                                                            |  |     
|Federal Home Loan Bank borrowings                                                                                                                                                                                                           |  |      | 228,215   |   |      |   | 279,065   |  
|Other borrowings                                                                                                                                                                                                                            |  |      | 49,254    |   |      |   | 77,223    |  
|Overnight funds purchased                                                                                                                                                                                                                   |  |      |          |   |      |   | 73,300    |  
|Interest payable                                                                                                                                                                                                                            |  |      | 3,572     |   |      |   | 5,814     |  
|Other liabilities                                                                                                                                                                                                                           |  |      | 18,481    |   |      |   | 9,354     |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                                                                           |  |      | 2,794,562 |   |      |   | 2,740,902 |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Commitments and contingencies                                                                                                                                                                                                               |  |      |          |   |      |   |          |  
|                                                                                                                                                                                                                                            |  |     
|Shareholders equity:                                                                                                                                                                                                                       |  |      |           |   |      |   |           |  
|Preferred stock - 1,000,000 shares authorized:                                                                                                                                                                                              |  |      |           |   |      |   |           |  
|Series A non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 23,266 shares issued and
outstanding on December 31, 2009 and 2008                                                                            |  |      | 19,919    |   |      |   | 18,292    |  
|Series B non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 37,550 shares issued and
outstanding on December 31, 2009 and 2008                                                                            |  |      | 39,729    |   |      |   | 40,953    |  
|Series C fixed rate, cumulative preferred stock, $1,000 liquidation value, 80,347 shares issued and outstanding on
December 31, 2009 and 2008                                                                                               |  |      | 75,322    |   |      |   | 74,297    |  
|Common stock, $0.625 par value, 100,000,000 shares authorized on December 31, 2009 and 70,000,000 shares authorized on December
31, 2008; 22,154,320 shares issued and outstanding on December 31, 2009 and 21,777,937 on December 31, 2008 |  |      | 13,846    |   |      |   | 13,611    |  
|Capital surplus                                                                                                                                                                                                                             |  |      | 165,391   |   |      |   | 171,284   |  
|Retained earnings (deficit)                                                                                                                                                                                                                 |  |      | (132,466  | ) |      |   | 26,482    |  
|Accumulated other comprehensive loss, net of tax                                                                                                                                                                                            |  |      | (745      | ) |      |   | (110      | )
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Total shareholders equity                                                                                                                                                                                                                  |  |      | 180,996   |   |      |   | 344,809   |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                                  |  | $    | 2,975,558 |   |      | $ | 3,085,711 |  
|                                                                                                                                                                                                                                            |  |      |           |   |      |   |           |  

See accompanying notes to the consolidated financial statements.



37



---

Consolidated Statements of Operations

Years ended December 31, 2009, 2008, and 2007



|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ----------
|(in thousands, except share and per share data)                                                                                                                                                                                                                  |  | 2009 |            |   | 2008 |   |            | 2007
|Interest Income:                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Loans, including fees                                                                                                                                                                                                                                            |  | $    | 142,969    |   |      | $ | 43,201     |      |  | $ | 35,604    
|Investment securities                                                                                                                                                                                                                                            |  |      | 6,339      |   |      |   | 1,677      |      |  |   | 2,316     
|Overnight funds sold                                                                                                                                                                                                                                             |  |      | 99         |   |      |   | 53         |      |  |   | 35        
|Interest bearing deposits in other banks                                                                                                                                                                                                                         |  |      | 38         |   |      |   | 246        |      |  |   | 248       
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Total interest income                                                                                                                                                                                                                                            |  |      | 149,445    |   |      |   | 45,177     |      |  |   | 38,203    
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Interest Expense:                                                                                                                                                                                                                                                |  |      |            |   |      |   |            |      |  |   |           
|Deposits:                                                                                                                                                                                                                                                        |  |      |            |   |      |   |            |      |  |   |           
|Demand                                                                                                                                                                                                                                                           |  |      | 7,512      |   |      |   | 1,030      |      |  |   | 678       
|Savings                                                                                                                                                                                                                                                          |  |      | 1,110      |   |      |   | 1,741      |      |  |   | 2,866     
|Time deposits:                                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |      |  |   |           
|Less than $100                                                                                                                                                                                                                                                   |  |      | 14,513     |   |      |   | 6,536      |      |  |   | 4,061     
|$100 or more                                                                                                                                                                                                                                                     |  |      | 12,880     |   |      |   | 4,785      |      |  |   | 4,052     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Interest on deposits                                                                                                                                                                                                                                             |  |      | 36,015     |   |      |   | 14,092     |      |  |   | 11,657    
|Federal Home Loan Bank borrowings                                                                                                                                                                                                                                |  |      | 4,184      |   |      |   | 3,160      |      |  |   | 2,274     
|Other borrowings                                                                                                                                                                                                                                                 |  |      | 3,704      |   |      |   | 609        |      |  |   |          
|Overnight funds purchased                                                                                                                                                                                                                                        |  |      | 391        |   |      |   | 56         |      |  |   | 85        
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Total interest expense                                                                                                                                                                                                                                           |  |      | 44,294     |   |      |   | 17,917     |      |  |   | 14,016    
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Net interest income                                                                                                                                                                                                                                              |  |      | 105,151    |   |      |   | 27,260     |      |  |   | 24,187    
|Provision for loan losses                                                                                                                                                                                                                                        |  |      | 134,223    |   |      |   | 1,418      |      |  |   | 1,232     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Net interest income (expense) after provision for loan losses                                                                                                                                                                                                    |  |      | (29,072    | ) |      |   | 25,842     |      |  |   | 22,955    
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Noninterest Income:                                                                                                                                                                                                                                              |  |      |            |   |      |   |            |      |  |   |           
|Service charges on deposit accounts                                                                                                                                                                                                                              |  |      | 8,117      |   |      |   | 3,379      |      |  |   | 1,996     
|Mortgage banking revenue                                                                                                                                                                                                                                         |  |      | 4,642      |   |      |   |           |      |  |   |          
|Gain on sale of investment securities available-for-sale                                                                                                                                                                                                         |  |      | 4,274      |   |      |   | 457        |      |  |   |          
|Gain (loss) on sale of premises and equipment                                                                                                                                                                                                                    |  |      | (29        | ) |      |   | 519        |      |  |   | 11        
|Extinguishment of debt charge                                                                                                                                                                                                                                    |  |      | (1,962     | ) |      |   |           |      |  |   |          
|Losses on foreclosed real estate                                                                                                                                                                                                                                 |  |      | (1,204     | ) |      |   |           |      |  |   |          
|Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $2,659 and $561, net of
$190 and $0 recognized in other comprehensive income for the years ended December 31, 2009 and 2008, respectively, before taxes) |  |      | (2,469     | ) |      |   | (561       | )    |  |   |          
|Insurance revenue                                                                                                                                                                                                                                                |  |      | 4,901      |   |      |   |           |      |  |   |          
|Brokerage revenue                                                                                                                                                                                                                                                |  |      | 354        |   |      |   |           |      |  |   |          
|Income from bank owned life insurance                                                                                                                                                                                                                            |  |      | 1,658      |   |      |   |           |      |  |   |          
|Other                                                                                                                                                                                                                                                            |  |      | 4,043      |   |      |   | 2,186      |      |  |   | 1,433     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Total noninterest income                                                                                                                                                                                                                                         |  |      | 22,325     |   |      |   | 5,980      |      |  |   | 3,440     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Noninterest Expense:                                                                                                                                                                                                                                             |  |      |            |   |      |   |            |      |  |   |           
|Salaries and employee benefits                                                                                                                                                                                                                                   |  |      | 42,285     |   |      |   | 11,518     |      |  |   | 9,954     
|Occupancy                                                                                                                                                                                                                                                        |  |      | 9,044      |   |      |   | 2,261      |      |  |   | 1,668     
|Data processing                                                                                                                                                                                                                                                  |  |      | 5,368      |   |      |   | 1,189      |      |  |   | 612       
|Impairment of goodwill                                                                                                                                                                                                                                           |  |      | 84,837     |   |      |   |           |      |  |   |          
|FDIC insurance                                                                                                                                                                                                                                                   |  |      | 5,661      |   |      |   | 262        |      |  |   | 42        
|Equipment                                                                                                                                                                                                                                                        |  |      | 4,735      |   |      |   | 663        |      |  |   | 343       
|Other                                                                                                                                                                                                                                                            |  |      | 18,865     |   |      |   | 5,094      |      |  |   | 3,375     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Total noninterest expense                                                                                                                                                                                                                                        |  |      | 170,795    |   |      |   | 20,987     |      |  |   | 15,994    
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Income (loss) before provision for income taxes (benefit)                                                                                                                                                                                                        |  |      | (177,542   | ) |      |   | 10,835     |      |  |   | 10,401    
|Provision for income taxes (benefit)                                                                                                                                                                                                                             |  |      | (32,075    | ) |      |   | 3,660      |      |  |   | 3,590     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Net income (loss)                                                                                                                                                                                                                                                |  |      | (145,467   | ) |      |   | 7,175      |      |  |   | 6,811     
|Preferred stock dividend and accretion of discount                                                                                                                                                                                                               |  |      | 8,689      |   |      |   |           |      |  |   |          
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Net income (loss) available to common shareholders                                                                                                                                                                                                               |  | $    | (154,156   | ) |      | $ | 7,175      |      |  | $ | 6,811     
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Per Share:                                                                                                                                                                                                                                                       |  |      |            |   |      |   |            |      |  |   |           
|Cash dividends declared                                                                                                                                                                                                                                          |  | $    | 0.22       |   |      | $ | 0.44       |      |  | $ | 0.43      
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Basic earnings (loss)                                                                                                                                                                                                                                            |  | $    | (7.07      | ) |      | $ | 0.60       |      |  | $ | 0.67      
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Diluted earnings (loss)                                                                                                                                                                                                                                          |  | $    | (7.07      | ) |      | $ | 0.59       |      |  | $ | 0.65      
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Basic weighted average shares outstanding                                                                                                                                                                                                                        |  |      | 21,816,407 |   |      |   | 11,960,604 |      |  |   | 10,228,638
|Effect of dilutive stock options and non-vested stock                                                                                                                                                                                                            |  |      |           |   |      |   | 114,121    |      |  |   | 202,916   
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           
|Diluted weighted average shares outstanding                                                                                                                                                                                                                      |  |      | 21,816,407 |   |      |   | 12,074,725 |      |  |   | 10,431,554
|                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |      |  |   |           

See accompanying notes to the consolidated financial statements.



38



---

Consolidated Statements of Changes in Shareholders Equity

Years ended December 31, 2009, 2008, and 2007



|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|----------------------------------------------------------------------------------------------- | ------ | --------------- | ------ | ------------ | ------- |  | --------------- | ------ |  | ---------------- | ------ | - |  | - | ------- | - |  | ------------------------------------------ | -------- | - | ------------------------ | - | ------ | - |  | - | -------- | -
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  | AccumulatedOtherComprehensiveIncome (Loss) |          |   | TotalStockholdersEquity |  
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                           
|(in thousands, except share data)                                                               |        | Preferred Stock |        | Common Stock |         |  | Capital Surplus |        |  | RetainedEarnings |        |   | 
|                                                                                                | Shares |                 | Amount |              | Shares  |  |                 | Amount |  |                  |        |   | 
|Balance at December 31, 2006                                                                    |        |                |        | $            |        |  | 10,251,336      |        |  | $                | 6,407  |   |  | $ | 42,106  |   |  | $                                          | 22,091   |   |                          | $ | (441   | ) |  | $ | 70,163   |  
|                                                                                                |        |                 |        |              |         |  |                 |       
|Comprehensive income:                                                                           |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Net income                                                                                      |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | 6,811    |   |                          |   |       |   |  |   | 6,811    |  
|Change in unrealized loss on securities available-for-sale, net of taxes of $253                |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   | 491    |   |  |   | 491      |  
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Total comprehensive income                                                                      |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   | 7,302    |  
|Shares issued related to:                                                                       |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|401(k) plan                                                                                     |        |                |        |              |        |  | 11,020          |        |  |                  | 7      |   |  |   | 130     |   |  |                                            |         |   |                          |   |       |   |  |   | 137      |  
|Executive savings plan                                                                          |        |                |        |              |        |  | 11,686          |        |  |                  | 7      |   |  |   | 138     |   |  |                                            |         |   |                          |   |       |   |  |   | 145      |  
|Regional board fees                                                                             |        |                |        |              |        |  | 1,893           |        |  |                  | 1      |   |  |   | 23      |   |  |                                            |         |   |                          |   |       |   |  |   | 24       |  
|Exercise of stock options                                                                       |        |                |        |              |        |  | 93,599          |        |  |                  | 59     |   |  |   | 648     |   |  |                                            |         |   |                          |   |       |   |  |   | 707      |  
|Dividend reinvestment                                                                           |        |                |        |              |        |  | 165,991         |        |  |                  | 104    |   |  |   | 2,146   |   |  |                                            |         |   |                          |   |       |   |  |   | 2,250    |  
|Stock-based compensation                                                                        |        |                |        |              |        |  | 11,864          |        |  |                  | 7      |   |  |   | 330     |   |  |                                            |         |   |                          |   |       |   |  |   | 337      |  
|Common stock repurchased                                                                        |        |                |        |              |        |  | (232,490        | )      |  |                  | (145   | ) |  |   | (2,962  | ) |  |                                            |         |   |                          |   |       |   |  |   | (3,107   | )
|Tax benefit of stock option exercises                                                           |        |                |        |              |        |  |                |        |  |                  |       |   |  |   | 118     |   |  |                                            |         |   |                          |   |       |   |  |   | 118      |  
|Common stock cash dividends ($0.43 per share)                                                   |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | (4,416   | ) |                          |   |       |   |  |   | (4,416   | )
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Balance at December 31, 2007                                                                    |        |                |        | $            |        |  | 10,314,899      |        |  | $                | 6,447  |   |  | $ | 42,677  |   |  | $                                          | 24,486   |   |                          | $ | 50     |   |  | $ | 73,660   |  
|                                                                                                |        |                 |        |              |         |  |                 |       
|Comprehensive income:                                                                           |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Net income                                                                                      |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | 7,175    |   |                          |   |       |   |  |   | 7,175    |  
|Change in unrealized loss on securities available-for-sale, net of taxes of ($118)              |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   | (229   | ) |  |   | (229     | )
|Reclassification adjustment for securities gains included in net income, net of taxes of $35    |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   | 69     |   |  |   | 69       |  
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Total comprehensive income                                                                      |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   | 7,015    |  
|Shares issued related to:                                                                       |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Executive savings plan                                                                          |        |                |        |              |        |  | 11,582          |        |  |                  | 7      |   |  |   | 114     |   |  |                                            |         |   |                          |   |       |   |  |   | 121      |  
|Regional board fees                                                                             |        |                |        |              |        |  | 8,510           |        |  |                  | 5      |   |  |   | 105     |   |  |                                            |         |   |                          |   |       |   |  |   | 110      |  
|Exercise of stock options                                                                       |        |                |        |              |        |  | 112,964         |        |  |                  | 71     |   |  |   | 509     |   |  |                                            |         |   |                          |   |       |   |  |   | 580      |  
|Dividend reinvestment                                                                           |        |                |        |              |        |  | 201,460         |        |  |                  | 126    |   |  |   | 2,117   |   |  |                                            |         |   |                          |   |       |   |  |   | 2,243    |  
|Stock-based compensation                                                                        |        |                |        |              |        |  | 32,908          |        |  |                  | 20     |   |  |   | 129     |   |  |                                            |         |   |                          |   |       |   |  |   | 149      |  
|Acquisition of Shore Financial Corporation                                                      |        |                |        |              |        |  | 2,713,425       |        |  |                  | 1,696  |   |  |   | 29,509  |   |  |                                            |         |   |                          |   |       |   |  |   | 31,205   |  
|Acquisition of Gateway Financial Holdings                                                       |        |                |        |              |        |  | 8,513,595       |        |  |                  | 5,321  |   |  |   | 88,839  |   |  |                                            |         |   |                          |   |       |   |  |   | 94,160   |  
|Series A non-cumulative perpetual preferred stock                                               |        | 23,266          |        |              | 18,292  |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   |       |   |  |   | 18,292   |  
|Series B non-cumulative perpetual preferred stock                                               |        | 37,550          |        |              | 40,953  |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   |       |   |  |   | 40,953   |  
|Series C fixed rate cumulative preferred stock and warrant                                      |        | 80,347          |        |              | 74,297  |  |                |        |  |                  |       |   |  |   | 6,050   |   |  |                                            |         |   |                          |   |       |   |  |   | 80,347   |  
|Common stock repurchased                                                                        |        |                |        |              |        |  | (131,406        | )      |  |                  | (82    | ) |  |   | (1,372  | ) |  |                                            |         |   |                          |   |       |   |  |   | (1,454   | )
|Options acquired in mergers                                                                     |        |                |        |              |        |  |                |        |  |                  |       |   |  |   | 2,587   |   |  |                                            |         |   |                          |   |       |   |  |   | 2,587    |  
|Tax benefit of stock option exercises                                                           |        |                |        |              |        |  |                |        |  |                  |       |   |  |   | 20      |   |  |                                            |         |   |                          |   |       |   |  |   | 20       |  
|Common stock cash dividends ($0.44 per share)                                                   |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | (5,179   | ) |                          |   |       |   |  |   | (5,179   | )
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Balance at December 31, 2008                                                                    |        | 141,163         |        | $            | 133,542 |  | 21,777,937      |        |  | $                | 13,611 |   |  | $ | 171,284 |   |  | $                                          | 26,482   |   |                          | $ | (110   | ) |  | $ | 344,809  |  
|                                                                                                |        |                 |        |              |         |  |                 |       
|Comprehensive income:                                                                           |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Net loss                                                                                        |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | (145,467 | ) |                          |   |       |   |  |   | (145,467 | )
|Change in unrealized loss on securities available-for-sale, net of taxes of $207                |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   | 513    |   |  |   | 513      |  
|Reclassification adjustment for securities gains included in net income, net of taxes of ($657) |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   | (1,148 | ) |  |   | (1,148   | )
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Total comprehensive income                                                                      |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   | (146,102 | )
|Shares issued related to:                                                                       |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Regional board fees                                                                             |        |                |        |              |        |  | 73,676          |        |  |                  | 46     |   |  |   | 118     |   |  |                                            |         |   |                          |   |       |   |  |   | 164      |  
|Exercise of stock options                                                                       |        |                |        |              |        |  | 86,243          |        |  |                  | 54     |   |  |   | 559     |   |  |                                            |         |   |                          |   |       |   |  |   | 613      |  
|Dividend reinvestment                                                                           |        |                |        |              |        |  | 68,748          |        |  |                  | 43     |   |  |   | 488     |   |  |                                            |         |   |                          |   |       |   |  |   | 531      |  
|Stock-based compensation                                                                        |        |                |        |              |        |  | 80,765          |        |  |                  | 50     |   |  |   | 580     |   |  |                                            |         |   |                          |   |       |   |  |   | 630      |  
|Private placement shares                                                                        |        |                |        |              |        |  | 136,771         |        |  |                  | 86     |   |  |   | 220     |   |  |                                            |          |   |                          |   |        |   |  |   | 306      |  
|Common stock repurchased                                                                        |        |                |        |              |        |  | (69,820         | )      |  |                  | (44    | ) |  |   | (500    | ) |  |                                            |         |   |                          |   |       |   |  |   | (544     | )
|Amortization of fair market value adjustment                                                    |        |                |        |              | 403     |  |                |        |  |                  |       |   |  |   |        |   |  |                                            |         |   |                          |   |       |   |  |   | 403      |  
|Tax benefit of stock option exercises                                                           |        |                |        |              |        |  |                |        |  |                  |       |   |  |   | 142     |   |  |                                            |         |   |                          |   |       |   |  |   | 142      |  
|Stock financed                                                                                  |        |                |        |              |        |  |                |        |  |                  |       |   |  |   | (7,500  | ) |  |                                            |         |   |                          |   |       |   |  |   | (7,500   | )
|Preferred stock dividend declared and amortization of preferred stock discount                  |        |                |        |              | 1,025   |  |                |        |  |                  |       |   |  |   |         |   |  |                                            | (8,689   | ) |                          |   |       |   |  |   | (7,664   | )
|Common stock cash dividends ($0.22 per share)                                                   |        |                |        |              |        |  |                |        |  |                  |       |   |  |   |        |   |  |                                            | (4,792   | ) |                          |   |       |   |  |   | (4,792   | )
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  
|Balance at December 31, 2009                                                                    |        | 141,163         |        | $            | 134,970 |  | 22,154,320      |        |  | $                | 13,846 |   |  | $ | 165,391 |   |  | $                                          | (132,466 | ) |                          | $ | (745   | ) |  | $ | 180,996  |  
|                                                                                                |        |                 |        |              |         |  |                 |        |  |                  |        |   |  |   |         |   |  |                                            |          |   |                          |   |        |   |  |   |          |  

See accompanying notes to the consolidated financial statements.



