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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the Quarterly Period Ended September 30, 2009

or



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

For the transition period from  to

Commission File No. 0-24753





ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)







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



|                                                    
|----------------------------------------------------
|Post Office Box 337, Engelhard, North Carolina 27824
|(Address of principal executive offices) (Zip Code) 

(252) 925-9411

(Registrants telephone number, including area code)





Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



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

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

On November 6, 2009, there were 2,847,881 outstanding shares of Registrants common stock.

This Form 10-Q has 45 pages.









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##### Table of Contents

Table of Contents



|                                                                                                                          |  |                                                                                       |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Index                                                                                                                     |  | Beginson Page                                                                        
|Part 1  Financial Information                                                                                            |  |                                                                                      
|Item 1.                                                                                                                   |  | Financial Statements:                                                                 |  |   
|Consolidated Balance Sheets at September 30, 2009 (unaudited) and December 31,
2008                                       |  | 3                                                                                    
|Consolidated Income Statements for Three and Nine Months Ended September 
30, 2009 and 2008 (unaudited)                   |  | 4                                                                                    
|Consolidated Statements of Changes in Shareholders Equity for Nine Months Ended September 30,
 2009 and 2008 (unaudited) |  | 5                                                                                    
|Consolidated Statements of Cash Flows for Nine Months Ended September 
30, 2009 and 2008 (unaudited)                      |  | 6                                                                                    
|Notes to Consolidated Financial Statements                                                                                |  | 7                                                                                    
|Item 2.                                                                                                                   |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations |  | 22
|Item 3.                                                                                                                   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 37
|Item 4.                                                                                                                   |  | Controls and Procedures                                                               |  | 38
|                                                                                                                          | 
|Part II  Other Information                                                                                               |  |                                                                                      
|Item 1.                                                                                                                   |  | Legal Proceedings                                                                     |  | 38
|Item 1A.                                                                                                                  |  | Risk Factors                                                                          |  | 38
|Item 2.                                                                                                                   |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38
|Item 3.                                                                                                                   |  | Defaults upon Senior Securities                                                       |  | 38
|Item 4.                                                                                                                   |  | Submission of Matters to a Vote of Security Holders                                   |  | 38
|Item 5.                                                                                                                   |  | Other Information                                                                     |  | 38
|Item 6.                                                                                                                   |  | Exhibits                                                                              |  | 39
|Signatures                                                                                                                |  | 40                                                                                   
|Exhibit Index                                                                                                             |  | 41                                                                                   



2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2009 and December 31, 2008

(Dollars in thousands, except per share data)



|                                                                                                                              |  |                   |            |   |                   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                              |  | September 30,2009 |            |   | December 31,2008* |  
|                                                                                                                              |  | (unaudited)       |            |   |                   |  
|Assets                                                                                                                        |  |                   |            |   |                   |   |            |  
|Non-interest bearing deposits and cash                                                                                        |  | $                 | 13,925     |   |                   | $ | 15,897     |  
|Interest bearing deposits                                                                                                     |  |                   | 871        |   |                   |   | 902        |  
|Overnight investments                                                                                                         |  |                   | 1,600      |   |                   |   | -          |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total cash and cash equivalents                                                                                               |  |                   | 16,396     |   |                   |   | 16,799     |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Investment securities                                                                                                         |  |                   |            |   |                   |   |            |  
|Available-for-sale, at market value (cost of $213,714 and $237,638 at September 30, 2009 and December 31, 2008,
respectively) |  |                   | 218,591    |   |                   |   | 239,709    |  
|                                                                                                                              |  |                  
|Loans                                                                                                                         |  |                   | 573,837    |   |                   |   | 538,836    |  
|Allowance for loan losses                                                                                                     |  |                   | (7,800     | ) |                   |   | (5,931     | )
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Loans, net                                                                                                                    |  |                   | 566,037    |   |                   |   | 532,905    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Real estate and repossessions acquired in settlement of loans, net                                                            |  |                   | 6,039      |   |                   |   | 3,724      |  
|Federal Home Loan Bank common stock, at cost                                                                                  |  |                   | 5,116      |   |                   |   | 3,859      |  
|Bank premises and equipment, net                                                                                              |  |                   | 25,400     |   |                   |   | 25,737     |  
|Accrued interest receivable                                                                                                   |  |                   | 5,082      |   |                   |   | 4,663      |  
|Bank owned life insurance                                                                                                     |  |                   | 8,593      |   |                   |   | 8,347      |  
|Other assets                                                                                                                  |  |                   | 7,483      |   |                   |   | 6,108      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total                                                                                                                         |  | $                 | 858,737    |   |                   | $ | 841,851    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Liabilities and Shareholders Equity                                                                                          |  |                   |            |   |                   |   |            |  
|Deposits                                                                                                                      |  |                   |            |   |                   |   |            |  
|Demand, noninterest bearing                                                                                                   |  | $                 | 102,335    |   |                   | $ | 90,197     |  
|Demand, interest bearing                                                                                                      |  |                   | 117,769    |   |                   |   | 99,011     |  
|Savings                                                                                                                       |  |                   | 19,958     |   |                   |   | 16,882     |  
|Time                                                                                                                          |  |                   | 456,571    |   |                   |   | 423,062    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total deposits                                                                                                                |  |                   | 696,633    |   |                   |   | 629,152    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Payable, settlement for securities purchased                                                                                  |  |                   | -          |   |                   |   | 53,426     |  
|Accrued interest payable                                                                                                      |  |                   | 1,466      |   |                   |   | 2,889      |  
|Short-term borrowings                                                                                                         |  |                   | 46,989     |   |                   |   | 57,716     |  
|Long-term obligations                                                                                                         |  |                   | 21,000     |   |                   |   | 26,000     |  
|Other liabilities                                                                                                             |  |                   | 4,713      |   |                   |   | 4,725      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total liabilities                                                                                                             |  |                   | 770,801    |   |                   |   | 773,908    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Shareholders equity                                                                                                          |  |                   |            |   |                   |   |            |  
|Preferred stock, Series A                                                                                                     |  |                   | 17,080     |   |                   |   | -          |  
|Common stock, par value $3.50 per share                                                                                       |  |                   | 9,968      |   |                   |   | 9,956      |  
|Capital surplus                                                                                                               |  |                   | 25,792     |   |                   |   | 25,707     |  
|Warrants                                                                                                                      |  |                   | 878        |   |                   |   | -          |  
|Retained earnings                                                                                                             |  |                   | 31,238     |   |                   |   | 31,026     |  
|Accumulated other comprehensive income                                                                                        |  |                   | 2,980      |   |                   |   | 1,254      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total shareholders equity                                                                                                    |  |                   | 87,936     |   |                   |   | 67,943     |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total                                                                                                                         |  | $                 | 858,737    |   |                   | $ | 841,851    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Common shares outstanding                                                                                                     |  |                   | 2,847,881  |   |                   |   | 2,844,489  |  
|Common shares authorized                                                                                                      |  |                   | 10,000,000 |   |                   |   | 10,000,000 |  
|Preferred shares outstanding                                                                                                  |  |                   | 17,949     |   |                   |   | -          |  
|Preferred shares authorized                                                                                                   |  |                   | 2,000,000  |   |                   |   | -          |  



|* | Derived from audited consolidated financial statements.
|- | -------------------------------------------------------



3



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and nine months ended September 30, 2009 and 2008

(Dollars in
thousands, except per share data)