39



---

Consolidated Statements of Cash Flows

Years ended December 31, 2009, 2008, and 2007



|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|(in thousands)                                                                           |  | 2009 |          |   | 2008 |   |          | 2007 | 
|Operating Activities:                                                                    |  |      |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                                        |  | $    | (145,467 | ) |      | $ | 7,175    |      |  | $ | 6,811    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                            |  |      | 5,511    |   |      |   | 1,407    |      |  |   | 886      |  
|Amortization of intangible assets and fair value adjustments                             |  |      | (8,263   | ) |      |   | 133      |      |  |   |         |  
|Provision for loan losses                                                                |  |      | 134,223  |   |      |   | 1,418    |      |  |   | 1,232    |  
|Deferred board fees                                                                      |  |      | 164      |   |      |   | 110      |      |  |   | 24       |  
|Proceeds from mortgage loans held for sale                                               |  |      | 259,783  |   |      |   |         |      |  |   |         |  
|Originations of mortgage loans held for sale                                             |  |      | (267,334 | ) |      |   |         |      |  |   |         |  
|Stock-based compensation expense                                                         |  |      | 630      |   |      |   | 149      |      |  |   | 337      |  
|Net amortization of premiums and accretion of discounts on investment securities         |  |      | (2,680   | ) |      |   | (62      | )    |  |   | 7        |  
|(Gain) loss on sale of premises and equipment                                            |  |      | 29       |   |      |   | (519     | )    |  |   | (11      | )
|Losses on foreclosed real estate and repossesed assets                                   |  |      | 1,204    |   |      |   |         |      |  |   |         |  
|Gain on sale of investment securities available-for-sale                                 |  |      | (4,274   | ) |      |   | (457     | )    |  |   |         |  
|Gain on sale of loans                                                                    |  |      | (51      | ) |      |   |         |      |  |   |         |  
|Earnings on bank owned life insurance                                                    |  |      | (1,658   | ) |      |   |         |      |  |   |         |  
|Other-than-temporary impairment of securities                                            |  |      | 2,469    |   |      |   | 561      |      |  |   |         |  
|Impairment of goodwill                                                                   |  |      | 84,837   |   |      |   |         |      |  |   |         |  
|Deferred income tax expense (benefit)                                                    |  |      | (23,032  | ) |      |   | (836     | )    |  |   | (568     | )
|Changes in:                                                                              |  |      |          |   |      |   |          |      |  |   |          |  
|Interest receivable                                                                      |  |      | 2,435    |   |      |   | 20       |      |  |   | (149     | )
|Other assets                                                                             |  |      | (38,200  | ) |      |   | 107      |      |  |   | (6       | )
|Interest payable                                                                         |  |      | (2,242   | ) |      |   | 304      |      |  |   | 163      |  
|Other liabilities                                                                        |  |      | 3,888    |   |      |   | 787      |      |  |   | 672      |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                |  |      | 1,972    |   |      |   | 10,297   |      |  |   | 9,398    |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Investing Activities:                                                                    |  |      |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturities and calls of debt securities available-for-sale                 |  |      | 45,799   |   |      |   | 11,215   |      |  |   | 15,171   |  
|Proceeds from sale of investment securities available-for-sale                           |  |      | 84,121   |   |      |   | 18,457   |      |  |   |         |  
|Purchase of debt securities available-for-sale                                           |  |      | (137,569 | ) |      |   | (2,000   | )    |  |   | (1,242   | )
|Purchase of equity securities available-for-sale                                         |  |      |         |   |      |   | (1,006   | )    |  |   |         |  
|Proceeds from sales of restricted equity securities                                      |  |      | 9,824    |   |      |   | 5,024    |      |  |   | 1,040    |  
|Purchase of restricted equity securities                                                 |  |      | (11,787  | ) |      |   | (6,885   | )    |  |   | (1,769   | )
|Proceeds from the sale of loans                                                          |  |      | 697      |   |      |   |         |      |  |   |         |  
|Net (increase) decrease in loans                                                         |  |      | 100,575  |   |      |   | (111,879 | )    |  |   | (102,195 | )
|Purchase of premises and equipment                                                       |  |      | (2,901   | ) |      |   | (4,499   | )    |  |   | (720     | )
|Proceeds from sale of foreclosed real estate                                             |  |      | 4,707    |   |      |   |         |      |  |   | 15       |  
|Proceeds from sale of premises and equipment                                             |  |      | 178      |   |      |   | 764      |      |  |   | 37       |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                      |  |      | 93,644   |   |      |   | (90,809  | )    |  |   | (89,663  | )
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Financing Activities:                                                                    |  |      |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in deposits                                                      |  |      | 212,908  |   |      |   | (37,499  | )    |  |   | 68,196   |  
|Proceeds from Federal Home Loan Bank borrowings                                          |  |      | 49,450   |   |      |   | 226,912  |      |  |   | 23,000   |  
|Repayments of Federal Home Loan Bank borrowings                                          |  |      | (94,016  | ) |      |   | (218,445 | )    |  |   | (8,000   | )
|Net increase (decrease) in overnight funds borrowed                                      |  |      | (73,300  | ) |      |   | 16,000   |      |  |   |         |  
|Net increase (decrease) in other borrowings                                              |  |      | (28,000  | ) |      |   | 28,000   |      |  |   |         |  
|Cash exchanged in mergers                                                                |  |      |         |   |      |   | 11,614   |      |  |   |         |  
|Common stock repurchased                                                                 |  |      | (544     | ) |      |   | (1,446   | )    |  |   | (2,877   | )
|Issuance of private placement shares                                                     |  |      | 306      |   |      |   |         |      |  |   |         |  
|Issuance of shares to 401(k) plan                                                        |  |      |         |   |      |   |         |      |  |   | 137      |  
|Issuance of shares to executive savings plan                                             |  |      |         |   |      |   | 121      |      |  |   | 146      |  
|Issuance of Series C preferred stock and warrant                                         |  |      |         |   |      |   | 80,347   |      |  |   |         |  
|Proceeds from exercise of stock options                                                  |  |      | 613      |   |      |   | 572      |      |  |   | 476      |  
|Excess tax benefit realized from stock options exercised                                 |  |      | 142      |   |      |   | 20       |      |  |   | 118      |  
|Preferred stock dividends paid and amortization of preferred stock discount              |  |      | (7,182   | ) |      |   |         |      |  |   |         |  
|Common stock dividends paid, net of reinvestment                                         |  |      | (4,261   | ) |      |   | (2,936   | )    |  |   | (2,166   | )
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                |  |      | 56,116   |   |      |   | 103,260  |      |  |   | 79,030   |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                         |  |      | 151,732  |   |      |   | 22,748   |      |  |   | (1,235   | )
|Cash and cash equivalents at beginning of period                                         |  |      | 48,312   |   |      |   | 25,564   |      |  |   | 26,799   |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                               |  | $    | 200,044  |   |      | $ | 48,312   |      |  | $ | 25,564   |  
|                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  



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|                                                       |  |      |        |   |      |   |           |      |  |   |       
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | --------- | ---- |  | - | ------
|                                                       |  | 2009 |        |   | 2008 |   |           | 2007
|Supplemental cash flow information:                    |  |      |        |   |      |   |           |      |  |   |       
|Cash paid for interest                                 |  | $    | 46,536 |   |      | $ | 17,613    |      |  | $ | 13,852
|Cash paid for income taxes                             |  |      | 13,714 |   |      |   | 4,600     |      |  |   | 4,085 
|                                                       |  |      |       
|Supplemental non-cash information:                     |  |      |        |   |      |   |           |      |  |   |       
|Dividends reinvested                                   |  | $    | 531    |   |      | $ | 2,243     |      |  | $ | 2,250 
|Value of shares exchanged in exercise of stock options |  |      |       |   |      |   | 8         |      |  |   | 231   
|Change in unrealized gain (loss) on securities         |  |      | (957   | ) |      |   | (243      | )    |  |   | 744   
|Transfer between loans and other real estate owned     |  |      | 9,686  |   |      |   | 1,372     |      |  |   | 50    
|Transfer between premises and equipment and loans      |  |      |       |   |      |   |          |      |  |   | 25    
|Stock financed                                         |  |      | 7,500  |   |      |   |          |      |  |   |      
|                                                       |  |      |       
|Transactions related to acquisitions:                  |  |      |        |   |      |   |           |      |  |   |       
|Increase in assets and liabilities:                    |  |      |        |   |      |   |           |      |  |   |       
|Loans, net                                             |  |      |       |   |      | $ | 1,972,398 |      |  | $ |      
|Securities                                             |  |      |       |   |      |   | 155,507   |      |  |   |      
|Other assets                                           |  |      |       |   |      |   | 267,637   |      |  |   |      
|Deposits                                               |  |      |       |   |      |   | 1,902,462 |      |  |   |      
|Borrowings                                             |  |      |       |   |      |   | 324,293   |      |  |   |      
|Other liabilities                                      |  |      |       |   |      |   | 8,366     |      |  |   |      
|Issuance of preferred stock                            |  |      |       |   |      |   | 59,245    |      |  |   |      
|Issuance of common stock and stock options             |  |      |       |   |      |   | 127,952   |      |  |   |      

See accompanying
notes to the consolidated financial statements.



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Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007



|(1) | Basis of Financial Statement Presentation and Summary of Significant Accounting Policies
|--- | ----------------------------------------------------------------------------------------

Basis of Presentation. Hampton Roads Bankshares, Inc. (the Company) is a multi-bank holding company incorporated in
2001 under the laws of the Commonwealth of Virginia. The consolidated financial statements of Hampton Roads Bankshares, Inc. include the accounts of the Company and its wholly-owned subsidiaries: Bank of Hampton Roads (BOHR), Shore Bank
(Shore), and Hampton Roads Investments, Inc., as well as their wholly owned subsidiaries: Bank of Hampton Roads Service Corporation; Gateway Bank Mortgage, Inc.; Gateway Investment Services, Inc.; Gateway Insurance Services, Inc.;
Gateway Title Agency, Inc.; Shore Investments, Inc.; and Insurance Express Premium Finance. The Company also owns Gateway Capital Statutory Trust I, Gateway Capital Statutory Trust II, Gateway Capital Statutory Trust III, and Gateway Capital
Statutory Trust IV. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-17, the Gateway Capital Trusts are not consolidated as part of the Companys consolidated
financial statements. However, the junior subordinated debentures issued by the Company to the trusts are included in long-term borrowings and the Companys equity interest in the trusts is included in other assets. Additionally, all
significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates.The
preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Material estimates that are
particularly susceptible to changes in the near term are the allowance for loan losses, the valuation of deferred tax assets, the fair value of stock options, and the estimated fair value of financial instruments.

Summary of Significant Accounting Policies.The following is a summary of the significant accounting and reporting policies used in
preparing the consolidated financial statements.

Cash and Due from Bank Accounts. For the purpose of presentation in
the consolidated statements of cash flows, the Company considers cash and due from banks, overnight funds sold and due from Federal Reserve Bank, and interest-bearing deposits in other banks as cash and cash equivalents.

The Company is required to maintain average reserve balances in cash with the Federal Reserve Bank (FRB). The amounts of daily
average required reserves for the final weekly reporting period were $26.4 million and $4.1 million at December 31, 2009 and 2008, respectively.

Investment Securities. Certain debt securities that management has the positive intent and ability to hold to maturity are
classified as held to maturity and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and
discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Impairment of securities occurs when the fair value of the security is less than its amortized cost. For debt securities,
impairment is considered other-than-temporary and recognized in its entirety in net income if either we intend to sell the security or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost
basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which
occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is credit loss, the loss must be recognized in net income and the remaining portion of impairment
must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the



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investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment
security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the
present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity, and the likelihood that we would be required to sell the security before recovery.

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether
other-than-temporary impairment exists, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For equity
securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily
impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made.

Restricted Equity Securities. As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of
Atlanta (FHLB), Community Bankers Bank, and FRB. These investments are carried at cost due to the redemption provisions of these entities and the restricted nature of the securities. Management reviews for impairment based on the
ultimate recoverability of the cost basis of these stocks.

Loans. The Company grants mortgage, commercial, and consumer
loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout Virginia and North Carolina. The ability of the Companys debtors to honor their contracts is dependent upon the real estate and general
economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred over the life of the loan and recognized as
an adjustment of the related loan yield using the interest and straight-line methods. Net fees related to standby letters of credit are recognized over the commitment period. In those instances when a loan prepays, the remaining deferred fee is
recognized in the income statement.

As a general rule, loans are placed in nonaccrual status when principal or interest is 90
days or more past due. The delinquency status of the loan is determined by the contractual terms of the loan. Accrual of interest ceases at that time and uncollected past due interest is reversed. Cash payments received on loans in nonaccrual status
are generally applied to reduce the outstanding principal balance, however, during 2009, cash payments in the amount of $1.2 million were recorded as interest income on nonaccrual loans. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan
Losses. The allowance for loan losses is a valuation allowance consisting of the cumulative effect of the provision for loan losses, less loans charged off, in addition to any amounts recovered on loans previously charged off. The provision for
loan losses is the amount necessary, in managements judgment, to maintain the allowance for loan losses at a level it believes sufficient to cover incurred losses in the collection of the Companys loans. Loans are charged against the
allowance when, in managements opinion, they are deemed uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For
those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Companys internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment
of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.



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A loan is deemed impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Certain loans are individually evaluated for impairment in accordance with the Companys ongoing loan review procedures. Smaller balance homogeneous loans are collectively
evaluated for impairment. Impaired loans are measured at the present value of their expected future cash flows by discounting those cash flows at the loans effective interest rate or at the loans observable market price or the fair value
of collateral if the loan is collateral dependent. The difference between this discounted amount and the loan balance is recorded as an allowance for loan losses. Once a loan is considered impaired, it continues to be considered impaired until the
collection of scheduled interest and principal is considered probable or the balance is charged off.

The allowance for loan
losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical loss experience, risk characteristics of the various categories of loans, adverse
situations affecting individual loans, loan risk grades, estimated value of any underlying collateral, and prevailing economic conditions. Further adjustments to the allowance for loan losses may be necessary based on changes in economic and real
estate market conditions, further information regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available.

Loans Held for Sale. The Company
originates single family, residential, first lien mortgage loans that have been approved by secondary market investors. The Company classifies loans originated with the intent of selling them in the secondary market as held for sale. Loans
originated for sale are primarily sold in the secondary market as whole loans. Whole loan sales are executed with the servicing rights being released to the buyer upon the sale, with the gain or loss on the sale equal to the difference between the
proceeds received and the carrying value of the loans sold.

Mortgage loans held for sale are carried at the lower of cost or
fair value in the aggregate. The fair value of mortgage loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities, and credit quality. The fair value of mortgage loans held for sale is
impacted by changes in market interest rates. Net unrealized losses, if any, are recognized through a valuation allowance.

The
Company enters into commitments to originate or purchase loans whereby the interest rate of the loan was determined prior to funding (interest rate lock commitments). Interest rate lock commitments on mortgage loans that the Company
intended to sell in the secondary market were considered freestanding derivatives. These derivatives are carried at fair value with changes in fair value reported as a component of gain on sale of the loans in accordance with the Securities and
Exchange Commissions Staff Account Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings.

Premises and Equipment. Land is reported at cost, while premises and equipment are reported at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment to 40 years for premises. Leasehold improvements are amortized on a
straight-line basis over the terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements
are capitalized.

Goodwill and Other Intangibles. Accounting Standards Codification (ASC) 350, Intangibles
 Goodwill and other Intangibles, states goodwill is not subject to amortization over its estimated useful life, but is subject to an annual assessment for impairment by applying a fair value based test. Additionally, acquired intangible assets
are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged; they are amortized over their estimated useful life.



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Foreclosed Real Estate and Repossessed Assets. Foreclosed real estate and repossessed
assets include real estate acquired in the settlement of loans and other repossessed collateral. Real estate acquired in settlement of loans is initially recorded at the lower of the recorded loan balance or fair market value less estimated disposal
costs. At foreclosure any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses. Such carrying value is periodically reevaluated and written down if there is an indicated decline in fair value.
Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred. Gains and losses on sales of foreclosed real estate and valuation
allowance are recognized in noninterest income upon disposition.

Long-Lived Assets. The Company accounts for long-lived
assets in accordance with ASC 360, Property, Plant, and Equipment, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.

Bank Owned Life Insurance. The Company purchased life insurance policies on the lives of certain officers.
The policies are recorded as an asset at the cash surrender value of the policies. Increases or decreases in the cash surrender value, other than proceeds from death benefits, are recorded as noninterest income. Proceeds from death benefits first
reduce the cash surrender value attributable to the individual policy and then any additional proceeds are recorded as noninterest income.

Revenue Recognition. Revenue earned on interest-earning assets is recognized based on the effective yield of the financial
instrument. Service charges on deposit accounts are recognized as charged. Credit-related fees, including letter of credit fees, are recognized in noninterest income when earned.

Insurance commission income is recorded as of the effective date of insurance coverage or the billing date, whichever is later. Contingent
commissions are recognized when determinable, which is generally when such commissions are received or when the Company receives data from the insurance companies that allow the reasonable estimation of these amounts. The income effects of
subsequent premium and fee adjustments are recorded when the adjustments become known.