|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|--------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | ----------- | - | ----------- |  | ----------- | --------- |  | - | ---------
|                                                    |  | Three months endedSeptember 30, |           | Nine months endedSeptember 30,
|                                                    |  | 2009                            |           |                                | 2008        |   | 2009        |  | 2008       
|                                                    |  | (unaudited)                     |           |                                | (unaudited) |   | (unaudited) |  | (unaudited)
|Interest income:                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Interest and fees on loans                          |  | $                               | 7,807     |                                |             | $ | 7,812       |  | $           | 22,820    |  | $ | 23,574   
|Interest on investment securities:                  |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Interest exempt from federal income taxes           |  |                                 | 354       |                                |             |   | 330         |  |             | 1,005     |  |   | 990      
|Taxable interest income                             |  |                                 | 2,122     |                                |             |   | 1,605       |  |             | 6,959     |  |   | 4,429    
|Dividend income                                     |  |                                 | 37        |                                |             |   | 54          |  |             | 67        |  |   | 205      
|Other interest income                               |  |                                 | -         |                                |             |   | 73          |  |             | 3         |  |   | 188      
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Total interest income                               |  |                                 | 10,320    |                                |             |   | 9,874       |  |             | 30,854    |  |   | 29,386   
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Interest expense:                                   |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Deposits:                                           |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Demand accounts                                     |  |                                 | 224       |                                |             |   | 209         |  |             | 609       |  |   | 690      
|Savings                                             |  |                                 | 12        |                                |             |   | 23          |  |             | 34        |  |   | 68       
|Time                                                |  |                                 | 2,742     |                                |             |   | 3,766       |  |             | 9,510     |  |   | 11,337   
|Short-term borrowings                               |  |                                 | 95        |                                |             |   | 388         |  |             | 403       |  |   | 1,237    
|Long-term obligations                               |  |                                 | 171       |                                |             |   | 188         |  |             | 538       |  |   | 437      
|Other interest expense                              |  |                                 | -         |                                |             |   | -           |  |             | 30        |  |   | -        
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Total interest expense                              |  |                                 | 3,244     |                                |             |   | 4,574       |  |             | 11,124    |  |   | 13,769   
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|                                                    |  |                                 |           |                               
|Net interest income                                 |  |                                 | 7,076     |                                |             |   | 5,300       |  |             | 19,730    |  |   | 15,617   
|Provision for loan losses                           |  |                                 | 2,675     |                                |             |   | 440         |  |             | 5,425     |  |   | 1,340    
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Net interest income after provision for loan losses |  |                                 | 4,401     |                                |             |   | 4,860       |  |             | 14,305    |  |   | 14,277   
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|                                                    |  |                                 |           |                               
|Noninterest income:                                 |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Service charges on deposit accounts                 |  |                                 | 932       |                                |             |   | 882         |  |             | 2,724     |  |   | 2,587    
|Other service charges and fees                      |  |                                 | 330       |                                |             |   | 411         |  |             | 947       |  |   | 1,085    
|Mortgage origination brokerage fees                 |  |                                 | 153       |                                |             |   | 207         |  |             | 680       |  |   | 844      
|Net gain on sale of securities                      |  |                                 | 444       |                                |             |   | 118         |  |             | 1,032     |  |   | 212      
|Income from bank owned life insurance               |  |                                 | 82        |                                |             |   | 76          |  |             | 246       |  |   | 241      
|Other operating income                              |  |                                 | 13        |                                |             |   | 171         |  |             | 80        |  |   | 554      
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Total noninterest income                            |  |                                 | 1,954     |                                |             |   | 1,865       |  |             | 5,709     |  |   | 5,523    
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|                                                    |  |                                 |           |                               
|Noninterest expenses:                               |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Salaries                                            |  |                                 | 2,061     |                                |             |   | 2,064       |  |             | 6,135     |  |   | 6,083    
|Retirement and other employee benefits              |  |                                 | 416       |                                |             |   | 863         |  |             | 1,869     |  |   | 2,542    
|Occupancy                                           |  |                                 | 474       |                                |             |   | 478         |  |             | 1,403     |  |   | 1,389    
|Equipment                                           |  |                                 | 465       |                                |             |   | 433         |  |             | 1,284     |  |   | 1,269    
|Professional fees                                   |  |                                 | 123       |                                |             |   | 168         |  |             | 522       |  |   | 464      
|Supplies                                            |  |                                 | 53        |                                |             |   | 70          |  |             | 164       |  |   | 225      
|Telephone                                           |  |                                 | 168       |                                |             |   | 177         |  |             | 458       |  |   | 515      
|FDIC insurance                                      |  |                                 | 306       |                                |             |   | 98          |  |             | 1,216     |  |   | 265      
|Other operating expenses                            |  |                                 | 2,097     |                                |             |   | 1,125       |  |             | 4,068     |  |   | 3,022    
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Total noninterest expenses                          |  |                                 | 6,163     |                                |             |   | 5,476       |  |             | 17,119    |  |   | 15,774   
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Income before income taxes                          |  |                                 | 192       |                                |             |   | 1,249       |  |             | 2,895     |  |   | 4,026    
|Income taxes                                        |  |                                 | (154      | )                              |             |   | 240         |  |             | 496       |  |   | 869      
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Net income                                          |  |                                 | 346       |                                |             |   | 1,009       |  |             | 2,399     |  |   | 3,157    
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Preferred stock dividends                           |  |                                 | 224       |                                |             |   | -           |  |             | 630       |  |   | -        
|Accretion of discount                               |  |                                 | 39        |                                |             |   | -           |  |             | 108       |  |   | -        
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Income available to common shareholders             |  | $                               | 83        |                                |             | $ | 1,009       |  | $           | 1,661     |  | $ | 3,157    
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|                                                    |  |                                 |           |                               
|Net income per share - basic                        |  | $                               | 0.03      |                                |             | $ | 0.35        |  | $           | 0.58      |  | $ | 1.09     
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Net income per share - diluted                      |  | $                               | 0.03      |                                |             | $ | 0.35        |  | $           | 0.58      |  | $ | 1.09     
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Weighted average shares outstanding - basic         |  |                                 | 2,845,343 |                                |             |   | 2,883,121   |  |             | 2,843,962 |  |   | 2,895,512
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          
|Weighted average shares outstanding - diluted       |  |                                 | 2,847,053 |                                |             |   | 2,888,466   |  |             | 2,845,630 |  |   | 2,901,730
|                                                    |  |                                 |           |                                |             |   |             |  |             |           |  |   |          



4



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Nine months ended September 30, 2009 and 2008

(Dollars in thousands, except
per share data)



|                                                                                             |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------------- | - | ------------ | --------- | - | ----------- | - | ------- | -------- |  | -------- | - |  | ----------------------------- | ------ | - | ------------- | - | ------ | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                             |  | Preferredstock, |   | Common Stock |           |   | Commonstock |   | Capital |          |  | Retained |   |  | Accumulatedothercomprehensive |        |   | Comprehensive |   |        |        | 
|                                                                                             |  | Series A        |   | Number       |           |   | Amount      |   |         | warrants |  | surplus  |   |  | earnings                      |        |   | loss          |   |        | income |  |   | Total  |  
|Balance January 1, 2008                                                                      |  | $               | - |              | 2,920,769 |   |             | $ | 10,184  |          |  |          | - |  | $                             | 27,026 |   |               | $ | 30,099 |        |  | $ | (468   | ) |  |   |        |   |  | $ | 66,841 |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Record postretirement benefit related to split-dollar insurance due to adoption of EITF 06-4 |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   | (387   | )      |  |   |        |   |  |   |        |   |  |   | (387   | )
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Unrealized loss, net of income tax benefit of $757                                           |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   | (1,209 | ) |  | $ | (1,209 | ) |  |   | (1,209 | )
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Net income                                                                                   |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   | 3,157  |        |  |   |        |   |  |   | 3,157  |   |  |   | 3,157  |  
|                                                                                             |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Total comprehensive income                                                                   |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  | $ | 1,948  |   |  |   |        |  
|                                                                                             |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Stock options exercised                                                                      |  |                 |   |              | -         |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   | -      |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Stock based compensation                                                                     |  |                 |   |              |           |   |             |   | 38      |          |  |          |   |  |                               | 118    |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   | 156    |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Repurchase of common stock                                                                   |  |                 |   |              | (35,273   | ) |             |   | (123    | )        |  |          |   |  |                               | (763   | ) |               |   |        |        |  |   |        |   |  |   |        |   |  |   | (886   | )
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Issuance of restricted stock                                                                 |  |                 |   |              | 2,500     |   |             |   | 9       |          |  |          |   |  |                               | (9     | ) |               |   |        |        |  |   |        |   |  |   |        |   |  |   | -      |  
|                                                                                             |  |                 |   |              |           |   |             |   |        
|Cash dividends ($0.5475 per share)                                                           |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   | (1,586 | )      |  |   |        |   |  |   |        |   |  |   | (1,586 | )
|                                                                                             |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|Balance September 30, 2008                                                                   |  | $               | - |              | 2,887,996 |   |             | $ | 10,108  |          |  | $        | - |  | $                             | 26,372 |   |               | $ | 31,283 |        |  | $ | (1,677 | ) |  |   |        |   |  | $ | 66,086 |  
|                                                                                             |  |                 |   |              |           |   |             |   |         |          |  |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  