Advertising Costs. Advertising
costs are expensed as incurred.

Stock-Based Compensation. According to ASC 718, Compensation  Stock
Compensation,the Company uses the fair value method, which requires that compensation cost relating to stock based transactions be recognized in the financial statements, to account for stock-based compensation and the fair value of stock
options is estimated at the date of grant using a lattice option pricing model. Stock options granted with pro rata vesting schedules are expensed over the vesting period on a straight line basis.

Income Taxes. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net
deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statement
and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.

A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is
recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available
evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect
managements judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.



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Per Share Data. Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the dilutive effect of stock options and non-vested stock using the treasury stock method. For
the year ended December 31, 2009, all options were anti-dilutive since the Company had a net loss available to common shareholders. There were 249,288 average anti-dilutive stock options for the year ended December 31, 2008, and there were
no anti-dilutive stock options for the year ended December 31, 2007.

Comprehensive Income (Loss). Accounting
principles generally require that recognized revenue, expenses, gains, and losses be included in net income or loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet, such items, along with the operating net income or loss, are components of comprehensive income or loss.

Credit Related Financial Instruments. In the ordinary course of business, the Company has entered into commitments to extend credit
including commitments under home equity lines of credit, overdraft protection arrangements, commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Concentrations of Credit Risk. Construction and mortgage loans represented 83% and 81% of the total loan portfolio at
December 31, 2009 and 2008, respectively. Substantially all such loans are collateralized by real property. Loans in these categories and their collateral values are continuously monitored by management.

At times the Company may have cash and cash equivalents at a financial institution in excess of insured limits. The Company places its
cash and cash equivalents with high credit quality financial institutions whose credit rating is monitored by management to minimize credit risk. The amount on deposit with correspondent institutions at December 31, 2009 exceeded the insurance
limits of the Federal Deposit Insurance Corporation by $386 thousand.

Reclassification. Certain 2008 and 2007 amounts
have been reclassified to conform to the 2009 presentation.

Recent Accounting Pronouncements

In June 2009, FASB issued new accounting guidance related to U.S. GAAP, ASC 105, Generally Accepted Accounting Principles. This
guidance establishes FASB ASC as the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in FASB ASC has become non-authoritative. FASB will no
longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs, which will serve to update FASB ASC, provide background information about the guidance, and provide the
basis for conclusions on the changes to FASB ASC. FASB ASC is not intended to change U.S. GAAP or any requirements of the SEC.

The Company adopted new guidance impacting ASC 805, Business Combinations on January 1, 2009. This guidance requires the
acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition), establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed, requires expensing of most transaction and restructuring costs, and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand
the nature and financial effect of the business combination. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In April 2009, the FASB issued new guidance impacting ASC 805. This guidance addresses application issues raised by preparers, auditors,
and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for
business combinations entered into on or after January 1, 2009. This guidance did not have a material impact on the Companys consolidated financial statements.



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In April 2009, the FASB issued new guidance impacting ASC 820, Fair Value Measurements
and Disclosures. This interpretation provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances
that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types that are required to be disclosed. This guidance was effective for interim and
annual periods ending after June 15, 2009 and should be applied prospectively. The adoption of this standard did not have a material impact on the Companys consolidated financial statements.

In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments  Debt and Equity Securities. This guidance
amends GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance was effective for
interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The additional disclosures required are included in the consolidated Statements of Operations and in Note 3 to
the Companys consolidated financial statements.

In May 2009, the FASB issued new guidance impacting ASC 855,
Subsequent Events. This update provides guidance on managements assessment of subsequent events that occur after the balance sheet date through the date that the financial statements are issued. This guidance is generally consistent
with current accounting practice. In addition, it requires certain additional disclosures. This guidance was effective for periods ending after June 15, 2009 and the required disclosure is included as Note 27 to the Companys consolidated
financial statements.

In August 2009, the FASB issued new guidance impacting ASC 820. This guidance is intended to reduce
ambiguity in financial reporting when measuring the fair value of liabilities. This guidance was effective for the first reporting period (including interim periods) after issuance and had no impact on the Companys consolidated financial
statements.

In September 2009, the FASB issued new guidance impacting ASC 820. This creates a practical expedient to measure
the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15,
2009. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation: Accounting and Reporting for Decreases in Ownership of a Subsidiary 
a Scope Clarification. ASU 2010-02 amends ASC 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is effective
beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should
be applied retrospectively to the first period Statement 160 was adopted. The Company does not expect the adoption of ASU 2010-02 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-01, Equity: Accounting for Distributions to Shareholders with Components of Stock and Cash
 a Consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after
December 15, 2009 and should be applied on a retrospective basis. The Company does not expect the adoption of ASU 2010-01 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was
issued as Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance
of ASU 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of
a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. The Company will adopt the new guidance in 2010 and is evaluating the impact it
will have, if any, on its consolidated financial statements.



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In June 2009, the FASB issued new guidance relating to the variable interest entities. The
new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The Company does not expect the adoption of the new guidance to have a
material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15, Accounting for
Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does
not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In January 2010,
the FASB issued ASU 2010-04, Accounting for Various Topics  Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including accounting for subsequent investments, termination of an
interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate
used for measuring defined benefit obligation. The Company does not expect the adoption of ASU 2010-04 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-05, Compensation  Stock Compensation: Escrowed Share Arrangements and the Presumption
of Compensation. ASU 2010-05 updates existing guidance to address the SEC staffs views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. The Company does not expect the adoption
of ASU 2010-05 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU
No. 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements. ASU 2010-06 amends ASC 820-10 to clarify existing disclosures, require new disclosures, and include conforming amendments to
guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect
the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

In February 2010, the FASB
issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The Company does
not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.



|(2) | Mergers and Acquisitions
|--- | ------------------------

Shore Financial Corporation (SFC)

On June 1, 2008, the Company acquired all of the outstanding shares of SFC. The shareholders of SFC received, for each share of SFC
common stock that they owned immediately prior to the effective time of the merger, either $22 per share in cash or 1.8 shares of the Companys common stock. In addition, at the effective time of the merger, each outstanding option to purchase
shares of SFCs common stock under any stock plans vested pursuant to its terms and was converted into an option to acquire the number of shares of the Companys common stock



48



---

equal to the number of shares of SFC common stock underlying the option multiplied by 1.8. The exercise price of each option was adjusted accordingly. The aggregate purchase price was $58.1
million, including common stock valued at $31.2 million, SFC stock held by the Company as an investment of $800 thousand, stock options exchanged valued at $1.2 million, cash of $21.0 million, and direct costs of the merger of $3.9 million. Net
assets (in thousands) acquired are shown in the table below.



|                                |  |   |        
|------------------------------- |  | - | -------
|Securities available-for-sale   |  | $ | 16,250 
|Loans, net                      |  |   | 220,450
|Goodwill                        |  |   | 27,898 
|Core deposit intangible         |  |   | 4,755  
|Employment agreement intangible |  |   | 160    
|Other assets                    |  |   | 33,587 
|                                |  |   |        
|Total assets acquired           |  |   | 303,100
|                                | 
|Deposits                        |  |   | 208,402
|Borrowings                      |  |   | 34,228 
|Other liabilities               |  |   | 2,409  
|                                |  |   |        
|Total liabilities assumed       |  |   | 245,039
|                                |  |   |        
|Net assets acquired             |  | $ | 58,061 
|                                |  |   |        

The merger transaction was accounted for under the
purchase method of accounting and is qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The merger resulted in the recording of $27.9 million of goodwill and $4.8 million of core deposit intangible assets.
During the second quarter of 2009, goodwill related to the SFC acquisition was determined to be impaired, and an impairment expense of $27.9 million was recorded. The core deposit intangible asset was based on an independent valuation and is being
amortized over the estimated life of the core deposits of eight years, based on undiscounted cash flows. In order to finance the merger transaction, the Company borrowed $23.0 million, which was completely paid off during second quarter 2009.

Gateway Financial Holdings (GFH)

On December 31, 2008 the Company acquired all of the outstanding shares of GFH. The shareholders of GFH received, for each share of
GFH common stock that they owned immediately prior to the effective time of the merger 0.67 shares of Company common stock. Each of GFHs preferred shares outstanding immediately prior to the effective time of the merger converted into new
preferred shares of the Company that have substantially identical rights. In addition, at the effective time of the merger, each outstanding option to purchase shares of GFHs common stock under any stock plans were converted into an option to
acquire the number of shares of Company common stock equal to the number of shares of GFH common stock underlying the option multiplied by 0.67. The exercise price of each option was adjusted accordingly. The aggregate purchase price was
approximately $161.0 million, including common stock valued at $94.2 million, preferred stock valued at $59.3 million, GFH stock held by the Company as an investment of $200 thousand, stock options exchanged valued at $1.4 million, and direct costs
of the merger of $5.9 million.



49



---

Net assets acquired, based on fair value adjustments, are shown in the table below (in
thousands).



|                              |  |   |          
|----------------------------- |  | - | ---------
|Securities available-for-sale |  | $ | 117,706  
|Loans, net                    |  |   | 1,752,793
|Goodwill                      |  |   | 56,939   
|Core deposit intangible       |  |   | 3,282    
|Other intangibles             |  |   | 7,485    
|Other assets                  |  |   | 205,672  
|                              |  |   |          
|Total assets acquired         |  |   | 2,143,877
|                              | 
|Deposits                      |  |   | 1,688,473
|Borrowings                    |  |   | 289,497  
|Other liabilities             |  |   | 4,950    
|                              |  |   |          
|Total liabilities assumed     |  |   | 1,982,920
|                              |  |   |          
|Net assets acquired           |  | $ | 160,957  
|                              |  |   |          

The merger transaction was accounted for under the
purchase method of accounting and is qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The merger resulted in the recording of $56.9 million of goodwill and $3.3 million of core deposit intangible assets.
During the fourth quarter of 2009, goodwill related to the GFH acquisition was determined to be impaired, and an impairment expense of $56.9 million was recorded. The core deposit intangible assets were based on an independent valuation and will be
amortized over the estimated life of the core deposits of 4.5 years, based on undiscounted cash flows.

Pro forma Financial
Information

The Companys consolidated financial statements include the results of operations of SFC and GFH from the
date of acquisition. Pro forma condensed consolidated income statements (in thousands) for the years ended December 31, 2008 and 2007 are shown as if the mergers occurred at the beginning of each year as follows.



|                                      |  |      |         |   |      |   |        
|------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                      |  | 2008 |         |   | 2007
|Interest income                       |  | $    | 171,295 |   |      | $ | 162,913
|Interest expense                      |  |      | 77,462  |   |      |   | 74,572 
|                                      |  |      |         |   |      |   |        
|Net interest income                   |  |      | 93,833  |   |      |   | 88,341 
|                                      |  |     
|Provision for loan losses             |  |      | 44,874  |   |      |   | 6,059  
|Noninterest income (loss)             |  |      | (11,456 | ) |      |   | 24,605 
|Noninterest expense                   |  |      | 85,438  |   |      |   | 70,860 
|                                      |  |      |         |   |      |   |        
|Income (loss) before for income taxes |  |      | (47,935 | ) |      |   | 36,027 
|                                      |  |     
|Provision for income taxes (benefit)  |  |      | (18,575 | ) |      |   | 12,360 
|                                      |  |      |         |   |      |   |        
|Net income (loss)                     |  | $    | (29,360 | ) |      | $ | 23,667 
|                                      |  |      |         |   |      |   |        
|Basis earnings (loss) per share       |  | $    | (1.36   | ) |      | $ | 1.10   
|                                      |  |      |         |   |      |   |        
|Diluted earnings (loss) per share     |  | $    | (1.36   | ) |      | $ | 1.08   
|                                      |  |      |         |   |      |   |        



50



---

|(3) | Investment Securities
|--- | ---------------------

The amortized cost and estimated fair values of investment securities available-for-sale (in thousands) at December 31, 2009 and 2008
were as follows.



|                                               |  |               |         |                      |   |                       |  |                    |       |  |   |        
|---------------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | ------------------ | ----- |  | - | -------
|                                               |  | 2009         
|                                               |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFairValue
|State and municipal securities                 |  | $             | 1,279   |                      | $ | 27                    |  | $                  |      |  | $ | 1,306  
|U.S. agency securities                         |  |               | 11,376  |                      |   | 173                   |  |                    | 105   |  |   | 11,444 
|Mortgage-backed securities                     |  |               | 146,583 |                      |   | 482                   |  |                    | 1,339 |  |   | 145,726
|Equity securities                              |  |               | 2,966   |                      |   | 3                     |  |                    | 383   |  |   | 2,586  
|                                               |  |               |         |                      |   |                       |  |                    |       |  |   |        
|Total investment securities available-for-sale |  | $             | 162,204 |                      | $ | 685                   |  | $                  | 1,827 |  | $ | 161,062
|                                               |  |               |         |                      |   |                       |  |                    |       |  |   |        
|                                               | 
|                                               |  | 2008         
|                                               |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFairValue
|State and municipal securities                 |  | $             | 18,186  |                      | $ | 39                    |  | $                  | 8     |  | $ | 18,217 
|U.S. agency securities                         |  |               | 24,584  |                      |   | 415                   |  |                    |      |  |   | 24,999 
|Mortgage-backed securities                     |  |               | 95,202  |                      |   | 46                    |  |                    |      |  |   | 95,248 
|Corporate bonds                                |  |               | 5,093   |                      |   |                      |  |                    |      |  |   | 5,093  
|Equity securities                              |  |               | 6,747   |                      |   | 19                    |  |                    | 686   |  |   | 6,080  
|                                               |  |               |         |                      |   |                       |  |                    |       |  |   |        
|Total investment securities available-for-sale |  | $             | 149,812 |                      | $ | 519                   |  | $                  | 694   |  | $ | 149,637
|                                               |  |               |         |                      |   |                       |  |                    |       |  |   |        

Proceeds from sales of investment securities
available-for-sale during 2009 were $84.1 million and resulted in gross realized gains of $4.3 million. For the year ended December 31, 2008, proceeds from available-for-sale securities amounted to $18.5 million and resulted in realized gains
of $457 thousand. There were no sales of securities in 2007.

The amortized cost and estimated fair value of investment
securities available-for-sale (in thousands) that are not determined to be other-than-temporarily impaired, by contractual maturity at December 31, 2009 are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities do not have contractual maturities.



|                                             |  |               |         |                      |   |        
|-------------------------------------------- |  | ------------- | ------- | -------------------- | - | -------
|                                             |  | 2009         
|                                             |  | AmortizedCost |         | EstimatedFair 
Value
|Due in one year or less                      |  | $             | 1,005   |                      | $ | 1,025  
|Due after one year but less than five years  |  |               | 1,012   |                      |   | 1,089  
|Due after five years but less than ten years |  |               | 9,569   |                      |   | 9,557  
|Due after ten years                          |  |               | 147,652 |                      |   | 146,806
|Equity securities                            |  |               | 2,966   |                      |   | 2,585  
|                                             |  |               |         |                      |   |        
|Total available-for-sale securities          |  | $             | 162,204 |                      | $ | 161,062
|                                             |  |               |         |                      |   |        



51



---

Information pertaining to securities with gross unrealized losses (in thousands) at
December 31, 2009 and 2008, aggregated by investment category and length of time that the individual securities have been in a continuous loss position is as follows.



|                               |  |                      |        |                   |   |                      |  |                |       |                      |   |                |  |   |        |  |   |      
|------------------------------ |  | -------------------- | ------ | ----------------- | - | -------------------- |  | -------------- | ----- | -------------------- | - | -------------- |  | - | ------ |  | - | -----
|                               |  | 2009                
|                               |  | Less than 12 Months  |        | 12 Months or More |   | Total               
|                               |  | EstimatedFair 
Value |        | UnrealizedLoss    |   | EstimatedFair 
Value |  | UnrealizedLoss |       | EstimatedFair 
Value |   | UnrealizedLoss
|Agency securities              |  | $                    | 4,711  |                   | $ | 105                  |  | $              |      |                      | $ |               |  | $ | 4,711  |  | $ | 105  
|Mortgage-backed securities     |  |                      | 69,078 |                   |   | 1,339                |  |                |      |                      |   |               |  |   | 69,078 |  |   | 1,339
|Equity securities              |  |                      | 32     |                   |   | 13                   |  |                | 1,097 |                      |   | 370            |  |   | 1,129  |  |   | 383  
|                               |  |                      |        |                   |   |                      |  |                |       |                      |   |                |  |   |        |  |   |      
|                               |  | $                    | 73,821 |                   | $ | 1,457                |  | $              | 1,097 |                      | $ | 370            |  | $ | 74,918 |  | $ | 1,827
|                               |  |                      |        |                   |   |                      |  |                |       |                      |   |                |  |   |        |  |   |      
|                               | 
|                               |  | 2008                
|                               |  | Less than 12 Months  |        | 12 Months or More |   | Total               
|                               |  | EstimatedFair 
Value |        | UnrealizedLoss    |   | EstimatedFair 
Value |  | UnrealizedLoss |       | EstimatedFair 
Value |   | UnrealizedLoss
|State and municipal securities |  | $                    | 2,713  |                   | $ | 8                    |  | $              |      |                      | $ |               |  | $ | 2,713  |  | $ | 8    
|Mortgage-backed securities     |  |                      |       |                   |   |                     |  |                | 5     |                      |   |               |  |   | 5      |  |   |     
|Equity securities              |  |                      | 1,281  |                   |   | 360                  |  |                | 147   |                      |   | 326            |  |   | 1,428  |  |   | 686  
|                               |  |                      |        |                   |   |                      |  |                |       |                      |   |                |  |   |        |  |   |      
|                               |  | $                    | 3,994  |                   | $ | 368                  |  | $              | 152   |                      | $ | 326            |  | $ | 4,146  |  | $ | 694  
|                               |  |                      |        |                   |   |                      |  |                |       |                      |   |                |  |   |        |  |   |      

Management evaluates securities for
other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale are generally evaluated for
OTTI in accordance with ASC 320, Investment  Debt and Equity Securities.

In determining OTTI, management
considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary
decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more
likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If an entity intends to sell or it is more likely than not that it will be required to sell the security
before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet
date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated
into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in
earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the
investment.

The unrealized loss positions on debt securities at December 31, 2009 were directly related to interest rate
movements as there is minimal credit risk exposure in these investments. Debt securities with unrealized loss positions at December 31, 2009 included one agency security and 21 agency mortgage-backed securities. Management does not believe that
any of these debt securities were other-than-temporarily impaired at December 31, 2009.



52



---

In accordance with SAB Topic 5M, our impairment analysis considered all available evidence
including the length of time and the extent to which the market value of each security was less than cost, the financial condition of the issuer of each equity security (based upon financial statements of the issuers), and the near term prospects of
each issuer, as well as our intent and ability to retain these investments for a sufficient period of time to allow for any anticipated recovery in their respective market values. During 2009 and 2008, equity securities with an amortized cost basis
of $5.4 million and $613 thousand, respectively, were determined to be other-than-temporarily impaired. Impairment losses of $2.5 million and $561 thousand were recognized through noninterest income during 2009 and 2008, respectively. An additional
$190 thousand was included in accumulated other comprehensive loss in the equity section of the balance sheet as of December 31, 2009. Management has evaluated the unrealized losses associated with the remaining equity securities as of
December 31, 2009 and, in managements opinion, the unrealized losses are temporary and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative other-than-temporary impairment losses (in
thousands) recognized in earnings for all debt securities is as follows.



|                                                    |  |   |      
|--------------------------------------------------- |  | - | -----
|December 31, 2008                                   |  | $ | 561  
|Loss where impairment was not previously recognized |  |   | 2,469
|                                                    |  |   |      
|December 31, 2009                                   |  | $ | 3,030
|                                                    |  |   |      

The Companys investment in FHLB stock totaled
$19.7 million at December 31, 2009. FHLB stock is generally viewed as a long-term investment and as a restricted investment security and is carried at cost as there is no market for the stock other than the FHLB or member institutions.
Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLBs change in policy relating to repurchases of excess
capital stock in 2009, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2009, and no impairment has been recognized.

Investment securities at estimated fair value (in thousands) that were pledged to secure deposits or outstanding borrowings or were
pledged to secure potential future borrowings at December 31, 2009 and 2008 were as follows.



|                                  |  |      |        |      |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|                                  |  | 2009 |        | 2008
|Public deposits                   |  | $    | 34,219 |      | $ | 32,116
|Treasury, tax, and loan deposits  |  |      | 4,015  |      |   | 3,605 
|Federal Home Loan Bank borrowings |  |      | 21,550 |      |   | 26,528
|Federal Reserve Bank borrowings   |  |      | 2,115  |      |   | 7,755 
|Repurchase agreements             |  |      | 24,174 |      |   | 22,923
|Housing and Urban Development     |  |      | 604    |      |   | 413   
|                                  |  |      |        |      |   |       
|                                  |  | $    | 86,677 |      | $ | 93,340
|                                  |  |      |        |      |   |       



|(4) | Loans and Allowance for Loan Losses
|--- | -----------------------------------

The Company grants commercial, construction, real estate, and consumer loans to customers throughout its lending areas. A substantial
portion of debtors abilities to honor their contracts is dependent upon the real estate and general economic environment of the lending area. Overdrafts in the amount of $399 thousand and $332 thousand as of December 31, 2009 and 2008,
respectively, were reclassified from deposits to loans.



53



---

Major classifications of loans (in thousands) at December 31, 2009 and 2008 were as
follows.



|                                     |  |      |           |   |      |   |           |  
|------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                     |  | 2009 |           |   | 2008 |  
|Commercial                           |  | $    | 361,256   |   |      | $ | 451,426   |  
|Construction                         |  |      | 757,702   |   |      |   | 897,288   |  
|Real estate - commercial mortgage    |  |      | 740,570   |   |      |   | 673,351   |  
|Real estate - residential mortgage   |  |      | 524,853   |   |      |   | 528,760   |  
|Installment loans to individuals     |  |      | 42,858    |   |      |   | 50,085    |  
|Deferred loan fees and related costs |  |      | (547      | ) |      |   | (1,384    | )
|                                     |  |      |           |   |      |   |           |  
|                                     |  | $    | 2,426,692 |   |      | $ | 2,599,526 |  
|                                     |  |      |           |   |      |   |           |  

Non-performing assets (in thousands) at December 31, 2009 and 2008 were as follows.



|                                                      |  |      |         |      |   |       
|----------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                                      |  | 2009 |         | 2008
|Loans 90 days past due and still accruing interest    |  | $    |        |      | $ | 3,219 
|Nonaccrual loans, including nonaccrual impaired loans |  |      | 248,303 |      |   | 32,885
|Foreclosed real estate and repossessed assets         |  |      | 8,867   |      |   | 5,092 
|                                                      |  |      |         |      |   |       
|Non-performing assets                                 |  | $    | 257,170 |      | $ | 41,196
|                                                      |  |      |         |      |   |       

Estimated gross interest income that would have been
recorded if the foregoing nonaccrual loans had remained current in accordance with their contractual terms totaled $44.2 million, $99 thousand, and $164 thousand in 2009, 2008, and 2007, respectively.

Information on impaired loans (in thousands) at December 31, 2009, 2008, and 2007 is as follows.



|                                                                                 |  |      |         |      |   |       |  |   |      
|-------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ----- |  | - | -----
|                                                                                 |  | 2009 |         | 2008 |   | 2007 
|Impaired loans for which an allowance has been provided                          |  | $    | 331,532 |      | $ | 2,161 |  | $ | 1,698
|Impaired loans for which no allowance has been provided                          |  |      | 137,536 |      |   | 2,130 |  |   |     
|                                                                                 |  |      |         |      |   |       |  |   |      
|Total impaired loans                                                             |  | $    | 469,068 |      | $ | 4,291 |  | $ | 1,698
|                                                                                 |  |      |         |      |   |       |  |   |      
|Allowance provided for impaired loans, included in the allowance for loan losses |  | $    | 91,488  |      | $ | 545   |  | $ | 406  
|                                                                                 |  |      |         |      |   |       |  |   |      
|Average balance in impaired loans                                                |  | $    | 215,363 |      | $ | 3,883 |  | $ | 1,782
|                                                                                 |  |      |         |      |   |       |  |   |      
|Interest income recognized from impaired loans                                   |  | $    | 17,440  |      | $ | 131   |  | $ | 20   
|                                                                                 |  |      |         |      |   |       |  |   |      

As of December 31, 2009, loans classified as
troubled debt restructurings were $73.5 million, all of which are considered impaired and included in the disclosure above. There were no troubled debt restructurings as of December 31, 2008. Upon execution of a forbearance agreement including
modified terms, an impaired loan will be re-classified from non-performing to a troubled debt restructuring, but will continue to be identified as impaired until the loan performs under the modified terms for the remainder of the calendar year in
which it was restructured but not less than 90 days.



54



---

Transactions affecting the allowance for loan losses (in thousands) for the years ended
December 31, 2009, 2008, and 2007 were as follows.



|                                 |  |      |         |   |      |   |        |      |  |   |       |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                 |  | 2009 |         |   | 2008 |   |        | 2007 | 
|Balance at beginning of year     |  | $    | 51,218  |   |      | $ | 5,043  |      |  | $ | 3,911 |  
|Provision for loan losses        |  |      | 134,223 |   |      |   | 1,418  |      |  |   | 1,232 |  
|Acquired through SFC acquisition |  |      |        |   |      |   | 2,932  |      |  |   |      |  
|Acquired through GFH acquisition |  |      |        |   |      |   | 42,060 |      |  |   |      |  
|Loans charged off                |  |      | (53,536 | ) |      |   | (337   | )    |  |   | (109  | )
|Recoveries                       |  |      | 792     |   |      |   | 102    |      |  |   | 9     |  
|                                 |  |      |         |   |      |   |        |      |  |   |       |  
|Balance at end of year           |  | $    | 132,697 |   |      | $ | 51,218 |      |  | $ | 5,043 |  
|                                 |  |      |         |   |      |   |        |      |  |   |       |  

In the opinion of management, based on conditions reasonably known to them, the allowance was adequate at
December 31, 2009. The allowance may be increased or decreased in the future based on loan balances outstanding, changes in internally generated credit quality ratings of the loan portfolio, changes in general economic conditions, or other risk
factors.



|(5) | Accounting for Certain Loans Acquired in a Transfer
|--- | ---------------------------------------------------

ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, requires acquired loans to be recorded at fair
value and prohibits carrying over valuation allowances when initially accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are
excluded from the scope of this pronouncement. It limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investors initial investment in the loan. The excess of the contractual cash flows over
expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loans yield over its remaining life. Decreases in
expected cash flows are recognized as impairments.

The Company acquired loans pursuant to the acquisition of GFH in December
2008. The Company reviewed the loan portfolio at acquisition to determine whether there was evidence of deterioration of credit quality since origination and if it was probable that it will be unable to collect all amounts due according to the
loans contractual terms. When both conditions existed, the Company accounted for each loan individually, considered expected prepayments, and estimated the amount and timing of discounted expected principal, interest, and other cash flows
(expected at acquisition) for each loan. The Company determined the excess of the loans scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted into
interest income (non-accretable difference). The remaining amount, representing the excess of the loans cash flows expected to be collected over the amount paid, is accreted into interest income over the remaining life of the loan (accretable
yield).

Over the life of the loan, the Company continues to estimate cash flows expected to be collected. The Company
evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased, and if so, the Company establishes a valuation allowance for the loan. Valuation allowances for acquired loans
reflect only those losses incurred after acquisition; that is, the present value of cash flows expected at acquisition that are not expected to be collected. Valuation allowances are established only subsequent to our acquisition of the loans. For
loans that are not accounted for as debt securities, the present value of any subsequent increase in the loans or pools actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance
for that loan. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loans remaining life. The Company does not have any such loans
that were accounted for as debt securities.

Loans that were acquired in the GFH acquisition for which there was evidence of
deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be made as scheduled had an outstanding balance of $88.0 million and a carrying amount of $78.2 million at
December 31, 2009. The carrying amount of these loans is included in the balance sheet amount of loans receivable at December 31, 2009. Of these loans, $58.2 million have experienced further deterioration since the acquisition date and are
included in the impaired loan amounts disclosed in Note 4. The following table depicts the accretable yield (in thousands) at the beginning and end of the period.



|                           |  |   |        |  
|-------------------------- |  | - | ------ | -
|Balance, December 31, 2008 |  | $ | 4,167  |  
|Accretion                  |  |   | (2,134 | )
|Disposals                  |  |   | (2,075 | )
|Additions                  |  |   | 1,084  |  
|                           |  |   |        |  
|Balance, December 31, 2009 |  | $ | 1,042  |  
|                           |  |   |        |  



55



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|(6) | Derivative Instruments
|--- | ----------------------

At December 31, 2009, the Company had rate lock commitments to originate mortgage loans in the amount of $17.2 million and loans held
for sale of $12.6 million. At December 31, 2008, the Company had rate lock commitments to originate mortgage loans in the amount of $17.1 million and loans held for sale of $5.1 million. The Company entered into corresponding commitments with
third party investors to sell loans of approximately $29.8 million in 2009 and $23.6 million in 2008. Under the contractual relationship with these investors, the Company is obligated to sell the loans only if the loans close. No other
obligation exists. As a result of these contractual relationships with these investors, the Company is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.



|(7) | Premises, Equipment, and Leases
|--- | -------------------------------

Premises and equipment (in thousands) at December 31, 2009 and 2008 are summarized as follows.



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2009 |         |   | 2008 |  
|Land                                           |  | $    | 31,335  |   |      | $ | 26,357  |  
|Buildings and improvements                     |  |      | 58,177  |   |      |   | 59,731  |  
|Leasehold improvements                         |  |      | 3,411   |   |      |   | 3,224   |  
|Equipment, furniture, and fixtures             |  |      | 14,828  |   |      |   | 15,101  |  
|Construction in progress                       |  |      | 7       |   |      |   | 2,768   |  
|                                               |  |      |         |   |      |   |         |  
|                                               |  |      | 107,758 |   |      |   | 107,181 |  
|Less accumulated depreciation and amortization |  |      | (10,246 | ) |      |   | (5,846  | )
|                                               |  |      |         |   |      |   |         |  
|                                               |  | $    | 97,512  |   |      | $ | 101,335 |  
|                                               |  |      |         |   |      |   |         |  

Depreciation and leasehold amortization expense for the years ended December 31, 2009, 2008, and 2007
was $5.5 million, $1.4 million, and $886 thousand, respectively.

The Company leases land and buildings upon which certain of
its operating facilities and financial center facilities are located. These leases expire at various dates through August 31, 2049. Additionally, the Company has the option to purchase the land upon which the building where some of our
operations occur at the end of the twenty-year lease term at a cost of $300 thousand.

Various facilities and equipment are
leased under noncancellable operating leases with initial remaining terms in excess of one year with options for renewal. In addition to minimum rents, certain leases have escalation clauses and include provisions for additional payments to cover
taxes, insurance, and maintenance. The effects of the scheduled rent increases, which are included in the minimum lease payments, are recognized on a straight-line basis over the lease term. Rental expense was $3.8 million for 2009 compared to $1.1
million for 2008 and $907 thousand for 2007.



56



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Future minimum lease payments (in thousands), by year and in the aggregate, under
noncancellable operating leases at December 31, 2009 were as follows.



|           |  |   |       
|---------- |  | - | ------
|2010       |  | $ | 2,963 
|2011       |  |   | 2,631 
|2012       |  |   | 2,448 
|2013       |  |   | 2,383 
|2014       |  |   | 2,255 
|Thereafter |  |   | 18,979
|           |  |   |       
|           |  | $ | 31,659
|           |  |   |       

The Company has entered into contracts as lessor for
excess office space. Future minimum lease payments receivable (in thousands) under noncancelable leasing arrangements at December 31, 2009 were as follows.



|     |  |   |    
|---- |  | - | ---
|2010 |  | $ | 156
|2011 |  |   | 94 
|2012 |  |   | 92 
|2013 |  |   | 92 
|2014 |  |   | 31 
|     |  |   |    
|     |  | $ | 465
|     |  |   |    



|(8) | Goodwill and Intangible Assets
|--- | ------------------------------

Goodwill and other intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events
or circumstances suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible
assets with a finite life are periodically reviewed for other-than-temporary impairment. ASC 350 identifies a two-step impairment test that should be used to test for impairment and measure the amount of the impairment loss to be recognized. The
first step involves comparing the fair value of the reporting unit with the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds fair value of the reporting unit, a potential impairment may exist. The second step
compares the implied fair value of the reporting units goodwill to the carrying amount of that goodwill. The excess of the carrying amount over the fair value is an impairment of goodwill.

As of May 31, 2009, the Company, in accordance to ASC 350, conducted an impairment test on the goodwill from the SFC acquisition
related to Shore. Managements review of goodwill indicated an impairment of $27.9 million. Also in the second quarter of 2009, the goodwill associated with the GFH merger was tested for impairment. Our testing indicated that there was no
impairment of the goodwill related to the GFH merger as of June 30, 2009. The differing result of the GFH impairment testing from the SFC testing was due to several factors including the relative value of consideration paid for GFH (only five
months had elapsed since the GFH merger, and, thus, fair values were more current than for SFC) and the market prices paid in acquisitions had already fallen substantially prior to the GFH acquisition. Annual impairment testing of the GFH goodwill
subsequently was conducted on its planned schedule as of October 31, 2009. Due in part to a decline in the Companys stock price and, thus, its market capitalization, and its further deterioration in the fair value of the Companys
assets, the assessment reflected impairment of the entire $56.9 million in goodwill associated with the GFH acquisition. The non-cash loss on impairment of goodwill was recorded as a noninterest expense in the statement of operations for the year
ended December 31, 2009.



57



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A summary of goodwill and intangible assets (in thousands) as of December 31, 2009 and
2008 is as follows.



|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |    
|------------------------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------------------- |  | ----------------------- | ------ |  | - | ---
|                                                       |  | 2009                |        | 2008                   
|                                                       |  | GrossCarryingAmount |        | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Intangible assets subject to future amortization:      |  |                     |        |                         |   |                     |  |                         |        |  |   |    
|Core deposit intangible                                |  | $                   | 8,105  |                         | $ | 1,703               |  | $                       | 8,105  |  | $ | 347
|Employment contract intangible                         |  |                     | 1,130  |                         |   | 713                 |  |                         | 1,957  |  |   | 19 
|Insurance book of business intangible                  |  |                     | 6,450  |                         |   | 430                 |  |                         | 6,000  |  |   |   
|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |    
|Total intangible assets subject to future amortization |  |                     | 15,685 |                         |   | 2,846               |  |                         | 16,062 |  |   | 366
|                                                       |  |                     |        |                        
|Intangible assets not subject to amortization:         |  |                     |        |                         |   |                     |  |                         |        |  |   |    
|Goodwill                                               |  |                     |       |                         |   |                    |  |                         | 82,671 |  |   |   
|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |    
|Total goodwill and intangible assets                   |  | $                   | 15,685 |                         | $ | 2,846               |  | $                       | 98,733 |  | $ | 366
|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |    

There were no intangible assets as of December 31,
2007.

The aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2009 was
$2.5 million, compared to $366 thousand for 2008; there was no amortization expense for intangible assets in 2007. The estimated aggregate annual amortization expense (in thousands) for the years subsequent to December 31, 2009 is as follows.



|           |  |   |       
|---------- |  | - | ------
|2010       |  | $ | 1,979 
|2011       |  |   | 1,945 
|2012       |  |   | 1,765 
|2013       |  |   | 1,392 
|2014       |  |   | 1,026 
|Thereafter |  |   | 4,732 
|           |  |   |       
|Total      |  | $ | 12,839
|           |  |   |       

Changes in the carrying amount of goodwill (in
thousands) for the year ended December 31, 2009 are as follows.



|                           |  |   |         |  
|-------------------------- |  | - | ------- | -
|Balance, December 31, 2008 |  | $ | 82,671  |  
|Impairment losses          |  |   | (84,837 | )
|Adjustments                |  |   | 2,166   |  
|                           |  |   |         |  
|Balance, December 31, 2009 |  | $ |        |  
|                           |  |   |         |  



|(9) | Foreclosed Real Estate and Repossessed Assets
|--- | ---------------------------------------------

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed
assets is as follows.



|                             |  |                   |       |   |                   |   |  
|---------------------------- |  | ----------------- | ----- | - | ----------------- | - | -
|                             |  | December 31, 2009 |       |   | December 31, 2008
|Balance at beginning of year |  | $                 |      |   |                   | $ | 
|Provision for losses         |  |                   | 1,043 |   |                   |   | 
|Charge-offs                  |  |                   | (687  | ) |                   |   | 
|                             |  |                   |       |   |                   |   |  
|Balance at end of year       |  | $                 | 356   |   |                   | $ | 
|                             |  |                   |       |   |                   |   |  



58



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Expenses (in thousands) applicable to foreclosed assets include the following.



|                                         |  |                   |      
|---------------------------------------- |  | ----------------- | -----
|                                         |  | Year Ended       
|                                         |  | December 31, 2009
|Net loss on sales of real estate         |  | $                 | 161  
|Provision for losses                     |  |                   | 1,043
|Operating expenses, net of rental income |  |                   | 417  
|                                         |  |                   |      
|Total                                    |  | $                 | 1,621
|                                         |  |                   |      

There were no foreclosed asset expenses for the years
ended December 31, 2008 and 2007.



|(10) | Deposits
|---- | --------

The scheduled
maturities of time deposits (in thousands) at December 31, 2009 and 2008 were as follows.



|                     |  |                             |         |                           |   |                             |  |                           |         |  |   |        
|-------------------- |  | --------------------------- | ------- | ------------------------- | - | --------------------------- |  | ------------------------- | ------- |  | - | -------
|                     |  | 2009                        |         | 2008                     
|                     |  | Time DepositsLess than $100 |         | Time Deposits$100 or More |   | Time DepositsLess than $100 |  | Time Deposits$100 or More
|Maturity of:         |  |                             |         |                           |   |                             |  |                           |         |  |   |        
|3 months or less     |  | $                           | 242,970 |                           | $ | 47,514                      |  | $                         | 357,126 |  | $ | 110,968
|3 months - 6 months  |  |                             | 157,105 |                           |   | 49,791                      |  |                           | 144,912 |  |   | 91,286 
|6 months - 12 months |  |                             | 286,701 |                           |   | 148,037                     |  |                           | 237,761 |  |   | 117,113
|1 year - 2 years     |  |                             | 165,255 |                           |   | 85,786                      |  |                           | 67,170  |  |   | 43,298 
|2 years - 3 years    |  |                             | 18,837  |                           |   | 13,771                      |  |                           | 29,209  |  |   | 17,797 
|3 years - 4 years    |  |                             | 8,389   |                           |   | 5,951                       |  |                           | 13,845  |  |   | 10,546 
|4 years - 5 years    |  |                             | 8,936   |                           |   | 5,895                       |  |                           | 7,761   |  |   | 3,528  
|Over 5 years         |  |                             | 1,595   |                           |   | 100                         |  |                           | 1,003   |  |   |       
|                     |  |                             |         |                           |   |                             |  |                           |         |  |   |        
|                     |  | $                           | 889,788 |                           | $ | 356,845                     |  | $                         | 858,787 |  | $ | 394,536
|                     |  |                             |         |                           |   |                             |  |                           |         |  |   |        

Total brokered deposits were $386.4 million and $484.8
million at December 31, 2009 and 2008, respectively. Of these brokered funds $47.6 million and $245.3 million were interest bearing demand deposits and the remaining $338.8 million and $239.5 million were time deposits at December 31, 2009
and 2008, respectively.



|(11) | Borrowings
|---- | ----------

As a member
of FHLB, the Company may borrow funds based on criteria established by the FHLB. The FHLB may call these borrowings prior to maturity if the collateral balance falls below the borrowing level. The borrowing arrangements with the FHLB could be either
short- or long- term depending on our related costs and needs. At December 31, 2009 and 2008, the Company had loans from the FHLB totaling $228.2 million and $279.1 million, respectively. Interest only is payable on a monthly basis until
maturity. The carrying value of maturities of FHLB borrowings at December 31, 2009 was as follows (in thousands).



|     |  |   |        
|---- |  | - | -------
|2010 |  | $ | 11,685 
|2011 |  |   | 15,000 
|2012 |  |   | 196,247
|2013 |  |   |       
|2014 |  |   | 5,283  
|     |  |   |        
|     |  | $ | 228,215
|     |  |   |        

FHLB borrowings carry a weighted average interest rate
of 4.06% and are all convertible at FHLBs option on the interest payment dates to either one month or three month LIBOR except for five fixed rate advances that total $32.5 million. The FHLB borrowings were collateralized with residential real
estate loans, commercial real estate loans, and investment securities. During 2009 two FHLB borrowings were paid off prior to maturity. An



59



---

extinguishment of debt charge in the amount of $2.0 million was incurred in association with these early pay-offs. The principal balance due, excluding acquisition fair value adjustments, of FHLB
borrowings in aggregate, were $219.8 million at December 31, 2009.

The Company acquired two reverse repurchase agreements
in the GFH acquisition. Each repurchase agreement has an original principal balance of $10.0 million and is collateralized with mortgage-backed securities with a similar fair market value. The first repurchase agreement has a five-year term with an
interest rate fixed at 4.99% until it is repurchased by the counterparty on August 1, 2011. The second repurchase agreement has a seven-year term with a repurchase date of August 1, 2013 (the 2013 Agreement). The interest rate
of this agreement is a variable rate of 9.85% minus three-month LIBOR (0.25% at December 31, 2009), not to exceed 5.85%. The applicable interest rate in effect at December 31, 2009 was 5.85%. Both agreements are callable by the
counterparty on a quarterly basis and the 2013 Agreement became immediately callable as a result of BOHR not maintaining well-capitalized status with the FDIC. The carrying value of these agreements as of December 31, 2009 was $21.0 million.

As part of the GFH acquisition, the Company acquired four placements of trust preferred securities as follows:



|                                    |  |                      |        |              |              |   |                       |                    |                     |                   
|----------------------------------- |  | -------------------- | ------ | ------------ | ------------ | - | --------------------- | ------------------ | ------------------- | ------------------
|                                    |  | Amount(in thousands) |        | InterestRate |              |   | RedeemableOn Or After |                    | MandatoryRedemption
|Gateway Capital Statutory Trust I   |  | $                    | 8,000  |              | LIBOR + 3.10 | % |                       | September 17, 2008 |                     | September 17, 2033
|Gateway Capital Statutory Trust II  |  |                      | 7,000  |              | LIBOR + 2.65 | % |                       | July 17, 2009      |                     | June 17, 2034     
|Gateway Capital Statutory Trust III |  |                      | 15,000 |              | LIBOR + 1.50 | % |                       | May 30, 2011       |                     | May 30, 2036      
|Gateway Capital Statutory Trust IV  |  |                      | 25,000 |              | LIBOR + 1.55 | % |                       | July 30, 2012      |                     | July 30, 2037     

LIBOR in the
table above refers to 3 month LIBOR. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company. The trust
preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The
Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Companys obligation under the guarantee is unsecured and subordinate to senior
and subordinated indebtedness of the Company. The carrying value of these debentures in aggregate as of December 31, 2009 was $28.3 million. The Company has suspended the payment of dividends on all four issues of trust preferred securities,
however, at year-end 2009 all payments had been made in accordance with contractual terms.

The Company borrowed $28.0 million
from another bank in 2008. This borrowing had a variable interest rate of prime minus 1% with a floor of 4% (4% at December 31, 2008) and was paid in full during 2009.



|(12) | Preferred Stock and Warrant
|---- | ---------------------------

In conjunction with the acquisition of GFH, the Company issued 23,266 shares of Series A Non-Convertible Non-Cumulative Perpetual
Preferred Stock (Series A Preferred Stock) and 37,550 shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock (Series B Preferred Stock). Both series are non-voting except as may otherwise be required
under applicable law.

The Series A Preferred Stock has no par value and a liquidation amount equal to $1,000 per share.
Dividends are payable quarterly, if declared, at an annual rate of 8.75%, and are non-cumulative. Since January 1, 2009, the Company had the right and option to redeem all or a portion of the Series A Preferred Stock at the rate of $1,000 per
share. At December 31, 2009, none of this stock has been redeemed.

The Series B Preferred Stock has no par value and a
liquidation amount equal to $1,000 per share. Dividends are payable quarterly, if declared, at a rate of 12%, and are non-cumulative. Since October 1, 2009, the Company had the right and option to redeem all or a portion of the Series B
Preferred Stock at the rate of $1,000 per share. At December 31, 2009, none of this stock has been redeemed.



60



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On December 31, 2008, the Company issued 80,347 shares of Series C Fixed Rate
Cumulative Preferred Stock (Series C Preferred Stock) to the United States Department of the Treasury (U.S. Treasury) for an aggregate price of $80.3 million. The shares were issued in connection with the Companys
participation in the Capital Purchase Program (CPP) as authorized under the Emergency Stabilization Act of 2008. The Series C Preferred Stock has no par value and a liquidation amount equal to $1,000 per share. The Series C Preferred
Stock pays cumulative dividends at an annual rate of 5% for the first five years and 9% thereafter. This Preferred Stock is redeemable at par plus accrued and unpaid dividends subject to the approval of the Companys primary regulators.

In addition, the Company issued to the U.S. Treasury a warrant to purchase 1,325,858 shares of the Companys common stock
at an initial exercise price of $9.09 per share. The warrant is immediately exercisable and provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as stock splits or distributions of securities or other assets to holders of common stock and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common stock. The
warrant expires ten years from the issuance date. The U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.

Shares of the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock have priority over the
Companys common stock with regard to the payment of dividends. As such, the Company may not pay dividends on, or repurchase, redeem, or otherwise acquire for consideration shares of its common stock unless dividends for these classes of
Preferred Stock are current.

The Company took actions during the fourth quarter that were intended to preserve capital. On
October 30, 2009, we announced that we would suspend dividends on our Series A Preferred Stock and Series B Preferred Stock, which required us to also suspend dividends on our Series C Preferred Stock under applicable law. As a result, on
November 17, 2009, we notified the Treasury of our intent to defer the payment of our regulatory quarterly cash dividend on our Series C Preferred Stock issued to the Treasury in connection with our participation in the TARP CPP. If we miss six
quarterly dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. We cannot pay dividends on our outstanding shares of
Series C Preferred Stock or our common stock until we have paid in full all deferred distributions on our trust preferred securities. As of December 31, 2009, dividends accrued but not paid for Series C Preferred Stock totaled $1.5 million.



|(13) | Financial Instruments with Off-Balance-Sheet Risk
|---- | -------------------------------------------------

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk which have not been recognized in the consolidated balance
sheets. The contract amount of these instruments reflects the extent of the Companys involvement or credit risk. The Company uses the same credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. Contractual amounts (in thousands) at December 31, 2009 and 2008 were as follows.



|                                                                    |  |      |         |      |   |        
|------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                    |  | 2009 |         | 2008
|Financial instruments whose contract amounts represent credit risk: |  |      |         |      |   |        
|Commitments to extend credit                                        |  | $    | 326,121 |      | $ | 523,179
|Standby letters of credit                                           |  |      | 8,590   |      |   | 29,030 
|                                                                    |  |      |         |      |   |        
|                                                                    |  | $    | 334,711 |      | $ | 552,209
|                                                                    |  |      |         |      |   |        

Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on managements credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, and real estate.



61



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Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of the contractual obligation by a customer to a third party. The majority of these guarantees extend until satisfactory completion of the customers contractual obligation. Management does not anticipate any material losses will
arise from additional funding of the aforementioned commitments or letters of credit.



|(14) | Retirement Plans
|---- | ----------------

Defined Contribution Plan

The Company has defined contribution 401(k) plans at both of its subsidiary banks and one for the former GFH employees. Under the BOHR
401(k) plan, all employees who are 21 years of age and have completed one year of service are eligible to participate. Participants may contribute up to 20% of their compensation, subject to statutory limitations and the Company matches 100% of the
employees contributions up to 4% of salary. Under the Shore 401(k) plan, all employees who are 18 years of age and have completed 3 months of service are eligible to participate. Participants may contribute up to 15% of their compensation and
the Company matches 100% up to 3% of the employees contributions and 50% of the next 3%. Former Gateway Bank employees who are 18 years of age and have completed three months of service are eligible to participate in that 401(k) plan, and the
Company matches 100% of the employees contributions up to 6% of salary. The Company may also make additional discretionary contributions to the plans. Participants are fully vested in their contributions and the Companys match
immediately and become fully vested in the Companys discretionary contributions after 3 years of service.

The Company
made no discretionary contributions in 2009 compared to $209 thousand and $119 thousand for the years ended December 31, 2008 and 2007, respectively. The Company also made matching contributions of $1.2 million, $257 thousand, and $202 thousand
for the years ended December 31, 2009, 2008, and 2007, respectively. The Company offers its stock as an investment option under the BOHR 401(k) plan.

Supplemental Executive Retirement Plans (SERP)

The Company has entered into SERPs with several key officers. Under these agreements, all but four of twelve officers are each eligible to
receive an annual benefit payable in fifteen installments each equal to $50 thousand following the attainment of their Plan Retirement Date. Two of the other four officers are eligible to receive an annual benefit payable in fifteen installments
each equal to 50% of their Benefit Computation Base following the attainment of his Plan Retirement Date. The remaining two officers are eligible to receive an annual benefit payable in fifteen installments each equal to 70% of their Benefit
Computation Base following the attainment of their Plan Retirement Date. The Benefit Computation Base is calculated as the average compensation from the Company over the three consecutive completed calendar years just prior to the year of retirement
or termination. The Company recognizes expense each year related to these agreements based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The change in benefit obligation and funded status (in
thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.



|                                        |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                        |  | 2009 |        |   | 2008 |   |        | 2007 | 
|Benefit obligation at beginning of year |  | $    | 3,915  |   |      | $ | 2,153  |      |  | $ | 1,650  |  
|Acquired in GFH acquisition             |  |      |       |   |      |   | 1,098  |      |  |   |       |  
|Service cost                            |  |      | 826    |   |      |   | 516    |      |  |   | 388    |  
|Interest cost                           |  |      | 228    |   |      |   | 148    |      |  |   | 115    |  
|Terminations                            |  |      | (95    | ) |      |   |       |      |  |   |       |  
|                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Benefit obligation at end of year       |  |      | 4,874  |   |      |   | 3,915  |      |  |   | 2,153  |  
|Fair value of plan assets               |  |      |       |   |      |   |       |      |  |   |       |  
|                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Funded status                           |  | $    | (4,874 | ) |      | $ | (3,915 | )    |  | $ | (2,153 | )
|                                        |  |      |        |   |      |   |        |      |  |   |        |  



62



---

The amount of the funded status is the accrued benefit cost included in other liabilities on
the balance sheet. The amounts (in thousands) recognized in the consolidated balance sheets as of December 31, 2009 and 2008 were as follows.



|                                                   |  |      |        |   |      |   |        |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                   |  | 2009 |        |   | 2008 |  
|Accrued benefit cost included in other liabilities |  | $    | (4,874 | ) |      | $ | (3,915 | )
|                                                   |  |      |        |   |      |   |        |  

The components of net periodic benefit cost (in thousands) for the years ended December 31, 2009, 2008,
and 2007 were as follows.



|                          |  |      |     |   |      |   |      |  |   |    
|------------------------- |  | ---- | --- | - | ---- | - | ---- |  | - | ---
|                          |  | 2009 |     |   | 2008 |   | 2007
|Service cost              |  | $    | 826 |   |      | $ | 516  |  | $ | 388
|Interest cost             |  |      | 228 |   |      |   | 148  |  |   | 115
|Terminations              |  |      | (95 | ) |      |   |     |  |   |   
|                          |  |      |     |   |      |   |      |  |   |    
|Net periodic benefit cost |  | $    | 959 |   |      | $ | 664  |  | $ | 503
|                          |  |      |     |   |      |   |      |  |   |    

The weighted-average assumptions used to determine
benefit obligations and net periodic pension benefit at December 31, 2009, 2008, and 2007 were as follows. The rate of compensation increase only applies to the officer agreements with a Benefit Computation Base.



|                              |  |               |  |               |  |      
|----------------------------- |  | ------------- |  | ------------- |  | -----
|                              |  | 2009          |  | 2008          |  | 2007 
|Discount rate                 |  | 6.00% - 7.00% |  | 7.00%         |  | 7.00%
|Rate of compensation increase |  | 3.00% - 5.75% |  | 3.00% - 5.00% |  | 3.00%

The Company
recognizes expense each year related to the SERPs based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The Company does not expect to make contributions to fund the supplemental retirement
agreements in 2010 and made no contributions to the plan in 2009. The plans are unfunded and there are no plan assets. As of December 31, 2009, the following benefit payments (in thousands) are expected to be paid over the next ten years.



|           |  |  |  |   |      
|---------- |  |  |  | - | -----
|2010       |  |  |  | $ | 359  
|2011       |  |  |  |   | 359  
|2012       |  |  |  |   | 359  
|2013       |  |  |  |   | 359  
|2014       |  |  |  |   | 359  
|2015 -2019 |  |  |  |   | 2,027
|           |  |  |  |   |      
|           |  |  |  | $ | 3,822
|           |  |  |  |   |      

Executive Savings Plan

The Company has an Executive Savings Plan with certain officers whereby an initial contribution made by the officers will be matched each
year by the Company as long as the officers employment continues and the Company is profitable. Contributions into the plan may be used to purchase employer stock or may be placed in savings accounts for the benefit of each individual
participant and earn interest at the highest rate currently being paid on a Company certificate of deposit. Company contributions to the Executive Savings Plan during 2008 and 2007 were $242 thousand and $268 thousand, respectively. No contributions
were made to the plan during 2009.

Board of Directors Retirement Agreement

The Company has entered into retirement agreements with certain members of the Board of Directors. Participants are eligible for
compensation under the plan upon the sixth anniversary of the participants first board meeting. Benefits are to be paid in monthly installments commencing at retirement and ending upon the death, disability, or



63



---

mutual consent of both parties to the agreement. Under the plan, the participants continue to serve the Company after retirement by performing certain duties as outlined in the plan document.
During 2009, 2008, and 2007, the Company expensed $72 thousand, $69 thousand, and $63 thousand, respectively, related to this plan.



|(15) | Stock Compensation Plans
|---- | ------------------------

During 2008 and 2007, the Company authorized the grant of options to employees and directors for 18,000 and 34,968 shares, respectively,
of the Companys common stock under stock compensation plans that have been approved by the Companys shareholders. During 2009, no options were granted. All outstanding options granted have original terms that range from 5 to 10 years and
are either fully vested and exercisable at the date of grant or vested ratably over 3 to 10 years. During 2008, the Company acquired 216,183 stock options as part of the Shore Merger and 1,185,018 stock options as part of the Gateway Merger. A
summary of the Companys stock option activity and related information is as follows:



|                                         |  |                    |   |  |                               |        |                       |   |  
|---------------------------------------- |  | ------------------ | - |  | ----------------------------- | ------ | --------------------- | - | -
|                                         |  | OptionsOutstanding |   |  | WeightedAverageExercise Price |        | AverageIntrinsicValue
|Balance at December 31, 2006             |  | 929,970            |   |  | $                             | 9.19   |                       | $ | 
|Granted                                  |  | 34,968             |   |  |                               | 12.91  |                       |   | 
|Exercised                                |  | (93,599            | ) |  |                               | 7.55   |                       |   | 
|Forfeited                                |  | (10,992            | ) |  |                               | 12.00  |                       |   | 
|Expired                                  |  | (2,191             | ) |  |                               | 10.85  |                       |   | 
|                                         |  |                    |   |  |                               |        |                       |   |  
|Balance at December 31, 2007             |  | 858,156            |   |  |                               | 9.48   |                       |   | 
|Acquired through SFC acquisition         |  | 216,183            |   |  |                               | 6.27   |                       |   | 
|Acquired through GFH acquisition         |  | 1,185,018          |   |  |                               | 14.12  |                       |   | 
|Granted                                  |  | 18,000             |   |  |                               | 11.41  |                       |   | 
|Exercised                                |  | (112,964           | ) |  |                               | 5.13   |                       |   | 
|Forfeited                                |  | (2,750             | ) |  |                               | 12.00  |                       |   | 
|Expired                                  |  | (65,637            | ) |  |                               | 113.33 |                       |   | 
|                                         |  |                    |   |  |                               |        |                       |   |  
|Balance at December 31, 2008             |  | 2,096,006          |   |  |                               | 11.96  |                       |   | 
|Exercised                                |  | (86,243            | ) |  |                               | 7.11   |                       |   | 
|Forfeited                                |  | (20,834            | ) |  |                               | 11.78  |                       |   | 
|Expired                                  |  | (568,716           | ) |  |                               | 11.14  |                       |   | 
|                                         |  |                    |   |  |                               |        |                       |   |  
|Balance at December 31, 2009             |  | 1,420,213          |   |  | $                             | 12.60  |                       | $ | 
|                                         |  |                    |   |  |                               |        |                       |   |  
|Options exercisable at December 31, 2009 |  | 1,307,168          |   |  | $                             | 12.43  |                       | $ | 
|                                         |  |                    |   |  |                               |        |                       |   |  