|                                                                                                            |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ------------ | --------- | ----------- | - | -------- | ------- | - | -------- | - | -------- | ----------------------------- | ------ | ------------- | - | ------ | - | ----- | - | ----- |  | - | ----- |  | - | ------ | -
|                                                                                                            |  | Preferredstock, |        |   | Common Stock |           | Commonstock |   |          | Capital |   | Retained |   |          | Accumulatedothercomprehensive |        | Comprehensive |   |        |  
|                                                                                                            |  | Series A        |        |   | Number       |           | Amount      |   | warrants |         |   | surplus  |   | earnings |                               |        | income        |   | income |   | Total |  
|Balance January 1, 2009                                                                                     |  | $               | -      |   |              | 2,844,489 |             | $ | 9,956    |         | $ | -        |   |          | $                             | 25,707 |               | $ | 31,026 |   |       | $ | 1,254 |  |   |       |  | $ | 67,943 |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Unrealized gain, net of income tax expense of $ (1,080)                                                     |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   | 1,726 |  | $ | 1,726 |  |   | 1,726  |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Net income                                                                                                  |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   | 2,399  |   |       |   |       |  |   | 2,399 |  |   | 2,399  |  
|                                                                                                            |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   |        |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Total comprehensive income                                                                                  |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  | $ | 4,125 |  |   |        |  
|                                                                                                            |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   |        |  
|Issuance of preferred stock in connection with Capital Purchase Program, net of discount on preferred stock |  |                 | 17,067 |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   | 17,067 |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Issuance of common stock warrants in connection with Capital Purchase Program                               |  |                 |        |   |              |           |             |   |          |         |   | 882      |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   | 882    |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Costs associated with issuance of preferred stock and common warrants                                       |  |                 | (95    | ) |              |           |             |   |          |         |   | (4       | ) |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   | (99    | )
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Stock based compensation                                                                                    |  |                 |        |   |              |           |             |   | -        |         |   |          |   |          |                               | 50     |               |   |        |   |       |   |       |  |   |       |  |   | 50     |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Stock options exercised                                                                                     |  |                 |        |   |              | 1,892     |             |   | 7        |         |   |          |   |          |                               | 16     |               |   |        |   |       |   |       |  |   |       |  |   | 23     |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Issuance of restricted stock                                                                                |  |                 |        |   |              | 1,500     |             |   | 5        |         |   |          |   |          |                               | 19     |               |   |        |   |       |   |       |  |   |       |  |   | 24     |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Preferred stock accretion                                                                                   |  |                 | 108    |   |              | -         |             |   | -        |         |   |          |   |          |                               | -      |               |   | (108   | ) |       |   |       |  |   |       |  |   | -      |  
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Cash dividends on preferred stock                                                                           |  |                 |        |   |              | -         |             |   |          |         |   |          |   |          |                               | -      |               |   | (521   | ) |       |   |       |  |   |       |  |   | (521   | )
|                                                                                                            |  |                 |        |   |              |           |             |   |         
|Cash dividends ($0.5475 per share)                                                                          |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   | (1,558 | ) |       |   |       |  |   |       |  |   | (1,558 | )
|                                                                                                            |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   |        |  
|Balance September 30, 2009                                                                                  |  | $               | 17,080 |   |              | 2,847,881 |             | $ | 9,968    |         | $ | 878      |   |          | $                             | 25,792 |               | $ | 31,238 |   |       | $ | 2,980 |  |   |       |  | $ | 87,936 |  
|                                                                                                            |  |                 |        |   |              |           |             |   |          |         |   |          |   |          |                               |        |               |   |        |   |       |   |       |  |   |       |  |   |        |  



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2009 and 2008

(Dollar amounts in thousands)



|                                                                                                                      |  |                                |          |   |             |   |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ----------- | - | -------- | -
|                                                                                                                      |  | Nine months endedSeptember
30, |         
|                                                                                                                      |  | 2009                           |          |   | 2008        |  
|                                                                                                                      |  | (unaudited)                    |          |   | (unaudited) |  
|Cash flows from operating activities:                                                                                 |  |                                |          |   |             |   |          |  
|Net income                                                                                                            |  | $                              | 2,399    |   |             | $ | 3,157    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |                                |          |   |             |   |          |  
|Depreciation                                                                                                          |  |                                | 1,022    |   |             |   | 999      |  
|Amortization of premium on investment securities, net                                                                 |  |                                | 724      |   |             |   | 78       |  
|Provision for loan losses                                                                                             |  |                                | 5,425    |   |             |   | 1,340    |  
|Gain on sale of securities                                                                                            |  |                                | (1,031   | ) |             |   | (144     | )
|Stock based compensation                                                                                              |  |                                | 74       |   |             |   | 156      |  
|Impairment on equity investment                                                                                       |  |                                | 37       |   |             |   | 67       |  
|Increase in accrued interest receivable                                                                               |  |                                | (419     | ) |             |   | (620     | )
|Loss on disposal of premises and equipment                                                                            |  |                                | 15       |   |             |   | 22       |  
|Loss on sale of real estate and repossessions acquired in settlement of loans                                         |  |                                | 1,052    |   |             |   | 73       |  
|Income from Bank owned life insurance                                                                                 |  |                                | (246     | ) |             |   | (241     | )
|Increase in other assets                                                                                              |  |                                | (1,412   | ) |             |   | (1,720   | )
|(Decrease) increase in accrued interest payable                                                                       |  |                                | (1,423   | ) |             |   | 447      |  
|(Decrease) increase in other liabilities, net                                                                         |  |                                | (1,092   | ) |             |   | 834      |  
|                                                                                                                      |  |                                |          |   |             |   |          |  
|Net cash provided by operating activities                                                                             |  |                                | 5,125    |   |             |   | 4,448    |  
|                                                                                                                      |  |                                |          |   |             |   |          |  
|                                                                                                                      |  |                               
|Cash flows from investing activities:                                                                                 |  |                                |          |   |             |   |          |  
|Proceeds from sales of investment securities classified as available-for-sale                                         |  |                                | 67,850   |   |             |   | 29,606   |  
|Proceeds from maturities of investment securities classified as available-for-sale                                    |  |                                | 45,508   |   |             |   | 23,909   |  
|Purchases of investment securities classified as available-for-sale                                                   |  |                                | (142,553 | ) |             |   | (86,252  | )
|Purchase of Federal Home Loan Bank common stock                                                                       |  |                                | (1,257   | ) |             |   | (1,477   | )
|Proceeds from disposal of premises and equipment                                                                      |  |                                | 11       |   |             |   | -        |  
|Purchases of premises and equipment                                                                                   |  |                                | (711     | ) |             |   | (1,821   | )
|Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for
sale |  |                                | 1,297    |   |             |   | 212      |  
|Net loan originations                                                                                                 |  |                                | (43,221  | ) |             |   | (71,401  | )
|                                                                                                                      |  |                                |          |   |             |   |          |  
|Net cash used by investing activities                                                                                 |  |                                | (73,076  | ) |             |   | (107,224 | )
|                                                                                                                      |  |                                |          |   |             |   |          |  
|                                                                                                                      |  |                               
|Cash flows from financing activities:                                                                                 |  |                                |          |   |             |   |          |  
|Net increase in deposits                                                                                              |  |                                | 67,481   |   |             |   | 92,658   |  
|Net increase (decrease) in borrowings                                                                                 |  |                                | (15,727  | ) |             |   | 28,500   |  
|Dividends paid to common shareholders                                                                                 |  |                                | (1,558   | ) |             |   | (1,569   | )
|Dividends paid on preferred stock                                                                                     |  |                                | (521     | ) |             |   | -        |  
|Net proceeds from issuance of common stock                                                                            |  |                                | 23       |   |             |   | -        |  
|Net proceeds from issuance of preferred stock                                                                         |  |                                | 17,850   |   |             |   | -        |  
|Repurchase of common stock                                                                                            |  |                                | -        |   |             |   | (886     | )
|                                                                                                                      |  |                                |          |   |             |   |          |  
|Net cash provided by financing activities                                                                             |  |                                | 67,548   |   |             |   | 118,703  |  
|                                                                                                                      |  |                                |          |   |             |   |          |  
|                                                                                                                      |  |                               
|Increase (decrease) in cash and cash equivalents                                                                      |  |                                | (403     | ) |             |   | 15,927   |  
|Cash and cash equivalents at beginning of period                                                                      |  |                                | 16,799   |   |             |   | 22,003   |  
|                                                                                                                      |  |                                |          |   |             |   |          |  
|Cash and cash equivalents at end of period                                                                            |  | $                              | 16,396   |   |             | $ | 37,930   |  
|                                                                                                                      |  |                                |          |   |             |   |          |  
|                                                                                                                      |  |                               
|Cash paid during the period:                                                                                          |  |                                |          |   |             |   |          |  
|Interest                                                                                                              |  | $                              | 12,547   |   |             | $ | 13,322   |  
|Taxes                                                                                                                 |  |                                | 2,583    |   |             |   | 1,360    |  
|                                                                                                                      |  |                               
|Supplemental disclosures of noncash financing and investing activities:                                               |  |                                |          |   |             |   |          |  
|Cash dividends declared but not paid                                                                                  |  | $                              | 519      |   |             | $ | 527      |  
|Unrealized gains (losses) on available-for-sale securities, net of deferred taxes                                     |  |                                | 1,726    |   |             |   | (1,209   | )
|Transfer from loans to real estate and repossessions acquired in settlement of loans                                  |  |                                | 4,664    |   |             |   | 916      |  
|Record postretirement benefit related to split-dollar insurance due to adoption of EITF 06-4                          |  |                                | -        |   |             |   | 387      |  
|Transfer from long-term to short-term borrowings                                                                      |  |                                | 5,000    |   |             |   | -        |  
|Payable, settlement for securities purchased                                                                          |  |                                | 53,000   |   |             |   | -        |  



6



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

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

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and retirement plan costs. In connection with the
determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. The Companys retirement plans and other post-retirement benefit costs are actuarially determined
based on assumptions of the discount rate, estimated future return on plan assets and the health care cost trend rate.

All
adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorps
annual report on Form 10-K should be referenced when reading these unaudited interim consolidated financial statements. Operating results for the period ended September 30, 2009, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.

Reclassification

Certain reclassifications have been made to the prior periods financial statements to place them on a comparable basis with the current
year. Net income and shareholders equity previously reported were not affected by these reclassifications.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition
or disclosure through November 9, 2009, the date the financial statements were issued.

(2) Net Income Per Share

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

Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding
during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the
treasury stock method. Restricted stock had no dilutive effect on earnings per share for the nine or three-month periods ended September 30, 2009. For the nine and three-month periods ended September 30, 2008, diluted weighted average
shares outstanding increased by 3,316 and 2,627, respectively, due to the dilutive impact of restricted stock.