Stock-based compensation expense recognized in the
consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the years ended December 31, 2009, 2008, and 2007 were as follows.



|                                           |  |      |         |      |   |         |  |   |        
|------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                           |  | 2009 |         | 2008 |   | 2007   
|Expense recognized:                        |  |      |         |      |   |         |  |   |        
|Related to stock options                   |  | $    | 179,304 |      | $ | 86,156  |  | $ | 160,229
|Related to share awards                    |  |      | 451,228 |      |   | 63,452  |  |   | 177,021
|Related tax benefit                        |  |      | 164,907 |      |   | 29,014  |  |   | 115,276
|                                           |  |      |        
|Number of options exercised:               |  |      |         |      |   |         |  |   |        
|New shares                                 |  |      | 86,243  |      |   | 112,282 |  |   | 76,700 
|Previously acquired shares                 |  |      |        |      |   | 682     |  |   | 16,899 
|                                           |  |      |        
|Total intrinsic value of options exercised |  | $    | 31,533  |      | $ | 642,619 |  | $ | 487,004
|Cash received from options exercised       |  |      | 613,209 |      |   | 571,222 |  |   | 476,076



64



---

Information pertaining to fully vested options outstanding and exercisable as of
December 31, 2009 is as follows.



|                          |  |                              |  |                                           |      |                                |   |                              |  |                                |  |   |      
|------------------------- |  | ---------------------------- |  | ----------------------------------------- | ---- | ------------------------------ | - | ---------------------------- |  | ------------------------------ |  | - | -----
|                          |  | Options Outstanding          |  | Options Exercisable                      
|Ranges of
Exercise
Prices |  | Number of OptionsOutstanding |  | WeightedAverage 
RemainingContractualLife |      | Weighted AverageExercise Price |   | Number of OptionsExercisable |  | Weighted AverageExercise Price
|$    3.09 -   5.05        |  | 73,340                       |  | $                                         | 2.08 |                                | $ | 4.17                         |  | 73,340                         |  | $ | 4.17 
|6.53 -   8.84             |  | 312,311                      |  |                                           | 2.43 |                                |   | 8.04                         |  | 312,311                        |  |   | 8.04 
|9.11 - 10.65              |  | 411,683                      |  |                                           | 3.86 |                                |   | 9.75                         |  | 407,663                        |  |   | 9.74 
|12.00 - 14.33             |  | 210,887                      |  |                                           | 6.79 |                                |   | 12.20                        |  | 130,954                        |  |   | 12.30
|19.43 - 22.07             |  | 358,562                      |  |                                           | 5.21 |                                |   | 20.05                        |  | 329,467                        |  |   | 19.91
|23.60 - 24.67             |  | 53,433                       |  |                                           | 5.59 |                                |   | 24.22                        |  | 53,433                         |  |   | 24.22
|                          |  |                              |  |                                           |      |                                |   |                              |  |                                |  |   |      
|$    3.09 - 24.67         |  | 1,420,216                    |  | $                                         | 4.30 |                                | $ | 12.60                        |  | 1,307,168                      |  | $ | 12.43
|                          |  |                              |  |                                           |      |                                |   |                              |  |                                |  |   |      

The Company has 786,535 shares available under
shareholder approved stock incentive plans. As of December 31, 2009, there was $384 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted average period of 3.51
years.

The weighted-average grant-date fair value of stock options granted and acquired through mergers during 2008 and 2007
was $1.86 and $2.34, respectively. The following assumptions were used to arrive at the fair value of stock options:



|                         |  |                 |  |                
|------------------------ |  | --------------- |  | ---------------
|                         |  | 2008            |  | 2007           
|Risk-free interest rate  |  | 2.25% - 3.34%   |  | 4.36% - 4.68%  
|Volatility               |  | 34.30% - 40.56% |  | 18.40% - 27.27%
|Dividend yield           |  | 3.39% - 5.04%   |  | 3.33% - 3.43%  
|Expected term (in years) |  | 0.10 - 8.30     |  | 1.90 - 9.50    

Option valuation models require the input of highly subjective assumptions. Because the Companys employee stock options have
characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide
a representative single measure of the fair value at which transactions may occur. Expected volatility is based on historical volatility of the Companys traded shares. The expected term is calculated by the lattice option pricing model using
assumptions regarding the contractual term of the stock options, vesting periods, the exercise price to market stock price multiple experienced by the Company, and the historical employee exit rate.

The Company has granted non-vested shares to certain directors and employees as part of incentive programs. These non-vested shares have
original vesting schedules that range from one to nine years and are expensed over the same schedules.



65



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A summary of the Companys non-vested share activity and related information was as
follows.



|                             |  |                 |   |  |                                      |      
|---------------------------- |  | --------------- | - |  | ------------------------------------ | -----
|                             |  | Number ofShares |   |  | Weighted AverageGrant DateFair
Value
|Balance at December 31, 2006 |  | 47,176          |   |  | $                                    | 10.76
|Granted                      |  | 20,364          |   |  |                                      | 12.12
|Vested                       |  | (4,500          | ) |  |                                      | 10.76
|Forfeited                    |  | (8,500          | ) |  |                                      | 10.98
|                             |  |                 |   |  |                                      |      
|Balance at December 31, 2007 |  | 54,540          |   |  |                                      | 11.23
|Granted                      |  | 32,908          |   |  |                                      | 8.50 
|Vested                       |  | (37,623         | ) |  |                                      | 11.16
|                             |  |                 |   |  |                                      |      
|Balance at December 31, 2008 |  | 49,825          |   |  |                                      | 9.49 
|Granted                      |  | 10,000          |   |  |                                      | 8.54 
|Vested                       |  | (33,756         | ) |  |                                      | 8.85 
|Forfeited                    |  | (4,152          | ) |  |                                      | 8.97 
|                             |  |                 |   |  |                                      |      
|Balance at December 31, 2009 |  | 21,917          |   |  | $                                    | 10.12
|                             |  |                 |   |  |                                      |      

As of December 31, 2009, there was $175 thousand
of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted average period of 3.79 years. The total fair value of shares vested during the years ended December 31, 2009,
2008, and 2007 was $164 thousand, $418 thousand, and $57 thousand, respectively.



|(16) | Employment Agreements
|---- | ---------------------

The Company and its subsidiaries have entered into employment agreements with 26 officers to ensure a stable and competent management
base. Two of the agreements expire in 2010, four expire in 2011, eighteen expire in 2012, one expires in 2013, and one expires in 2014. The agreements will automatically renew at the end of their terms unless the officer is notified in writing prior
to expiration. Among other things, the agreements provide for severance benefits payable to the officers upon termination of employment following a change of control in the Company.



|(17) | Dividend Reinvestment and Optional Cash Purchase Plan
|---- | -----------------------------------------------------

In order to raise additional capital, the Company has a Dividend Reinvestment and Optional Cash Purchase Plan. The plan enables
shareholders to receive cash payment or reinvest their dividends. In connection with this plan, for the year ended December 31, 2009, the Company entered the open market and acquired 68,748 shares at an average price of $7.72 per share. For the
year ended December 31, 2009, the Company did not issue any shares in connection with the dividend reinvestment plan. The stock purchased through the plan directly from the Company is valued at the weighted average sales price of the
Companys common stock in transactions occurring during the 60 calendar days immediately prior to the purchase date. The purchase price of shares purchased on the open market is the current market price of the shares purchased on the applicable
purchase dates.



66



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|(18) | Noninterest Expense
|---- | -------------------

A
summary of noninterest expense (in thousands) for the years ended December 31, 2009, 2008, and 2007 is as follows.



|                                          |  |      |         |      |   |        |  |   |       
|----------------------------------------- |  | ---- | ------- | ---- | - | ------ |  | - | ------
|(in thousands)                            |  | 2009 |         | 2008 |   | 2007  
|Salaries and employee benefits            |  | $    | 42,285  |      | $ | 11,518 |  | $ | 9,954 
|Occupancy                                 |  |      | 9,044   |      |   | 2,261  |  |   | 1,668 
|Data processing                           |  |      | 5,368   |      |   | 1,189  |  |   | 612   
|Impairment of goodwill                    |  |      | 84,837  |      |   |       |  |   |      
|FDIC insurance                            |  |      | 5,661   |      |   | 262    |  |   | 42    
|Equipment                                 |  |      | 4,735   |      |   | 663    |  |   | 343   
|Professional fees                         |  |      | 2,883   |      |   | 383    |  |   | 279   
|Amortization of intangible assets         |  |      | 2,546   |      |   | 365    |  |   |      
|Bank franchise tax                        |  |      | 1,922   |      |   | 621    |  |   | 464   
|Telephone and postage                     |  |      | 1,599   |      |   | 481    |  |   | 305   
|Directors and regional board fees        |  |      | 1,020   |      |   | 443    |  |   | 307   
|Stationery, printing, and office supplies |  |      | 894     |      |   | 229    |  |   | 168   
|Advertising and marketing                 |  |      | 888     |      |   | 412    |  |   | 326   
|ATM and VISA check card                   |  |      | 293     |      |   | 551    |  |   | 500   
|Other                                     |  |      | 6,820   |      |   | 1,609  |  |   | 1,026 
|                                          |  |      |         |      |   |        |  |   |       
|Total noninterest expenses                |  | $    | 170,795 |      | $ | 20,987 |  | $ | 15,994
|                                          |  |      |         |      |   |        |  |   |       



|(19) | Business Segment Reporting
|---- | --------------------------

The Company has two community banks, BOHR and Shore, which provide loan and deposit services throughout their 60 locations in Virginia,
North Carolina, and Maryland. In addition to its banking operations, the Company has three other reportable segments: Mortgage, Investment, and Insurance. The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Net income (loss) below is shown prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidated process. Because of the interrelationships
between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following table shows certain financial information (in thousands) at December 31, 2009 for each segment and
in total.



|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|--------------------------------------------------- |  | ----- | --------- | - | ----------- | - | -------- | ------- |  | - | --------- | - | ---------- | - | --------- |  | - | ----- |  | - | ------
|                                                    |  | Total |           |   | Elimination |   |          | Banking |  |   | Mortgage  |   | Investment |   | Insurance
|Total assets at December 31, 2009                   |  | $     | 2,975,558 |   |             | $ | (303,100 | )       |  | $ | 3,253,492 |   |            | $ | 13,599    |  | $ | 1,163 |  | $ | 10,404
|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|Year ended
December 31, 2009                        |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|                                                    |  |       |           |   |             |  
|Net interest income                                 |  | $     | 105,151   |   |             | $ |         |         |  | $ | 104,745   |   |            | $ | 392       |  | $ |      |  | $ | 14    
|Provision for loan losses                           |  |       | (134,223  | ) |             |   |         |         |  |   | (134,223  | ) |            |   |          |  |   |      |  |   |      
|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|Net interest income after provision for loan losses |  |       | (29,072   | ) |             |   |         |         |  |   | (29,478   | ) |            |   | 392       |  |   |      |  |   | 14    
|Noninterest income                                  |  |       | 22,325    |   |             |   |         |         |  |   | 12,428    |   |            |   | 4,642     |  |   | 354   |  |   | 4,901 
|Noninterest expense                                 |  |       | 170,795   |   |             |   |         |         |  |   | 162,304   |   |            |   | 3,686     |  |   | 183   |  |   | 4,622 
|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|Net income before income taxes                      |  |       | (177,542  | ) |             |   |         |         |  |   | (179,354  | ) |            |   | 1,348     |  |   | 171   |  |   | 293   
|Income tax expense (benefit)                        |  |       | (32,075   | ) |             |   |         |         |  |   | (32,683   | ) |            |   | 445       |  |   | 60    |  |   | 103   
|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       
|Net income (loss)                                   |  | $     | (145,467  | ) |             | $ |         |         |  | $ | (146,671  | ) |            | $ | 903       |  | $ | 111   |  | $ | 190   
|                                                    |  |       |           |   |             |   |          |         |  |   |           |   |            |   |           |  |   |       |  |   |       

The Company had no reportable business segments at
December 31, 2008 and 2007.



67



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|(20) | Restrictions on Loans and Dividends from Subsidiaries
|---- | -----------------------------------------------------

Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Banks to the Company. The amount of
dividends the Banks may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. Under these restrictions, at December 31, 2009, the Banks had no ability to pay
dividends without prior approval.

Loans and advances from the Banks to the Company are limited based on regulatory capital. As
of December 31, 2009, the aggregate principal balances of loans outstanding from BOHR and Shore to the Company were $21.5 million and $2.0 million, respectively. The loans from BOHR to the Company were not adequately secured with collateral
under applicable regulations.



|(21) | Regulatory Capital Requirements
|---- | -------------------------------

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company (on a consolidated basis) and the
Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. The Companys and the Banks capital amounts and
classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.



68



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A summary of the Companys and the Banks required and actual capital components
(in thousands) follows.



|                                                |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|----------------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | --------------------------------------------------- | ------- |  | ---- | ------ |  | ------- |  | ----- | -
|                                                |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be Well-CapitalizedUnder Prompt ActionProvisions |        
|                                                |  | Amount |         | Ratio |                              |   | Amount |                                                     | Ratio   |  |      | Amount |  | Ratio   | 
|As of December 31, 2009                         |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Tier 1 Capital:                                 |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  | $      | 160,485 |       | 6.80                         | % |        | $                                                   | 94,395  |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 162,508 |       | 7.43                         | % |        |                                                     | 87,480  |  | 4.00 | %      |  | 131,220 |  | 6.00  | %
|Shore Bank                                      |  |        | 21,668  |       | 11.13                        | % |        |                                                     | 7,789   |  | 4.00 | %      |  | 11,684  |  | 6.00  | %
|Total Risk-Based Capital:                       |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  |        | 191,257 |       | 8.10                         | % |        |                                                     | 188,789 |  | 8.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 191,098 |       | 8.74                         | % |        |                                                     | 174,960 |  | 8.00 | %      |  | 218,700 |  | 10.00 | %
|Shore Bank                                      |  |        | 24,121  |       | 12.39                        | % |        |                                                     | 15,578  |  | 8.00 | %      |  | 19,473  |  | 10.00 | %
|Leverage Ratio:                                 |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  |        | 160,485 |       | 5.32                         | % |        |                                                     | 123,660 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 162,508 |       | 5.92                         | % |        |                                                     | 113,551 |  | 4.00 | %      |  | 141,939 |  | 5.00  | %
|Shore Bank                                      |  |        | 21,668  |       | 7.13                         | % |        |                                                     | 12,151  |  | 4.00 | %      |  | 15,189  |  | 5.00  | %
|                                                |  |        |         |       |                              |  
|As of December 31, 2008                         |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Tier 1 Capital:                                 |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  | $      | 265,468 |       | 9.89                         | % |        | $                                                   | 107,386 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 70,499  |       | 12.43                        | % |        |                                                     | 22,690  |  | 4.00 | %      |  | 34,035  |  | 6.00  | %
|Shore Bank                                      |  |        | 24,483  |       | 11.42                        | % |        |                                                     | 8,578   |  | 4.00 | %      |  | 12,867  |  | 6.00  | %
|Gateway
Bank1                                   |  |        | 169,321 |       | 8.79                         | % |        |                                                     | 77,076  |  | 4.00 | %      |  | 115,614 |  | 6.00  | %
|Total Risk-Based Capital:                       |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  |        | 299,235 |       | 11.15                        | % |        |                                                     | 214,772 |  | 8.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 76,931  |       | 13.56                        | % |        |                                                     | 45,380  |  | 8.00 | %      |  | 56,725  |  | 10.00 | %
|Shore Bank                                      |  |        | 27,164  |       | 12.67                        | % |        |                                                     | 17,156  |  | 8.00 | %      |  | 21,445  |  | 10.00 | %
|Gateway
Bank1                                   |  |        | 193,629 |       | 10.05                        | % |        |                                                     | 154,152 |  | 8.00 | %      |  | 192,690 |  | 10.00 | %
|Leverage Ratio:                                 |  |        |         |       |                              |   |        |                                                     |         |  |      |        |  |         |  |       |  
|Consolidated Company                            |  |        | 265,468 |       | 32.06                        | % |        |                                                     | 33,120  |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank of Hampton Roads                           |  |        | 70,499  |       | 11.77                        | % |        |                                                     | 23,953  |  | 4.00 | %      |  | 29,942  |  | 5.00  | %
|Shore Bank                                      |  |        | 24,483  |       | 8.44                         | % |        |                                                     | 11,607  |  | 4.00 | %      |  | 14,508  |  | 5.00  | %
|Gateway
Bank1                                   |  |        | 169,321 |       | 8.04                         | % |        |                                                     | 84,281  |  | 4.00 | %      |  | 105,351 |  | 5.00  | %
|1Gateway Bank was merged into BOHR in May 2009. | 

The regulatory risk-based capital guidelines to which we are subject measure capital relative to risk-weighted assets and off-balance
sheet financial instruments. Tier I capital is comprised of shareholders equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and
qualifying allowances for loan losses.

Because our total risk-based capital ratio was below 10% as of December 31, 2009,
we are considered to be only adequately capitalized under the regulatory framework for prompt corrective action. Similarly, BOHR is considered to be adequately capitalized under applicable regulations. Section 29 of the
Federal Deposit Insurance Act limits the use of brokered deposits by institutions that are less than well-capitalized and allows the FDIC to place restrictions on interest rates that institutions may pay. As of December 31, 2009,
Shore Bank was well-capitalized.

On May 29, 2009, the FDIC approved a final rule to implement new interest
rate restrictions on institutions that are not well-capitalized. The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the
interest rate average of all institutions. On



69



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December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well-capitalized to request a determination from the FDIC whether they
are operating in an area where rates paid on deposits are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local
customers by March 1, 2010, if determined not to be operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning
January 1, 2010.

Although there can be no assurance that we will be successful, the Board and management will make their
utmost efforts to raise sufficient capital to regain well-capitalized status at all levels, and we are continuing to explore options for raising additional capital.



|(22) | Fair Value of Assets and Liabilities
|---- | ------------------------------------

ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. It defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also permits the measurement of transactions between market participants at the
measurement date and the measurement of selected eligible financial instruments at fair value at specified election dates.

The
Company groups our financial assets and liabilities measured 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. The majority of
instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:



|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|Level 1  |  | Quoted market prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are
traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.                                                                                                                                                                                                                                                                                                           
|          | 
|Level 2  |  | Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded
instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
|          | 
|Level 3  |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or
estimation.                                                                                                                                                                                                        

A financial instruments categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.