In computing
diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to



7



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##### Table of Contents

buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares
bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the nine months ended September 30, 2009 and
2008, diluted weighted average shares outstanding increased by 1,668 and 2,902, respectively, due to the dilutive impact of options. Stock options increased diluted weighted average shares by 1,710 for the three months ended September 30, 2009
and 2,718 for the three months ended September 30, 2008. There were 53,675 and 58,799 anti-dilutive (not in the money) options outstanding for the nine-months ended September 30, 2009 and 2008, respectively. There were 53,675 and
58,799 anti-dilutive (not in the money) options outstanding for the three-months ended September 30, 2009 and 2008, respectively. As of September 30, 2009 the warrant, covering 144,984 shares, issued to the U.S. Treasury Department as
discussed in Note 9, was not included in the computation of net income per share for either the nine or three-month period because its exercise price exceeded the market price of the Companys stock on that date.

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share for the nine
months ended September 30.



|                              |  |                                                                                   |       |                     |           |                |   |     
|----------------------------- |  | --------------------------------------------------------------------------------- | ----- | ------------------- | --------- | -------------- | - | ----
|                              |  | Nine months ended September 30,
2009(dollars in thousands, except per share data)
|                              |  | Income(Numerator)                                                                 |       | Shares(Denominator) |           | PerShareAmount
|                              |  |                                                                                   |      
|Basic net income              |  | $                                                                                 | 1,661 |                     | 2,843,962 |                | $ | 0.58
|                              |  |                                                                                   |       |                     |           |                |   |     
|                              |  |                                                                                   |      
|Effect of dilutive securities |  |                                                                                   | -     |                     | 1,668     |                |   |     
|                              |  |                                                                                   |       |                     |           |                |   |     
|                              |  |                                                                                   |      
|Diluted net income            |  | $                                                                                 | 1,661 |                     | 2,845,630 |                | $ | 0.58
|                              |  |                                                                                   |       |                     |           |                |   |     
|                              | 
|                              |  | Nine months ended September 30,
2008(dollars in thousands, except per share data)
|                              |  | Income(Numerator)                                                                 |       | Shares(Denominator) |           | PerShareAmount
|Basic net income              |  | $                                                                                 | 3,157 |                     | 2,895,512 |                | $ | 1.09
|                              |  |                                                                                   |       |                     |           |                |   |     
|                              |  |                                                                                   |      
|Effect of dilutive securities |  |                                                                                   | -     |                     | 6,218     |                |   |     
|                              |  |                                                                                   |       |                     |           |                |   |     
|                              |  |                                                                                   |      
|Diluted net income            |  | $                                                                                 | 3,157 |                     | 2,901,730 |                | $ | 1.09
|                              |  |                                                                                   |       |                     |           |                |   |     



8



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##### Table of Contents

The following is a reconciliation of the numerators and denominators used in computing Basic
and Diluted Net Income Per Share for the three months ended September 30.



|                              |  |                                                                                    |       |                     |           |                |   |     
|----------------------------- |  | ---------------------------------------------------------------------------------- | ----- | ------------------- | --------- | -------------- | - | ----
|                              |  | Three months ended September 30, 2009(dollars in thousands, except per share
data)
|                              |  | Income(Numerator)                                                                  |       | Shares(Denominator) |           | PerShareAmount
|Basic net income              |  | $                                                                                  | 83    |                     | 2,845,343 |                | $ | 0.03
|                              |  |                                                                                    |       |                     |           |                |   |     
|                              |  |                                                                                    |      
|Effect of dilutive securities |  |                                                                                    | -     |                     | 1,710     |                |   |     
|                              |  |                                                                                    |       |                     |           |                |   |     
|                              |  |                                                                                    |      
|Diluted net income            |  | $                                                                                  | 83    |                     | 2,847,053 |                | $ | 0.03
|                              |  |                                                                                    |       |                     |           |                |   |     
|                              | 
|                              |  | Three months ended September 30, 2008(dollars in thousands, except per share data)
|                              |  | Income(Numerator)                                                                  |       | Shares(Denominator) |           | PerShareAmount
|Basic net income              |  | $                                                                                  | 1,009 |                     | 2,883,121 |                | $ | 0.35
|                              |  |                                                                                    |       |                     |           |                |   |     
|                              |  |                                                                                    |      
|Effect of dilutive securities |  |                                                                                    | -     |                     | 5,345     |                |   |     
|                              |  |                                                                                    |       |                     |           |                |   |     
|                              |  |                                                                                    |      
|Diluted net income            |  | $                                                                                  | 1,009 |                     | 2,888,466 |                | $ | 0.35
|                              |  |                                                                                    |       |                     |           |                |   |     

(3) Stock Compensation Plan

During 2008, the Company adopted the 2008 Omnibus Equity Plan (the Plan) which replaced the expired 1998 Omnibus Stock Ownership
and Long-Term Incentive Plan. The Plan provides for the issuance of up to an aggregate of 200,000 shares of common stock of the Company in the form of stock options, restricted stock awards and performance share awards.

Stock based compensation is accounted for in accordance with FASB ASC Topic 718. Compensation cost charged to income was approximately $74
thousand and $156 thousand for the nine months ended September 30, 2009 and 2008, respectively. Compensation cost charged to income was approximately $35 thousand and $57 thousand for the three months ended September 30, 2009 and 2008,
respectively. No income tax benefit was recognized for stock based compensation, as the Company does not have any outstanding nonqualified stock options.

Stock Options

Under the Plan, stock options may be issued to
employees as incentive stock options which qualify for special tax treatment under the Internal Revenue Code, or as nonqualified stock options. The terms and exercise prices of options, and the dates or schedules on which options vest or become
exercisable, are established at the time the options are granted and may be different for each option. However, the term of an option may not exceed ten years, and the exercise price of each option may not be less than the fair market value of a
share of common stock on the date the option is granted. It is the Companys policy to issue new shares of stock to satisfy option exercises.

The weighted-average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average estimated fair values of stock option grants
and the assumptions that were used in calculating such fair values are based on estimates at the date of grant. There were no



9



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##### Table of Contents

options granted during the nine month period ending September 30, 2009. There were 6,100 shares granted during the nine month period ending September 30, 2008. The assumptions that were
used in calculating such fair values were based on estimates at the date of grant as follows:



|                                                                 |  |                                     |       |  
|---------------------------------------------------------------- |  | ----------------------------------- | ----- | -
|                                                                 |  | Nine months endedSeptember 30, 2008 |      
|Weighted-average fair value of options granted during the period |  | $                                   | 5.84  |  
|                                                                 | 
|Assumptions:                                                     |  |                                     |       |  
|Average risk free interest rate                                  |  |                                     | 3.52  | %
|Average expected volatility                                      |  |                                     | 24.37 | %
|Expected dividend rate                                           |  |                                     | 2.40  | %
|Expected life in years                                           |  |                                     | 7.00  |  

A summary of option activity under the Plan as of September 30, 2009, and
changes during the nine-month period ended September 30, 2009 is presented below:



|                                  |  |                                               |  |                              |       |                                 |            |                         |   |   
|--------------------------------- |  | --------------------------------------------- |  | ---------------------------- | ----- | ------------------------------- | ---------- | ----------------------- | - | --
|                                  |  | OptionsOutstanding                            |  | WeightedAverageExercisePrice |       | AverageRemainingContractualTerm |            | AggregateIntrinsicValue
|                                  |  | (Dollars in thousands, except per share data)
|                                  |  |                                               |  |                             
|Outstanding at December 31, 2008  |  | 59,227                                        |  | $                            | 27.79 |                                 |            |                         |   |   
|                                  |  |                                               |  |                             
|Granted                           |  | -                                             |  | $                            | -     |                                 |            |                         |   |   
|                                  |  |                                               |  |                             
|Forfeited                         |  | -                                             |  | $                            | -     |                                 |            |                         |   |   
|                                  |  |                                               |  |                             
|Exercised                         |  | 1,892                                         |  | $                            | 11.98 |                                 |            |                         |   |   
|                                  |  |                                               |  |                              |       |                                 |            |                         |   |   
|                                  |  |                                               |  |                             
|Outstanding at September 30, 2009 |  | 57,335                                        |  | $                            | 28.31 |                                 | 6.39 years |                         | $ | 18
|                                  |  |                                               |  |                              |       |                                 |            |                         |   |   
|                                  |  |                                               |  |                             
|Exercisable at September 30, 2009 |  | 37,091                                        |  | $                            | 28.00 |                                 | 5.86 years |                         | $ | 18
|                                  |  |                                               |  |                              |       |                                 |            |                         |   |   

There were 1,892 shares exercised during the nine month period ended
September 30, 2009 and no shares were exercised during the nine month period ended September 30, 2008. The intrinsic value of options exercised during the nine months ended September 30, 2009 was $9 thousand and $23 thousand was
received for options exercised.

Restricted Stock Awards

Restricted stock awards are subject to restrictions and the risk of forfeiture if conditions stated in the award agreement are not satisfied
at the end of a restriction period. During the restriction period, restricted stock covered by the award will be held by the Company. If the conditions stated in the award agreement are satisfied at the end of the restriction period, the restricted
stock will become unrestricted and the certificate evidencing the stock will be delivered to the employee.

There were 5,097
shares of non-vested restricted stock as of December 31, 2008. Of those shares, 2,597 shares vested on January 1, 2009, and the remaining 2,500 shares vested on March 31, 2009 resulting in there being no non-vested restricted stock as
of September 30, 2009. On August 26, 2009, 1500 additional shares of restricted stock



10



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##### Table of Contents

were issued under the Plan but those shares were immediately vested upon issuance.

Unrecognized Compensation Cost

Anticipated total unrecognized compensation cost related to outstanding
non-vested stock options will be recognized over the following periods:



|                              |  |                        |   
|----------------------------- |  | ---------------------- | --
|                              |  | Stock Options         
|                              |  | (Dollars in thousands)
|                              | 
|October 1  December 31, 2009 |  | $                      | 11
|                              | 
|2010                          |  |                        | 36
|                              | 
|2011                          |  |                        | 21
|                              | 
|2012                          |  |                        | 8 
|                              | 
|2013                          |  |                        | 2 
|                              |  |                        |   
|                              | 
|Total                         |  | $                      | 78

(4) Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that
have met minimum age and service requirements. Net periodic postretirement benefit cost for the nine- and three-month periods ended September 30, 2009 and 2008 includes the following components.



|                                         |  |                                                       |    |   |      |   |    |  
|---------------------------------------- |  | ----------------------------------------------------- | -- | - | ---- | - | -- | -
|                                         |  | Nine months endedSeptember 30,(Dollars in thousands)  |   
|                                         |  | 2009                                                  |    |   | 2008 |  
|                                         |  |                                                      
|Components of net periodic cost:         |  |                                                       |    |   |      |   |    |  
|Service cost                             |  | $                                                     | 3  |   |      | $ | 3  |  
|Interest cost                            |  |                                                       | 36 |   |      |   | 33 |  
|Prior service cost                       |  |                                                       | (6 | ) |      |   | (6 | )
|                                         |  |                                                       |    |   |      |   |    |  
|                                         |  |                                                      
|Net periodic postretirement benefit cost |  | $                                                     | 33 |   |      | $ | 30 |  
|                                         |  |                                                       |    |   |      |   |    |  
|                                         | 
|                                         |  | Three months endedSeptember 30,(Dollars in thousands) |   
|                                         |  | 2009                                                  |    |   | 2008 |  
|                                         |  |                                                      
|Components of net periodic cost:         |  |                                                       |    |   |      |   |    |  
|Service cost                             |  | $                                                     | 1  |   |      | $ | 1  |  
|Interest cost                            |  |                                                       | 12 |   |      |   | 11 |  
|Prior service cost                       |  |                                                       | (2 | ) |      |   | (2 | )
|                                         |  |                                                       |    |   |      |   |    |  



11



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##### Table of Contents

|                                         |  |   |    |  |   |   
|---------------------------------------- |  | - | -- |  | - | --
|Net periodic postretirement benefit cost |  | $ | 11 |  | $ | 10
|                                         |  |   |    |  |   |   

The Company expects to contribute $44 thousand to its postretirement benefit plan in
2009. No contributions were made in the first nine months of 2009. For additional information related to the plan, refer to the Companys Form 10-K for the year ended December 31, 2008.

(5) Investment Securities

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



|                                                 |  |                                          |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------ |  | ---------------------------------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                 |  | September 30, 2009(Dollars in
thousands)
|                                                 |  | AmortizedCost                            |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                 |  |                                          |         |                     
|Securities available-for-sale:                   |  |                                          |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  |                                          |         |                     
|Government-sponsored enterprises and FFCB bonds  |  | $                                        | 25,314  |                      | $ | 184                   |  | $ | (40        | ) |  | $ | 25,458 
|                                                 |  |                                          |         |                     
|Obligations of states and political subdivisions |  |                                          | 39,367  |                      |   | 1,485                 |  |   | (61        | ) |  |   | 40,791 
|                                                 |  |                                          |         |                     
|Mortgage-backed securities                       |  |                                          | 141,988 |                      |   | 3,955                 |  |   | (215       | ) |  |   | 145,728
|                                                 |  |                                          |         |                     
|Corporate Bonds                                  |  |                                          | 6,045   |                      |   | -                     |  |   | (256       | ) |  |   | 5,789  
|                                                 |  |                                          |         |                     
|Equity securities                                |  |                                          | 1,000   |                      |   | -                     |  |   | (175       | ) |  |   | 825    
|                                                 |  |                                          |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  | $                                        | 213,714 |                      | $ | 5,624                 |  | $ | (747       | ) |  | $ | 218,591
|                                                 |  |                                          |         |                      |   |                       |  |   |            |   |  |   |        



|                                                 |  |                                         |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------ |  | --------------------------------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                 |  | December 31, 2008(Dollars in
thousands)
|                                                 |  | AmortizedCost                           |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                 |  |                                         |         |                     
|Securities available-for-sale:                   |  |                                         |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  |                                         |         |                     
|Government-sponsored enterprises and FFCB bonds  |  | $                                       | 28,899  |                      | $ | 633                   |  | $ | (8         | ) |  | $ | 29,524 
|                                                 |  |                                         |         |                     
|Obligations of states and political subdivisions |  |                                         | 33,434  |                      |   | 306                   |  |   | (531       | ) |  |   | 33,209 
|                                                 |  |                                         |         |                     
|Mortgage-backed securities                       |  |                                         | 167,250 |                      |   | 2,163                 |  |   | (5         | ) |  |   | 169,408
|                                                 |  |                                         |         |                     
|Corporate Bonds                                  |  |                                         | 7,055   |                      |   | 9                     |  |   | (176       | ) |  |   | 6,888  
|                                                 |  |                                         |         |                     
|Equity securities                                |  |                                         | 1,000   |                      |   | -                     |  |   | (320       | ) |  |   | 680    
|                                                 |  |                                         |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  | $                                       | 237,638 |                      | $ | 3,111                 |  | $ | (1,040     | ) |  | $ | 239,709
|                                                 |  |                                         |         |                      |   |                       |  |   |            |   |  |   |        

Gross realized gains and losses on sales of securities for the three and nine-month
periods ended September 30, 2009 and September 30, 2008 were as follows:



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|                      |  |                                                      |       |   |      |   |     |  
|--------------------- |  | ---------------------------------------------------- | ----- | - | ---- | - | --- | -
|                      |  | Nine months endedSeptember 30,(Dollars in thousands) |      
|                      |  | 2009                                                 |       |   | 2008 |  
|                      |  |                                                     
|Gross realized gains  |  | $                                                    | 1,045 |   |      | $ | 250 |  
|                      |  |                                                     
|Gross realized losses |  |                                                      | (14   | ) |      |   | (38 | )
|                      |  |                                                      |       |   |      |   |     |  
|                      |  |                                                     
|Net realized gains    |  | $                                                    | 1,031 |   |      | $ | 212 |  
|                      |  |                                                      |       |   |      |   |     |  



|                      |  |                                                       |     |   |      |   |     |  
|--------------------- |  | ----------------------------------------------------- | --- | - | ---- | - | --- | -
|                      |  | Three months endedSeptember 30,(Dollars in thousands) |    
|                      |  | 2009                                                  |     |   | 2008 |  
|Gross realized gains  |  | $                                                     | 444 |   |      | $ | 118 |  
|                      |  |                                                      
|Gross realized losses |  |                                                       | (0  | ) |      |   | (0  | )
|                      |  |                                                       |     |   |      |   |     |  
|                      |  |                                                      
|Net realized gains    |  | $                                                     | 444 |   |      | $ | 118 |  
|                      |  |                                                       |     |   |      |   |     |  

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

The following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost
exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other than temporarily impaired. The table is segregated into investments that have been in continuous unrealized-loss position
for less than 12 months from those that have been in a continuous unrealized-loss position for more than 12 months, as of September 30, 2009 and December 31, 2008:

September 30, 2009



|                                                 |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                                 |  | Less than 12 months    |        | 12 months or longer |   | Total    
|                                                 |  | (Dollars in thousands)
|                                                 |  | FairValue              |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|Description of Securities                        |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Government-Sponsored enterprises                 |  | $                      | 6,324  |                     | $ | 40        |  | $                | -     |           | $ | -                |  | $ | 6,324  |  | $ | 40 
|Obligations of states and political subdivisions |  |                        | 775    |                     |   | 19        |  |                  | 2,880 |           |   | 42               |  |   | 3,655  |  |   | 61 
|Mortgage-backed securities                       |  |                        | 18,610 |                     |   | 215       |  |                  | -     |           |   | -                |  |   | 18,610 |  |   | 215
|                                                 |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Equity securities                                |  |                        | -      |                     |   | -         |  |                  | 825   |           |   | 175              |  |   | 825    |  |   | 175
|                                                 |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Corporate bonds                                  |  |                        | 3,343  |                     |   | 166       |  |                  | 2,446 |           |   | 90               |  |   | 5,789  |  |   | 256
|                                                 |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Total                                            |  | $                      | 29,052 |                     | $ | 440       |  | $                | 6,151 |           | $ | 307              |  | $ | 35,203 |  | $ | 747
|                                                 |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|                                                
|December 31, 2008                               
|                                                 |  | Less than 12 months    |        | 12 months or longer |   | Total    
|                                                 |  | (Dollars in thousands)
|                                                 |  | FairValue              |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|Description of Securities                        |  |                        |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Government-Sponsored enterprises                 |  | $                      | 3,989  |                     | $ | 8         |  | $                | -     |           | $ | -                |  | $ | 3,989  |  | $ | 8  