ASC 820 requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments, as defined by ASC 820:



| | (a) | Cash and Cash Equivalents
| | --- | -------------------------

Cash and cash equivalents include cash and due from banks, overnight funds sold, and interest-bearing deposits in other banks. The
carrying amount approximates fair value.



70



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| | (b) | Investment Securities Available-for-Sale
| | --- | ----------------------------------------

Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are
estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Investment securities available-for-sale are carried at their aggregate fair value.



| | (c) | Loans Held For Sale
| | --- | -------------------

The carrying value of loans held for sale is a reasonable estimate of fair value since the loans are expected to be sold within a short
period.



| | (d) | Loans
| | --- | -----

The fair
value of loans is estimated by discounting the future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.



| | (e) | Interest Receivable and Interest Payable
| | --- | ----------------------------------------

The carrying amount approximates fair value.



| | (f) | Bank Owned Life Insurance
| | --- | -------------------------

The carrying amount approximates fair value.



| | (g) | Deposits
| | --- | --------

The fair
values disclosed for demand deposits (for example, interest and noninterest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (this is, their carrying values). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies
market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.



| | (h) | Borrowings
| | --- | ----------

The
fair value of borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings, overnight funds purchased, and
FHLB borrowings.



| | (i) | Commitments to Extend Credit and Standby Letters of Credit
| | --- | ----------------------------------------------------------

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these
unrecognized financial instruments. These deferred fees are not deemed significant at December 31, 2009 and 2008, and as such, the related fair values have not been estimated.



71



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The estimated fair value (in thousands) of the Companys financial instruments required
to be disclosed under ASC 825, Financial Instruments, at December 31, 2009 and 2008 were as follows.



|                                         |  |               |           |                     |   |               |  |                     |           |  |   |          
|---------------------------------------- |  | ------------- | --------- | ------------------- | - | ------------- |  | ------------------- | --------- |  | - | ---------
|                                         |  | 2009          |           | 2008               
|                                         |  | CarryingValue |           | EstimatedFair Value |   | CarryingValue |  | EstimatedFair Value
|Assets:                                  |  |               |           |                     |   |               |  |                     |           |  |   |          
|Cash and due from banks                  |  | $             | 16,995    |                     | $ | 16,995        |  | $                   | 42,827    |  | $ | 42,827   
|Overnight funds sold and due from FRB    |  |               | 139,228   |                     |   | 139,228       |  |                     | 510       |  |   | 510      
|Interest-bearing deposits in other banks |  |               | 43,821    |                     |   | 43,821        |  |                     | 4,975     |  |   | 4,975    
|Investment securities available-for-sale |  |               | 161,062   |                     |   | 161,062       |  |                     | 149,637   |  |   | 149,637  
|Loans held for sale                      |  |               | 12,615    |                     |   | 12,615        |  |                     | 5,064     |  |   | 5,064    
|Loans, net                               |  |               | 2,293,995 |                     |   | 2,364,702     |  |                     | 2,548,308 |  |   | 2,550,018
|Interest receivable                      |  |               | 8,788     |                     |   | 8,788         |  |                     | 12,272    |  |   | 12,272   
|Bank owned life insurance                |  |               | 48,354    |                     |   | 48,354        |  |                     | 46,603    |  |   | 46,603   
|                                         |  |               |           |                    
|Liabilities:                             |  |               |           |                     |   |               |  |                     |           |  |   |          
|Deposits                                 |  |               | 2,495,040 |                     |   | 2,486,449     |  |                     | 2,296,146 |  |   | 2,299,179
|FHLB borrowings                          |  |               | 228,215   |                     |   | 233,356       |  |                     | 279,065   |  |   | 282,005  
|Other borrowings                         |  |               | 49,254    |                     |   | 50,316        |  |                     | 77,223    |  |   | 77,223   
|Overnight funds purchased                |  |               |          |                     |   |              |  |                     | 73,300    |  |   | 73,300   
|Interest payable                         |  |               | 3,572     |                     |   | 3,572         |  |                     | 5,814     |  |   | 5,814    

Recurring
Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is
used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following table reflects the fair value (in thousands) of assets
and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheet.



|                                         |  |                                           |         |                               |         |       |         |   |         |  |   |      
|---------------------------------------- |  | ----------------------------------------- | ------- | ----------------------------- | ------- | ----- | ------- | - | ------- |  | - | -----
|                                         |  | December 31, 2009                        
|                                         |  | Assets 
/LiabilitiesMeasured atFair Value |         | Fair Value Measurements Using
|                                         |  |                                           | Level 1 |                               | Level 2 |       | Level 3
|Investment securities available-for-sale |  | $                                         | 161,062 |                               | $       | 1,357 |         | $ | 158,477 |  | $ | 1,228
|Derivative loan commitments              |  |                                           | 201     |                               |         |      |         |   |        |  |   | 201  
|Loans held for sale                      |  |                                           | 12,615  |                               |         |      |         |   | 12,615  |  |   |     
|                                         | 
|                                         |  | December 31, 2008                        
|                                         |  | Assets /LiabilitiesMeasured
atFair Value  |         | Fair Value Measurements Using
|                                         |  |                                           | Level 1 |                               | Level 2 |       | Level 3
|Investment securities available-for-sale |  | $                                         | 149,637 |                               | $       | 6,080 |         | $ | 142,387 |  | $ | 1,170
|Derivative loan commitments              |  |                                           | 173     |                               |         |      |         |   |        |  |   | 173  
|Loans held for sale                      |  |                                           | 5,064   |                               |         |      |         |   | 5,064   |  |   |     



72



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|                                           |  |                                                                                         |       |   |                            |   |    
|------------------------------------------ |  | --------------------------------------------------------------------------------------- | ----- | - | -------------------------- | - | ---
|                                           |  | Fair Value
MeasurementsUsing Significant Unobservable Inputs(Level 3 measurements only)
|                                           |  | Investment SecuritiesAvailable-for-Sale                                                 |       |   | Derivative LoanCommitments
|Balance at December 31, 2008               |  | $                                                                                       | 1,170 |   |                            | $ | 173
|Unrealized losses included in:             |  |                                                                                         |       |   |                            |   |    
|Earnings                                   |  |                                                                                         | (304  | ) |                            |   |   
|Other comprehensive loss                   |  |                                                                                         | (190  | ) |                            |   |   
|Purchases, issuances, and settlements, net |  |                                                                                         |      |   |                            |   | 28 
|Transfers in and/or out of Level 3, net    |  |                                                                                         | 552   |   |                            |   |   
|                                           |  |                                                                                         |       |   |                            |   |    
|Balance at December 31, 2009               |  | $                                                                                       | 1,228 |   |                            | $ | 201
|                                           |  |                                                                                         |       |   |                            |   |    

The following describe the valuation techniques used to
measure fair value for our assets and liabilities classified as recurring.

Investment Securities Available-for-Sale.
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities. If quoted
market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities,
obligations of states and political subdivisions, and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level
3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage
loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. These are carried at fair value and are included in other assets at
December 31, 2009 and 2008.

Loans held for sale. The Company sells loans to outside investors. Fair value of
mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. As of December 31, 2009, mortgage loans held for sale had a net carrying value of approximately $12.6 million which approximated
its fair value. On December 31, 2008, mortgage loans held for sale had a net carrying value of approximately $5.1 million which approximated its fair value.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment.) The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals
or observable market prices are available. Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant
management assumptions and input with respect of the determination of fair value.

To assist in the discounting process, a
valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix is situated on both a
temporal and collateral type axis in an attempt to compensate for value fluctuations within the respective asset classes situated in the captured time period. The matrix applies discounts to external appraisals depending on the type of real estate
and age of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. To address the changing economic conditions prevalent during 2009, the discounts were based in part
upon externally derived data including but not limited to Case-Shiller composite indices, Moodys REAL



73



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Commercial Property Prices Indices, and information from Zillow.com. The discounts were also based upon managements knowledge of market conditions and prices of sales of foreclosed real
estate. In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales. In the
case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Companys policy to classify these as Level 3 within the fair value hierarchy. The following table presents the
carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.



|               |  |                              |         |                                                   |         |   |         |   |              |  |   |        |  |   |  
|-------------- |  | ---------------------------- | ------- | ------------------------------------------------- | ------- | - | ------- | - | ------------ |  | - | ------ |  | - | -
|               |  | AssetsMeasured atFair
Value  |         | Fair Value Measurements atDecember 31, 2009 Using |         |  
|               |  |                              | Level 1 |                                                   | Level 2 |   | Level 3 |   | Total Losses
|Impaired loans |  | $                            | 240,044 |                                                   | $       |  |         | $ | 149,346      |  | $ | 90,698 |  | $ | 
|               |  |                              |        
|               |  | AssetsMeasured 
atFair Value |         | Fair Value Measurements atDecember 31,
2008 Using |         |  
|               |  |                              | Level 1 |                                                   | Level 2 |   | Level 3 |   | Total Losses
|Impaired loans |  | $                            | 1,616   |                                                   | $       |  |         | $ | 1,616        |  | $ |       |  | $ | 

Our
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets and goodwill. The amounts below represent the carrying values (in
thousands) for our foreclosed real estate and repossessed assets and goodwill and impairment adjustments made to fair value during the respective reporting periods.



|                                              |  |                             |         |                                                   |         |   |         |   |              |  |   |        |  |   |       
|--------------------------------------------- |  | --------------------------- | ------- | ------------------------------------------------- | ------- | - | ------- | - | ------------ |  | - | ------ |  | - | ------
|                                              |  | AssetsMeasured
atFair Value |         | Fair Value Measurements
atDecember 31, 2009 Using |         |  
|                                              |  |                             | Level 1 |                                                   | Level 2 |   | Level 3 |   | Total Losses
|Foreclosed real estate and repossessed assets |  | $                           | 8,867   |                                                   | $       |  |         | $ | 8,867        |  | $ |       |  | $ | 1,043 
|Goodwill                                      |  |                             |        |                                                   |         |  |         |   |             |  |   |       |  |   | 84,837
|                                              |  |                             |        
|                                              |  | AssetsMeasured atFair Value |         | Fair Value Measurements atDecember 31,
2008 Using |         |  
|                                              |  |                             | Level 1 |                                                   | Level 2 |   | Level 3 |   | Total Losses
|Foreclosed real estate and repossessed assets |  | $                           | 5,092   |                                                   | $       |  |         | $ | 5,092        |  | $ |       |  | $ |      
|Goodwill                                      |  |                             | 82,671  |                                                   |         |   |         |   |              |  |   | 82,671 |  |   |      

The
following describe the valuation techniques used to measure fair value for our nonfinancial assets and liabilities classified as nonrecurring.

Foreclosed Real Estate and Repossessed Assets. The adjustments to foreclosed real estate and repossessed assets are based primarily
on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items. Where we do not have a current
appraisal, an existing appraisal would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value. As described above,
we utilize a valuation matrix to assist in this process.

Goodwill. The adjustments to goodwill are made in accordance
with FASB ASC 320-20-35 and FASB ASC 320-20-35-30 in which the prescribed two-step impairment testing was performed on goodwill arising from mergers with SFC and GFH.



74



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|(23) | Income Taxes
|---- | ------------

The Company
files income tax returns in the U.S. federal jurisdiction and the states of Virginia, Maryland, and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years
prior to 2006. The current and deferred components of income tax expense (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.



|                             |  |      |         |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2009 |         |   | 2008 |   |       | 2007 | 
|Current                      |  | $    | (9,043  | ) |      | $ | 4,496 |      |  | $ | 4,158 |  
|Deferred                     |  |      | (23,032 | ) |      |   | (836  | )    |  |   | (568  | )
|                             |  |      |         |   |      |   |       |      |  |   |       |  
|Income tax expense (benefit) |  | $    | (32,075 | ) |      | $ | 3,660 |      |  | $ | 3,590 |  
|                             |  |      |         |   |      |   |       |      |  |   |       |  

The provisions for income taxes for the years ended December 31, 2009, 2008, and 2007 differ from the
amount computed by applying the statutory federal income tax rate to income before taxes due to the following (in thousands).



|                                                        |  |      |         |   |      |   |       |      |  |   |      
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ----- | ---- |  | - | -----
|                                                        |  | 2009 |         |   | 2008 |   |       | 2007
|Federal income tax expense (benefit), at statutory rate |  | $    | (62,140 | ) |      | $ | 3,709 |      |  | $ | 3,555
|Decrease resulting from:                                |  |      |         |   |      |   |       |      |  |   |      
|State income tax, net of federal benefit                |  |      | (1,217  | ) |      |   |      |      |  |   |     
|Valuation allowance of deferred tax assets              |  |      | 1,032   |   |      |   |      |      |  |   |     
|Rate change                                             |  |      | 517     |   |      |   |      |      |  |   |     
|Dividends and tax-exempt interest                       |  |      | (198    | ) |      |   | (77   | )    |  |   |     
|Goodwill impairment                                     |  |      | 29,693  |   |      |   |      |      |  |   |     
|Officers life insurance                                |  |      | (505    | ) |      |   | (24   | )    |  |   | 11   
|Other                                                   |  |      | 743     |   |      |   | 52    |      |  |   | 24   
|                                                        |  |      |         |   |      |   |       |      |  |   |      
|Income tax expense (benefit)                            |  | $    | (32,075 | ) |      | $ | 3,660 |      |  | $ | 3,590
|                                                        |  |      |         |   |      |   |       |      |  |   |      



75



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Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities (in thousands) as of December 31, 2009 and
2008 were as follows.



|                                                                      |  |      |        |   |      |   |       
|--------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                                                      |  | 2009 |        |   | 2008
|Deferred tax assets:                                                  |  |      |        |   |      |   |       
|Allowance for loan losses                                             |  | $    | 52,510 |   |      | $ | 22,804
|Federal net operating loss carryforward                               |  |      | 10,325 |   |      |   |      
|State net operating loss carryforward                                 |  |      | 769    |   |      |   |       
|AMT carryforward                                                      |  |      | 502    |   |      |   |      
|Impairment of securities and other assets                             |  |      | 1,210  |   |      |   | 14,567
|Unrealized loss on securities available-for-sale                      |  |      | 397    |   |      |   |      
|Nonaccrual loan interest                                              |  |      | 4,658  |   |      |   | 183   
|Accrued expenses                                                      |  |      | 1,314  |   |      |   | 501   
|Nonqualified deferred compensation                                    |  |      | 3,135  |   |      |   | 2,925 
|Other                                                                 |  |      | 443    |   |      |   | 15    
|                                                                      |  |      |        |   |      |   |       
|Total deferred tax assets before valuation allowance                  |  |      | 75,263 |   |      |   | 40,995
|                                                                      |  |     
|Valuation allowance                                                   |  |      | (1,032 | ) |      |   |      
|                                                                      |  |      |        |   |      |   |       
|Total deferred tax assets                                             |  |      | 74,231 |   |      |   | 40,995
|                                                                      |  |      |        |   |      |   |       
|                                                                      |  |     
|Deferred tax liabilities:                                             |  |      |        |   |      |   |       
|Prepaid expenses                                                      |  |      | 881    |   |      |   | 328   
|Deferred loan costs                                                   |  |      | 1,019  |   |      |   | 1,027 
|Fair value adjustment to net assets acquired in business combinations |  |      | 13,148 |   |      |   | 4,257 
|Unrealized gain on securities available-for-sale                      |  |      |       |   |      |   | 335   
|Depreciation                                                          |  |      | 2,654  |   |      |   | 2,087 
|Other                                                                 |  |      | 149    |   |      |   | 345   
|                                                                      |  |      |        |   |      |   |       
|Total deferred tax liabilities                                        |  |      | 17,851 |   |      |   | 8,379 
|                                                                      |  |      |        |   |      |   |       
|Net deferred tax assets                                               |  | $    | 56,380 |   |      | $ | 32,616
|                                                                      |  |      |        |   |      |   |       

At December 31, 2009, the Company had net
operating loss carryforwards for federal income tax purposes of $29.5 million, which are available to offset future federal taxable income, if any, through 2029. In addition, the Company has alternative minimum tax credit carryforwards of
approximately $502 thousand, which are available to reduce federal regular income taxes, if any, over an indefinite period. Since we expect to become a regular tax payer after our net operating losses are fully utilized, we expect to be able to
utilize this AMT carryforward.

A valuation allowance was established in 2009 related to capital losses realized. Since capital
losses are only deductible for income tax purposes to the extent the Company has capital gains, a valuation allowance of $1.0 million has been established against the $2.8 million in capital loss carryforwards.

In addition to a net operating loss carryforward, our net deferred tax asset consisted primarily of two asset components offset by one
liability component: (1) At December 31, 2009, the timing differences related to the allowance for loan losses was $142.2 million, resulting in a deferred tax asset of approximately $52.5 million. (2) Interest income related to
non-performing loans (referred to as lost interest) is recognized as taxable income for tax purposes, but is not recorded as income for book purposes. Lost interest was approximately $12.6 million at December 31, 2009, resulting in
a deferred tax asset of approximately $4.6 million. (3) The aggregate deferred tax effect of all purchase accounting entries related to the acquisitions of GFH and Shore resulted in a net deferred tax liability of approximately $13.1 million at
December 31, 2009.



76



---

In assessing the realizability of the deferred tax asset and in accordance with ASC
740-10-30-17, management considered both positive and negative evidence when determining whether it was more likely than not that some portion or all of the gross deferred tax asset would not be realized. We considered all available evidence and
reviewed relevant sources of taxable income within the carryforward and carryback periods. Those sources included: (1) future reversals of existing taxable temporary differences (ASC 740-10-30-18(a)); (2) future taxable income, exclusive
of reserving temporary differences and carryforwards (ASC 740-10-30-18(b)); and (3) taxable income in prior carryback year(s) if carryback is permitted under the tax laws (ASC 740-10-30-18(c)). Under applicable accounting rules and guidance, we
determined that the tax benefit would more likely than not be realized, and consequently, that a further valuation allowance was not necessary.

Approximately 50% of our 2009 pre-tax operating loss is attributable to non-recurring items such as the write-off of goodwill associated
with the SFC and GFH transactions, as well as other identified non-recurring expenses. The majority of the loss creating the deferred tax asset associated with net operating loss carryforwards is characterized as ordinary. In considering the
positive and negative factors affecting the likelihood of being able to utilize the deferred tax asset, we have, as noted above, placed reliance on past and future taxable income. In order to utilize our entire net deferred tax asset of $56.4
million, the Company would need to generate approximately $150 to $160 million of future taxable income over the 20 year carryforward period. This translates to approximately $8.0 million per year. The Company earned between $5.5 million and $7.2
million each year in the previous four years. In addition, we note that a portion of the deferred tax asset will be recovered as problem assets are recognized as losses, which will be deductible for income tax purposes. We also took into account
expanded time available as certain tax assets such as the allowance for loan losses transfers to a net operating loss carryforward. Further, we have considered limited prudent and feasible tax-planning strategies, such as, sale-leaseback of certain
branches/buildings and divestiture of separately chartered banking subsidiary, that are available to accelerate taxable income. Negative factors we have considered include a projected loss in 2010 (which, on a quarterly basis, reduces over the year)
and potential negative consequences related to regulatory capital and liquidity issues.