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|                                                 |  |   |        |  |   |     |  |   |       |  |   |     |  |   |        |  |   |      
|------------------------------------------------ |  | - | ------ |  | - | --- |  | - | ----- |  | - | --- |  | - | ------ |  | - | -----
|Obligations of states and political subdivisions |  |   | 9,025  |  |   | 490 |  |   | 2,520 |  |   | 41  |  |   | 11,545 |  |   | 531  
|Mortgage-backed securities                       |  |   | 2,989  |  |   | -   |  |   | 1,117 |  |   | 5   |  |   | 4,106  |  |   | 5    
|                                                 |  |   |        |  |   |     |  |   |       |  |   |     |  |   |        |  |   |      
|Equity securities                                |  |   | -      |  |   | -   |  |   | 680   |  |   | 320 |  |   | 680    |  |   | 320  
|                                                 |  |   |        |  |   |     |  |   |       |  |   |     |  |   |        |  |   |      
|Corporate bonds                                  |  |   | 2,363  |  |   | 176 |  |   | -     |  |   | -   |  |   | 2,363  |  |   | 176  
|                                                 |  |   |        |  |   |     |  |   |       |  |   |     |  |   |        |  |   |      
|Total                                            |  | $ | 18,366 |  | $ | 674 |  | $ | 4,317 |  | $ | 366 |  | $ | 22,683 |  | $ | 1,040
|                                                 |  |   |        |  |   |     |  |   |       |  |   |     |  |   |        |  |   |      

As of September 30, 2009, management has concluded that the unrealized losses
above (which consisted of 28 securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its
cost. The losses above, with the exception of the equity securities, are on securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than
1 year include eight (8) municipal obligations and two (2) corporate securities. The unrealized losses associated with these securities are not considered to be other-than-temporary because they are related to changes in interest rates and
do not affect the expected cash flows of the underlying collateral or the issuer. There was one (1) equity security that has been in an unrealized loss position for more than twelve months. The Banks mortgage-backed securities are all
backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.

During the first quarter of 2007, Triangle Mezzanine converted from a privately held SBIC to a publicly traded entity called Triangle Capital Corporation (TCAP). As a result, the Bank reclassified the asset as an equity security
in the investment portfolio with no gain or loss on the transaction since the proceeds to the Bank equaled its initial cost of the investment. Although TCAPs stock price traded below it carrying price of $15 per share during the past year, it
did report a $1.8 million increase in net investment income to $6.3 million for the six months ended June 30, 2009 compared to $4.5 million for the same period in 2008. TCAP also continued to increase its quarterly dividend by announcing a
$0.41 dividend per share for the third quarter of 2009, a 2.5% increase over the second quarter of 2009. This resulted in a dividend yield of over thirteen percent on an annualized basis as of September 30, 2009. Based upon the analysis
performed and the Banks ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Bank does not consider the investment to be other-than-temporarily impaired.

At September 30, 2009 and December 30, 2008, the balance of Federal Home Loan Bank (FHLB) of Atlanta stock held by the
Company was $5.1 million and $3.9 million, respectively. On August 12, 2009, FHLB announced that it would pay a dividend for the second quarter of 2009 of 0.84% and on October 30, 2009, FHLB announced that it would pay a dividend for the third
quarter of 2009 of 0.41%. The FHLB also announced that it would not repurchase activity-based excess capital stock and would continue to evaluate on a quarterly basis whether to repurchase excess capital stock. FHLB stated that the dividend and
excess capital stock repurchase decisions continue to reflect the FHLB conservative financial management approach in light of continued volatility in the financial markets. Management believes that its investment in FHLB stock was not
other-than-temporarily impaired as of September 30, 2009 or December 31, 2008. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB
stock held by the Company.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at
September 30, 2009 and December 31, 2008 by remaining contractual maturity are as follows:

September 30,
2009



|                                                  |  |                        |        |           |   |       
|------------------------------------------------- |  | ---------------------- | ------ | --------- | - | ------
|                                                  |  | AmortizedCost          |        | FairValue
|                                                  |  | (Dollars in thousands)
|Government-sponsored enterprises and FFCB bonds:  |  |                        |        |           |   |       
|                                                  |  |                       
|Due in one through five years                     |  | $                      | 2,181  |           | $ | 2,197 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 18,118 |           |   | 18,182
|                                                  |  |                       
|Due after ten years                               |  |                        | 5,015  |           |   | 5,079 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |        |           |   |       
|                                                  |  |                       
|Due in one year or less                           |  |                        | 871    |           |   | 878   
|                                                  |  |                       
|Due in one through five years                     |  |                        | 7,012  |           |   | 7,364 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 17,252 |           |   | 17,969
|                                                  |  |                       
|Due after ten years                               |  |                        | 14,232 |           |   | 14,580



14



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|                              |  |               |         |           |   |        
|----------------------------- |  | ------------- | ------- | --------- | - | -------
|                              |  | AmortizedCost |         | FairValue
|Mortgage-backed securities:   |  |               |         |           |   |        
|                              |  |              
|Due in five through ten years |  |               | 8,497   |           |   | 8,878  
|                              |  |              
|Due after ten years           |  |               | 133,491 |           |   | 136,850
|                              |  |              
|Corporate Bonds:              |  |               |         |           |   |        
|                              |  |              
|Due in five through ten years |  |               | 6,045   |           |   | 5,789  
|                              |  |              
|Equity securities:            |  |               |         |           |   |        
|                              |  |              
|Due after ten years           |  |               | 1,000   |           |   | 825    
|                              |  |               |         |           |   |        
|                              |  |              
|Total securities              |  | $             | 213,714 |           | $ | 218,591
|                              |  |               |         |           |   |        

Securities with an amortized cost of $166.8 million at September 30, 2009 were
pledged as collateral. Of this total, amortized cost of $87.3 million and fair value of $89.3 million are pledged as collateral for FHLB advances.

December 31, 2008



|                                                  |  |                        |         |           |   |        
|------------------------------------------------- |  | ---------------------- | ------- | --------- | - | -------
|                                                  |  | AmortizedCost          |         | FairValue
|                                                  |  | (Dollars in thousands)
|Government-sponsored enterprises and FFCB bonds:  |  |                        |        
|                                                  |  |                       
|Due in one through five years                     |  | $                      | 5,000   |           | $ | 5,149  
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 9,384   |           |   | 9,614  
|                                                  |  |                       
|Due after ten years                               |  |                        | 14,515  |           |   | 14,761 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |         |           |   |        
|                                                  |  |                       
|Due in one year or less                           |  |                        | 1,320   |           |   | 1,326  
|                                                  |  |                       
|Due in one through five years                     |  |                        | 6,052   |           |   | 6,147  
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 16,936  |           |   | 16,936 
|                                                  |  |                       
|Due after ten years                               |  |                        | 9,126   |           |   | 8,800  
|                                                  |  |                       
|Mortgage-backed securities:                       |  |                        |         |           |   |        
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 7,706   |           |   | 7,892  
|                                                  |  |                       
|Due after ten years                               |  |                        | 159,544 |           |   | 161,516
|                                                  |  |                       
|Corporate Bonds:                                  |  |                        |         |           |   |        
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 7,055   |           |   | 6,888  
|                                                  |  |                       
|Equity securities:                                |  |                        |         |           |   |        
|                                                  |  |                       
|Due after ten years                               |  |                        | 1,000   |           |   | 680    
|                                                  |  |                        |         |           |   |        



15



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##### Table of Contents

|                 |  |               |         |           |   |        
|---------------- |  | ------------- | ------- | --------- | - | -------
|                 |  | AmortizedCost |         | FairValue
|                 |  |              
|Total securities |  | $             | 237,638 |           | $ | 239,709
|                 |  |               |         |           |   |        

Securities with an amortized cost of $113.3 million at December 31, 2008 were
pledged as collateral. Of this total, amortized cost of $39.1 million and fair value of $40.0 million are pledged as collateral for FHLB advances.

(6) Comprehensive Income (Loss)

A summary of comprehensive income (loss) is as follows:



|                                                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                    |  | 2009                            |        |   | 2008                           |   |       | 2009 |  |   | 2008   |  
|                                                    |  | (Dollars in thousands)          |       
|                                                    |  |                                 |        |  
|Net income                                          |  | $                               | 346    |   |                                | $ | 1,009 |      |  | $ | 2,399  |   |  | $ | 3,157  |  
|                                                    |  |                                 |        |  
|Other comprehensive income (loss):                  |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                                 |        |  
|Unrealized gains (losses) arising during the period |  |                                 | 4,483  |   |                                |   | 1,121 |      |  |   | 3,837  |   |  |   | (2,178 | )
|                                                    |  |                                 |        |  
|Tax benefit (expense)                               |  |                                 | (1,725 | ) |                                |   | (432  | )    |  |   | (1,478 | ) |  |   | 839    |  
|                                                    |  |                                 |        |  
|Reclassification to realized (gains) losses         |  |                                 | (444   | ) |                                |   | 118   |      |  |   | (1,031 | ) |  |   | 212    |  
|                                                    |  |                                 |        |  
|Tax (benefit) expense                               |  |                                 | 171    |   |                                |   | (46   | )    |  |   | 398    |   |  |   | (82    | )
|                                                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                                 |        |  
|Other comprehensive income (loss)                   |  |                                 | 2,485  |   |                                |   | 761   |      |  |   | 1,726  |   |  |   | (1,209 | )
|                                                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                                 |        |  
|Total comprehensive income                          |  | $                               | 2,831  |   |                                | $ | 1,770 |      |  | $ | 4,125  |   |  | $ | 1,948  |  
|                                                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  

(7) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial
information by the Company.

FSP SFAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan
Assets, (FSP SFAS 132(R)-1) (FASB ASC 715-20-65) issued in December 2008, provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan to provide the users of
financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets;
(c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and
(e) significant concentrations of risk within plan assets.

The Staff Position also requires a nonpublic entity, as
defined in SFAS 132, to disclose net periodic benefit cost for each period for which a statement of income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Staff Position will require the Company
to provide additional disclosures related it to its benefit plans.

On April 9, 2009, the FASB issued three staff positions related to
fair value which are discussed below.



16



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FSP SFAS 115-2 and SFAS 124-2(FASB ASC 320-10-65) , Recognition and Presentation of
Other-Than-Temporary Impairments, (FSP SFAS 115-2 and SFAS 124-2) categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit
issues and losses related to all other factors. Other-than-temporary impairment (OTTI) exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses
should be recognized through earnings. An OTTI related to other factors should be recognized in other comprehensive income. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity
securities. Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the aging of securities with unrealized losses).

FSP SFAS 157-4 (FASB ASC 820-10-65), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That are Not Orderly recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased. The evaluation of certain
factors may necessitate that fair value be determined using a different valuation technique. Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation
or distressed sale. If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price. If there is not sufficient information to conclude as to whether or not the transaction is orderly, the
transaction price should be considered when estimating fair value. An entitys intention to hold an asset or liability is not relevant in determining fair value. Quoted prices provided by pricing services may still be used when estimating fair
value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions. Inputs and valuation techniques are required to be disclosed in addition to any changes in
valuation techniques.

FSP SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), Interim Disclosures about Fair Value of
Financial Instruments requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized
financial information at interim reporting periods. A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor.
Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market, it is considered a publicly traded company for this purpose.

The three staff positions were effective for periods ending after June 15, 2009. The Company adopted the staff positions for its second
quarter ended June 30, 2009 and they had no material impact on the consolidated financial statements.

The Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., Other Than Temporary Impairment of Certain Investments in Debt and Equity
Securities and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staffs previous views related to equity securities; however debt securities are excluded from its scope. The SAB provides that
other-than-temporary impairment is not necessarily the same as permanent impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to
fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Companys financial position.

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), Subsequent Events, (SFAS 165) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the
financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that
arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is
the date the financial statements were issued or the date the financial statements were available to be issued. For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the
event and an estimate of its financial effect, or a statement that such an estimate cannot



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be made, should be disclosed. The standard is effective for interim or annual periods ending after June 15, 2009. This standard was adopted and disclosures made beginning in the second
quarter ended June 30, 2009.

The FASB issued SFAS 166 (not yet reflected in FASB ASC), Accounting for Transfers of
Financial Assets  an amendment of FASB Statement No. 140, (SFAS 166) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire
financial asset by taking into consideration the transferors continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferors beneficial interest)
and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective
for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company
does not expect the standard to have any impact on the Companys financial position.

SFAS 167 (not yet reflected in FASB
ASC), Amendments to FASB Interpretation No. 46(R), (SFAS 167) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity
(VIE) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of
the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the
effective date. The Company does not expect the standard to have any impact on the Companys financial position.

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles  a replacement of FASB Statement No. 162, (SFAS 168). SFAS 168 establishes the FASB Accounting Standards CodificationTM(Codification) as the source of authoritative generally accepted accounting principles (GAAP)
for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics
using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification
involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with FASB ASC, where ASC stands for Accounting Standards Codification.
SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) is effective for interim and annual periods ending after September 15, 2009 and did not have an impact on the Companys financial position but will change the referencing system for accounting
standards.

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update
No. 2009-1, Topic 105 Generally Accepted Accounting Principles (ASU 2009-1) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after
September 15, 2009 and will not have an impact on the Companys financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the
issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.

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



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(8) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the
market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. Beginning with the
year ended December 31, 2008, fair value estimates are determined in accordance with FASB ASC Topic 820. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.

The following table presents the carrying values and estimated fair values of the Companys financial instruments at September 30,
2009 and December 31, 2008 (dollars in thousands):



|                            |  |                    |         |                     |   |               |  |                     |         |  |   |        
|--------------------------- |  | ------------------ | ------- | ------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                            |  | September 30, 2009 |         | December 31, 2008  
|                            |  | CarryingValue      |         | Estimated FairValue |   | CarryingValue |  | Estimated FairValue
|                            |  |                    |         |                    
|Financial assets:           |  |                    |         |                     |   |               |  |                     |         |  |   |        
|                            |  |                    |         |                    
|Cash and cash equivalents   |  | $                  | 16,396  |                     | $ | 16,396        |  | $                   | 16,799  |  | $ | 16,799 
|                            |  |                    |         |                    
|Investment securities       |  |                    | 218,591 |                     |   | 218,591       |  |                     | 239,709 |  |   | 239,709
|                            |  |                    |         |                    
|FHLB stock                  |  |                    | 5,116   |                     |   | 5,116         |  |                     | 3,859   |  |   | 3,859  
|                            |  |                    |         |                    
|Accrued interest receivable |  |                    | 5,082   |                     |   | 5,082         |  |                     | 4,663   |  |   | 4,663  
|                            |  |                    |         |                    
|Net loans                   |  |                    | 566,037 |                     |   | 563,020       |  |                     | 532,905 |  |   | 531,166
|                            |  |                    |         |                    
|Financial liabilities:      |  |                    |         |                     |   |               |  |                     |         |  |   |        
|                            |  |                    |         |                    
|Deposits                    |  | $                  | 696,633 |                     | $ | 694,753       |  | $                   | 629,152 |  | $ | 632,152
|                            |  |                    |         |                    
|Short-term borrowings       |  |                    | 46,989  |                     |   | 46,989        |  |                     | 57,716  |  |   | 57,716 
|                            |  |                    |         |                    
|Accrued interest payable    |  |                    | 1,466   |                     |   | 1,466         |  |                     | 2,889   |  |   | 2,889  
|                            |  |                    |         |                    
|Long-term obligations       |  |                    | 21,000  |                     |   | 21,504        |  |                     | 26,000  |  |   | 26,254 

Fair Value Hierarchy

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



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



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| |  |                                                            
| |  | -----------------------------------------------------------
| |  | models, discounted cash flow models and similar techniques.

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

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

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

Investment Securities Available-for-Sale

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

Loans

The Company
does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be
made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with FASB ASC Topic 310. The fair value of impaired loans
is estimated using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. At September 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with FASB ASC Topic 820, impaired loans where an allowance is
established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as
nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as
nonrecurring Level 3.

Real Estate and Repossessions Acquired in Settlement of Loans

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of
loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the
estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the
collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Assets and liabilities recorded at fair value on a recurring basis as of September 30, 2009



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|                                         |  |       |         |         |   |         |  |         |         |  |   |      
|---------------------------------------- |  | ----- | ------- | ------- | - | ------- |  | ------- | ------- |  | - | -----
|(Dollars in thousands)                   |  | Total |         | Level 1 |   | Level 2 |  | Level 3
|Investment securities available-for-sale |  | $     | 218,591 |         | $ | 7,070   |  | $       | 209,683 |  | $ | 1,838
|                                         |  |       |         |         |   |         |  |         |         |  |   |      
|Total assets at fair value               |  | $     | 218,591 |         | $ | 7,070   |  | $       | 209,683 |  | $ | 1,838
|                                         |  |       |         |         |   |         |  |         |         |  |   |      
|                                         |  |       |         |        
|Total liabilities at fair value          |  | $     | -       |         | $ | -       |  | $       | -       |  | $ | -    
|                                         |  |       |         |         |   |         |  |         |         |  |   |      