In summary, we believe the positive
evidence of (i) only one year of a loss, which includes a large amount of non-recurring type expenses and write-offs, (ii) ordinary income treatment for substantially all the deferred tax assets, (iii) a long carryforward period (20
years), (iv) taxes paid available for carryback, and (v) the reversal of existing deferred tax liabilities offset the negative evidence of (i) additional operating losses in 2010 and (ii) regulatory capital and liquidity issues
that may have reputational consequences. Accordingly, except for the $1.0 million valuation allowance associated with capital loss carryforwards, we believe it is more likely than not we will realize our recognized gross deferred tax assets and a
valuation allowance will not be required.

ASC 740 provides a comprehensive model for how the Company should recognize,
measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its tax return. The Company recognizes interest and penalties related to unrecognized tax benefits as part of the tax
provision. The Company recognized minimal amounts in penalties and fees for the years ended December 31, 2009 and 2008. The Company has no uncertain tax positions at December 31, 2009.



77



---

|(24) | Condensed Parent Company Only Financial Statements
|---- | --------------------------------------------------

The condensed financial position as of December 31, 2009 and 2008, and the condensed results of operations and cash flows for each of
the years in the three-year period ended December 31, 2009, of Hampton Roads Bankshares, Inc., parent company only, are presented below (in thousands).

Condensed Balance Sheets



|                                           |  |      |          |   |      |   |         |  
|------------------------------------------ |  | ---- | -------- | - | ---- | - | ------- | -
|                                           |  | 2009 |          |   | 2008 |  
|Assets:                                    |  |      |          |   |      |   |         |  
|Cash on deposit with subsidiaries          |  | $    | 4,414    |   |      | $ | 55,605  |  
|Equity securities available-for-sale       |  |      | 1,871    |   |      |   | 5,104   |  
|Investment in subsidiaries                 |  |      | 234,124  |   |      |   | 372,703 |  
|Deferred tax assets, net                   |  |      |         |   |      |   | 529     |  
|Other assets                               |  |      | 5,678    |   |      |   | 3,677   |  
|                                           |  |      |          |   |      |   |         |  
|Total assets                               |  | $    | 246,087  |   |      | $ | 437,618 |  
|                                           |  |      |          |   |      |   |         |  
|                                           |  |     
|Liabilities:                               |  |      |          |   |      |   |         |  
|Borrowings                                 |  | $    | 51,747   |   |      | $ | 78,646  |  
|Deferred tax liability                     |  |      | 9,910    |   |      |   |        |  
|Other liabilities                          |  |      | 3,434    |   |      |   | 14,163  |  
|                                           |  |      |          |   |      |   |         |  
|Total liabilities                          |  |      | 65,091   |   |      |   | 92,809  |  
|                                           |  |     
|Shareholders equity:                      |  |      |          |   |      |   |         |  
|Preferred stock                            |  |      | 134,970  |   |      |   | 133,542 |  
|Common stock                               |  |      | 13,846   |   |      |   | 13,611  |  
|Capital surplus                            |  |      | 165,391  |   |      |   | 171,284 |  
|Retained earnings (deficit)                |  |      | (132,466 | ) |      |   | 26,482  |  
|Accumulated other comprehensive loss       |  |      | (745     | ) |      |   | (110    | )
|                                           |  |      |          |   |      |   |         |  
|Total shareholders equity                 |  |      | 180,996  |   |      |   | 344,809 |  
|                                           |  |      |          |   |      |   |         |  
|Total liabilities and shareholders equity |  | $    | 246,087  |   |      | $ | 437,618 |  
|                                           |  |      |          |   |      |   |         |  



78



---

Condensed Statements of Operations



|                                                                                       |  |      |          |   |      |   |       |  |   |      
|-------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ----- |  | - | -----
|                                                                                       |  | 2009 |          |   | 2008 |   | 2007 
|Income:                                                                                |  |      |          |   |      |   |       |  |   |      
|Dividends from subsidiaries                                                            |  | $    | 1,750    |   |      | $ | 7,429 |  | $ | 4,420
|Interest income                                                                        |  |      | 186      |   |      |   | 668   |  |   |     
|Other-than-temporary impairment of securities                                          |  |      | (2,469   | ) |      |   |      |  |   |     
|Other income                                                                           |  |      | 71       |   |      |   | 58    |  |   |     
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|Total income (loss)                                                                    |  |      | (462     | ) |      |   | 8,155 |  |   | 4,420
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|                                                                                       |  |      |         
|Expenses:                                                                              |  |      |          |   |      |   |       |  |   |      
|Interest expense                                                                       |  |      | 4,151    |   |      |   | 891   |  |   |     
|Other expense                                                                          |  |      | 1,606    |   |      |   | 637   |  |   | 280  
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|Total expense                                                                          |  |      | 5,757    |   |      |   | 1,528 |  |   | 280  
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|                                                                                       |  |      |         
|Income (loss) before income taxes and equity in undistributed earnings of subsidiaries |  |      | (6,219   | ) |      |   | 6,627 |  |   | 4,140
|Income tax expense                                                                     |  |      | 2,697    |   |      |   | 275   |  |   | 96   
|Equity in undistributed earnings (loss) of subsidiaries                                |  |      | (141,945 | ) |      |   | 273   |  |   | 2,575
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|Net income (loss)                                                                      |  |      | (145,467 | ) |      |   | 7,175 |  |   | 6,811
|                                                                                       |  |      |         
|Preferred stock dividends and accretion of discount                                    |  |      | 8,689    |   |      |   |      |  |   |     
|                                                                                       |  |      |          |   |      |   |       |  |   |      
|Net income (loss) available to common shareholders                                     |  | $    | (154,156 | ) |      | $ | 7,175 |  | $ | 6,811
|                                                                                       |  |      |          |   |      |   |       |  |   |      



79



---

Condensed Statements of Cash Flows



|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|--------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                      |  | 2009 |          |   | 2008 |   |         | 2007 | 
|Operating Activities:                                                 |  |      |          |   |      |   |         |      |  |   |        |  
|Net income (loss)                                                     |  | $    | (145,467 | ) |      | $ | 7,175   |      |  | $ | 6,811  |  
|Adjustments:                                                          |  |      |          |   |      |   |         |      |  |   |        |  
|Equity in undistributed (earnings) loss of subsidiaries               |  |      | 141,945  |   |      |   | (273    | )    |  |   | (2,575 | )
|Amortization of intangibles                                           |  |      | 2,529    |   |      |   |        |      |  |   |       |  
|Stock-based compensation expense                                      |  |      | 630      |   |      |   | 149     |      |  |   | 337    |  
|Board fees                                                            |  |      | 164      |   |      |   | 110     |      |  |   | 24     |  
|Other-than-temporary impairment                                       |  |      | 2,469    |   |      |   | 427     |      |  |   |       |  
|Change in other assets                                                |  |      | (3,704   | ) |      |   | 33      |      |  |   | 648    |  
|Change in other liabilities                                           |  |      | (12,236  | ) |      |   | 3,240   |      |  |   | (1     | )
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) operating activities                   |  |      | (13,670  | ) |      |   | 10,861  |      |  |   | 5,244  |  
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|                                                                      |  |      |         
|Investing Activities:                                                 |  |      |          |   |      |   |         |      |  |   |        |  
|Purchase of equity securities available-for-sale                      |  |      |         |   |      |   | (1,006  | )    |  |   |       |  
|Proceeds from sales of equity securities                              |  |      | 976      |   |      |   |        |      |  |   |       |  
|Net decrease (increase) in loans                                      |  |      | 429      |   |      |   | (429    | )    |  |   |       |  
|Investment in subsidiaries                                            |  |      |         |   |      |   | (36,000 | )    |  |   | (788   | )
|Investment in affiliates                                              |  |      |         |   |      |   |        |      |  |   | 210    |  
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) investing activities                   |  |      | 1,405    |   |      |   | (37,435 | )    |  |   | (578   | )
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|                                                                      |  |      |         
|Financing Activities:                                                 |  |      |          |   |      |   |         |      |  |   |        |  
|Net increase (decrease) in borrowings                                 |  |      | (28,000  | ) |      |   | 20,529  |      |  |   |       |  
|Issuance of shares in private placement                               |  |      | 306      |   |      |   |        |      |  |   |       |  
|Common stock repurchased                                              |  |      | (544     | ) |      |   | (1,446  | )    |  |   | (2,877 | )
|Common dividends paid, net                                            |  |      | (4,261   | ) |      |   | (2,936  | )    |  |   | (2,166 | )
|Preferred dividends paid and amortization of preferred stock discount |  |      | (7,182   | ) |      |   |        |      |  |   |       |  
|Cash exchanged in mergers                                             |  |      |         |   |      |   | (16,076 | )    |  |   |       |  
|Issuance of Series C preferred stock and warrant                      |  |      |         |   |      |   | 80,347  |      |  |   |       |  
|Excess tax benefit realized from stock options exercised              |  |      | 142      |   |      |   | 20      |      |  |   | 118    |  
|Proceeds from exercise of stock options                               |  |      | 613      |   |      |   | 572     |      |  |   | 476    |  
|Issuance of shares to 401(k) plan                                     |  |      |         |   |      |   |        |      |  |   | 137    |  
|Issuance of shares to executive savings plan                          |  |      |         |   |      |   | 121     |      |  |   | 146    |  
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) financing activities                   |  |      | (38,926  | ) |      |   | 81,131  |      |  |   | (4,166 | )
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|                                                                      |  |      |         
|Increase (decrease) in cash and cash equivalents                      |  |      | (51,191  | ) |      |   | 54,557  |      |  |   | 500    |  
|                                                                      |  |      |         
|Cash and cash equivalents at beginning of year                        |  |      | 55,605   |   |      |   | 1,048   |      |  |   | 548    |  
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents at end of year                              |  | $    | 4,414    |   |      | $ | 55,605  |      |  | $ | 1,048  |  
|                                                                      |  |      |          |   |      |   |         |      |  |   |        |  



|(25) | Related Party Transactions
|---- | --------------------------

The Company had a 19% interest in Tidewater Home Funding, LLC (THF), which was sold in 2009. The Company accounted for this
investment under the equity method. BOHR had a warehouse credit facility for THF for up to $10,000,000. As of December 31, 2008, THF had drawn $3.6 million on this warehouse line of credit, at a variable rate of 7.25%.



80



---

Loans are made to the Companys executive officers and directors and their associates
during the ordinary course of business. In managements opinion, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and do not
involve more than normal risk of collectability or present other unfavorable features. At December 31, 2009 and 2008, loans to executive officers, directors, and their associates amounted to $90.9 million and $88.3 million, respectively. During
2009, additional loans and repayments of loans by executive officers, directors, and their associates were $65.1 million and $62.5 million, respectively. As of December 31, 2009, $7.5 million of loans made to insiders for the purpose of acquiring
the Companys stock was deducted from the Companys loans and shareholders equity.

Deposits are taken from the
Companys executive officers and directors and their associates during the ordinary course of business. In managements opinion, these deposits are taken on substantially the same terms, including interest rates, as those prevailing at the
time for comparable deposits from other persons. At December 31, 2009 and 2008, deposits from executive officers, directors, and their associates amounted to $38.8 million and $16.0 million, respectively.

The Company leases one of its Nags Head and one of its Kitty Hawk branches from a director and his wife for monthly payments of $8,000 and
$17,096, respectively. The term of the Nags Head lease was recently renewed for five years commencing August 2009. Kitty Hawk is a land lease which commenced in April 2006 for a term of twenty years, with three five-year renewals.

One of the Companys directors is the managing member of two limited liability companies that serve as the managers for the legal
entities which own and manage the Dominion Tower at 999 Waterside Drive, Norfolk, Virginia 23510. The Company leases the second floor and a portion of the nineteenth floor of the Dominion Tower for its executive offices and a portion of the first
floor as a financial center. The lease expires in September 2016, with one renewal option for a period of seven years. Rent payments made in 2009, 2008, and 2007 totaled $724 thousand, $625 thousand, and $583 thousand, respectively.

The Company leases from a director the land on which one of its Eastern Shore branches is located for monthly payments of $2,006. The
terms of this lease were recently renewed for five years commencing June 2009 with one additional five-year renewal.

BOHR and
Shore had loans outstanding to the Company with balances of $21.5 million and $2.0 million, respectively, as of December 31, 2009. The loan from BOHR was inadequately secured in violation of Regulation W promulgated to the Federal Reserve.



81



---

|(26) | Quarterly Financial Data (Unaudited)
|---- | ------------------------------------

Summarized unaudited quarterly financial data (in thousands) for the years ended December 31, 2009 and 2008 is as follows.



|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|-------------------------------------------------- |  | ------ | -------- | - | ----- | - | ------- | ------ |  | - | ------- | - |  | - | ------
|                                                   |  | 2009  
|                                                   |  | Fourth |          |   | Third |   |         | Second |  |   | First  
|Interest income                                    |  | $      | 34,798   |   |       | $ | 37,388  |        |  | $ | 37,728  |   |  | $ | 39,531
|Interest expense                                   |  |        | 8,097    |   |       |   | 10,911  |        |  |   | 11,829  |   |  |   | 13,457
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Net interest income                                |  |        | 26,701   |   |       |   | 26,477  |        |  |   | 25,899  |   |  |   | 26,074
|                                                   |  |        |          |  
|Provision for loan losses                          |  |        | 65,666   |   |       |   | 33,662  |        |  |   | 33,706  |   |  |   | 1,189 
|Noninterest income                                 |  |        | 2,998    |   |       |   | 7,232   |        |  |   | 5,655   |   |  |   | 6,440 
|Noninterest expense                                |  |        | 78,911   |   |       |   | 21,706  |        |  |   | 50,330  |   |  |   | 19,848
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Income (loss) before provision for income taxes    |  |        | (114,878 | ) |       |   | (21,659 | )      |  |   | (52,482 | ) |  |   | 11,477
|Provision for income taxes (benefit)               |  |        | (18,650  | ) |       |   | (8,282  | )      |  |   | (9,253  | ) |  |   | 4,110 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Net income (loss)                                  |  |        | (96,228  | ) |       |   | (13,377 | )      |  |   | (43,229 | ) |  |   | 7,367 
|Preferred stock dividend and accretion of discount |  |        | 1,370    |   |       |   | 1,360   |        |  |   | 2,995   |   |  |   | 2,964 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Net income (loss) available to common shareholders |  | $      | (97,598  | ) |       | $ | (14,737 | )      |  | $ | (46,224 | ) |  | $ | 4,403 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|                                                   |  |        |          |  
|Basic earnings (loss) per share                    |  | $      | (4.45    | ) |       | $ | (0.68   | )      |  | $ | (2.13   | ) |  | $ | 0.20  
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Diluted earnings (loss) per share                  |  | $      | (4.45    | ) |       | $ | (0.68   | )      |  | $ | (2.13   | ) |  | $ | 0.20  
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|                                                   | 
|                                                   |  | 2008  
|                                                   |  | Fourth |          |   | Third |   |         | Second |  |   | First  
|Interest income                                    |  | $      | 13,610   |   |       | $ | 12,370  |        |  | $ | 9,793   |   |  | $ | 9,404 
|Interest expense                                   |  |        | 5,039    |   |       |   | 4,848   |        |  |   | 4,012   |   |  |   | 4,018 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Net interest income                                |  |        | 8,571    |   |       |   | 7,522   |        |  |   | 5,781   |   |  |   | 5,386 
|                                                   |  |        |          |  
|Provision for loan losses                          |  |        | 594      |   |       |   | 280     |        |  |   | 274     |   |  |   | 270   
|Noninterest income                                 |  |        | 1,264    |   |       |   | 1,801   |        |  |   | 1,694   |   |  |   | 1,221 
|Noninterest expense                                |  |        | 5,671    |   |       |   | 6,541   |        |  |   | 4,659   |   |  |   | 4,116 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Income before provision for income taxes           |  |        | 3,570    |   |       |   | 2,502   |        |  |   | 2,542   |   |  |   | 2,221 
|Provision for income taxes                         |  |        | 1,225    |   |       |   | 806     |        |  |   | 869     |   |  |   | 760   
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Net income                                         |  | $      | 2,345    |   |       | $ | 1,696   |        |  | $ | 1,673   |   |  | $ | 1,461 
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|                                                   |  |        |          |  
|Basic earnings per share                           |  | $      | 0.18     |   |       | $ | 0.13    |        |  | $ | 0.15    |   |  | $ | 0.14  
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       
|Diluted earnings per share                         |  | $      | 0.18     |   |       | $ | 0.13    |        |  | $ | 0.15    |   |  | $ | 0.14  
|                                                   |  |        |          |   |       |   |         |        |  |   |         |   |  |   |       



|(27) | Subsequent Events
|---- | -----------------



82



---

Deferral of Trust Preferred Dividends. In January 2010, the Company exercised its right to
defer all quarterly distributions on the trust preferred securities it assumed in connection with its merger with GFH, which are identified immediately below (collectively, the Trust Preferred Securities).



|                                    |  |                      |  |              |   |  |                        |  |                     
|----------------------------------- |  | -------------------- |  | ------------ | - |  | ---------------------- |  | --------------------
|                                    |  | Amount(in thousands) |  | InterestRate |   |  | Redeemable
on or After |  | Mandatory
Redemption
|Gateway Capital Statutory Trust I   |  | 8,000                |  | LIBOR + 3.10 | % |  | September 17, 2008     |  | September 17, 2033  
|Gateway Capital Statutory Trust II  |  | 7,000                |  | LIBOR + 2.65 | % |  | July 17, 2009          |  | June 17, 2034       
|Gateway Capital Statutory Trust III |  | 15,000               |  | LIBOR + 1.50 | % |  | May 30, 2011           |  | May 30, 2036        
|Gateway Capital Statutory Trust IV  |  | 25,000               |  | LIBOR + 1.55 | % |  | July 30, 2012          |  | July 30, 2037       

On April 9, 2010, the
Company exercised its right to continue the deferral of such quarterly distributions. Interest payable under the Trust Preferred Securities continues to accrue during the deferral period and interest on the deferred interest also accrues, both of
which must be paid at the end of the deferral period. Prior to the expiration of the deferral period, the Company has the right to further defer interest payments, provided that no deferral period, together with all prior deferrals, exceeds 20
consecutive quarters and that no event of default (as defined by the terms of the applicable Trust Preferred Securities) has occurred and is continuing at the time of the deferral. The Company was not in default with respect to the terms of the
Trust Preferred Securities at the time the quarterly payments were deferred and such deferrals did not cause an event of default under the terms of the Trust Preferred Securities.

On April 1, 2010, the Company received a non-compliance notice from the NASDAQ Stock Market stating that because the Company did not
timely file its Annual Report on Form 10-K for the period ended December 31, 2009, it is no longer in compliance with the rules for continued listing, including Rule 5250(c)(l). NASDAQ Marketplace Rule 5250(c)(l) requires the Company to file with
NASDAQ, on a timely basis, all reports and other documents required to be filed with the Securities and Exchange Commission. The Company believes that it will regain compliance with NASDAQs listing rules upon the filing of this Form 10-K and
will seek confirmation from NASDAQ accordingly.



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