Assets and liabilities recorded at fair value on a recurring basis as of December 31, 2008



|                                         |  |       |         |         |   |         |  |         |         |  |   |       
|---------------------------------------- |  | ----- | ------- | ------- | - | ------- |  | ------- | ------- |  | - | ------
|(Dollars in thousands)                   |  | Total |         | Level 1 |   | Level 2 |  | Level 3
|Investment securities available-for-sale |  | $     | 239,709 |         | $ | 64,521  |  | $       | 164,116 |  | $ | 11,072
|                                         |  |       |         |         |   |         |  |         |         |  |   |       
|Total assets at fair value               |  | $     | 239,709 |         | $ | 64,521  |  | $       | 164,116 |  | $ | 11,072
|                                         |  |       |         |         |   |         |  |         |         |  |   |       
|                                         |  |       |         |        
|Total liabilities at fair value          |  | $     | -       |         | $ | -       |  | $       | -       |  | $ | -     
|                                         |  |       |         |         |   |         |  |         |         |  |   |       

Assets and liabilities recorded at fair value on a nonrecurring basis as of September 30,
2009



|                                                              |  |       |        |         |   |         |  |         |        |  |   |      
|------------------------------------------------------------- |  | ----- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -----
|(Dollars in thousands)                                        |  | Total |        | Level 1 |   | Level 2 |  | Level 3
|Impaired loans                                                |  | $     | 13,812 |         | $ | -       |  | $       | 9,145  |  | $ | 4,667
|Real estate and repossessions acquired in settlement of loans |  |       | 6,039  |         |   | 2,036   |  |         | 1,473  |  |   | 2,530
|                                                              |  |       |        |         |   |         |  |         |        |  |   |      
|Total assets at fair value                                    |  | $     | 19,851 |         | $ | 2,036   |  | $       | 10,618 |  | $ | 7,197
|                                                              |  |       |        |         |   |         |  |         |        |  |   |      
|                                                              |  |       |        |        
|Total liabilities at fair value                               |  | $     | -      |         | $ | -       |  | $       | -      |  | $ | -    
|                                                              |  |       |        |         |   |         |  |         |        |  |   |      

Assets and liabilities recorded at fair value on a nonrecurring basis as of December 31,
2008



|                                |  |       |        |         |   |         |  |         |        |  |   |      
|------------------------------- |  | ----- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -----
|(Dollars in thousands)          |  | Total |        | Level 1 |   | Level 2 |  | Level 3
|Impaired loans                  |  | $     | 12,271 |         | $ | -       |  | $       | 10,247 |  | $ | 2,024
|                                |  |       |        |         |   |         |  |         |        |  |   |      
|Total assets at fair value      |  | $     | 12,271 |         | $ | -       |  | $       | 10,247 |  | $ | 2,024
|                                |  |       |        |         |   |         |  |         |        |  |   |      
|                                |  |       |        |        
|Total liabilities at fair value |  | $     | -      |         | $ | -       |  | $       | -      |  | $ | -    
|                                |  |       |        |         |   |         |  |         |        |  |   |      

The table below presents a reconciliation for all assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) during 2009.

Total Fair Value Measurements



|                                             |  |                                  |        |  
|-------------------------------------------- |  | -------------------------------- | ------ | -
|(Dollars in thousands)                       |  | Available-forSale DebtSecurities |       
|Balance, December 31, 2008                   |  | $                                | 11,072 |  
|                                             | 
|Total gains or losses (realized/unrealized): |  |                                  |        |  
|                                             | 
|Included in earnings                         |  |                                  | -      |  
|                                             | 
|Included in other comprehensive loss         |  |                                  | (162   | )
|                                             | 
|Purchases, issuances, and settlements        |  |                                  | -      |  



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|                               |  |                                  |        |  
|------------------------------ |  | -------------------------------- | ------ | -
|(Dollars in thousands)         |  | Available-forSale DebtSecurities |       
|                               | 
|Transfers in to/out of Level 3 |  |                                  | (9,072 | )
|                               | 
|Balance, September 30, 2009    |  | $                                | 1,838  |  

(9) U.S. Treasurys Troubled Asset Relief Program (TARP) Capital Purchase Program

On January 16, 2009, the Company issued Series A Preferred Stock in the amount of $17,949,000 and a warrant to
purchase 144,984 shares of common stock with an exercise price of $18.57 to the U.S. Treasury as a participant in the TARP Capital Purchase Program. The Series A Preferred Stock qualifies as Tier 1 capital for purposes of regulatory capital
requirements and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Prior to January 16, 2012, unless the Company has redeemed all of this preferred stock or the U.S. Treasury
has transferred all of this preferred stock to a third party, the consent of the U.S. Treasury will be required to, among other things, increase common stock dividend above the current quarterly cash dividend of $0.1825 per share or repurchase
common stock except in limited circumstances. In addition, until the U.S. Treasury ceases to own the Series A Preferred Stock, the compensation arrangements for senior executive officers must comply in all respects with the U.S. Emergency Economic
Stabilization Act of 2008, as amended, and the rules and regulations thereunder.

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

Forward-Looking Statements

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific
activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from
those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in Item 1A under the heading Risk Factors in the Companys Annual Report on Form 10-K and in other documents
filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as may, will, should, could, expects,
plans, intends, anticipates, believes, estimates, predicts, forecasts, potential or continue, or similar terms or the negative of these
terms, or other statements concerning opinions or judgments of the Companys management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to: (a) pressures on the
earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and equity markets and the banking industry in general, (b) the financial success or changing strategies of the
Companys customers, (c) actions of government regulators, (d) the level of market interest rates, (e) weather and similar conditions, particularly the effect of hurricanes on the Companys banking and operations facilities
and on the Companys customers and the communities in which it does business, (f) changes in general economic conditions and the real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities
of our borrowers to repay their loans, and the values of loan collateral), (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against larger financial institutions in
our banking market. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements
attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligations, and does not intend, to update these forward-looking statements.

Executive Summary



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

As of September 30, 2009,
we had consolidated assets of approximately $858.7 million, total loans of approximately $573.8 million, total deposits of approximately $696.6 million and shareholders equity of approximately $87.9 million. For the three months ended
September 30, 2009, we had income available to common shareholders of $83 thousand or $0.03 basic and diluted earnings per share, compared to income available to common shareholders of $1.0 million or $0.35 basic and diluted earnings per share
for the three months ended September 30, 2008. For the nine months ended September 30, 2009, we had income available to common shareholders of $1.7 million or $0.58 basic and diluted earnings per share, compared to income available to
common shareholders of $3.2 million or $1.09 basic and diluted earnings per share for the nine months ended September 30, 2008.

Critical Accounting Policies

The Companys significant accounting policies are set forth in Note 1 to the
Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2008. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its
most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for
loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with
respect to its loan portfolio. The Companys assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known
to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for loan losses and related matters, see Asset Quality.

We also consider our determination of retirement plans and other postretirement benefit cost to be a critical accounting estimate as it
requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Our retirement plans and other post-retirement benefit
costs are actuarially determined based on assumptions on the discount rate, estimated future return on plan assets and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs
could have a material impact on our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future
benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year. For additional discussion concerning our retirement plans and other postretirement benefits refer to Note 8 to the Consolidated
Financial Statements contained in our Form 10-K Annual Report for the fiscal year ended December 31, 2008.

Comparison
of the Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2009 and 2008

Results of Operations

The following table summarizes components of income and expense and the changes in those components for the three- and
nine-month periods ended September 30, 2009 as compared to the same periods in 2008.

Condensed Consolidated Statements
of Income

(Dollars in thousands)



| |  |                            |  |                             |  |                          |  |                           
| |  | -------------------------- |  | --------------------------- |  | ------------------------ |  | --------------------------
| |  | For the Three Months Ended |  | Changes from the Prior Year |  | For the NineMonths Ended |  | Changes from thePrior
Year



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|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|-------------------------------------------------- |  | ----------------- | ------ | - | ------ | - | ------ | - |  | ------ | ----------------- |  | ------ | ------ |  | - | ------ | - |  | ----- | -
|                                                   |  | September 30,2009 |        |   | Amount |   |        | % |  |        | September 30,2009 |  | Amount |        |  | % |       
|Total interest income                              |  | $                 | 10,320 |   |        | $ | 446    |   |  | 4.5    |                   |  | $      | 30,854 |  | $ | 1,468  |   |  | 5.0   |  
|Total interest expense                             |  |                   | 3,244  |   |        |   | (1,330 | ) |  | (29.1  | )                 |  |        | 11,124 |  |   | (2,645 | ) |  | (19.2 | )
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|                                                   |  |                   |        |   |        |  
|Net interest income                                |  |                   | 7,076  |   |        |   | 1,776  |   |  | 33.5   |                   |  |        | 19,730 |  |   | 4,113  |   |  | 26.3  |  
|Provision for loan losses                          |  |                   | 2,675  |   |        |   | 2,235  |   |  | 508.0  |                   |  |        | 5,425  |  |   | 4,085  |   |  | 304.9 |  
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|Net interest income after                          |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|Provision for loan losses                          |  |                   | 4,401  |   |        |   | (459   | ) |  | (9.44  | )                 |  |        | 14,305 |  |   | 28     |   |  | 0.2   |  
|                                                   |  |                   |        |   |        |  
|Noninterest income                                 |  |                   | 1,954  |   |        |   | 89     |   |  | 4.8    |                   |  |        | 5,709  |  |   | 186    |   |  | 3.4   |  
|Noninterest expense                                |  |                   | 6,163  |   |        |   | 687    |   |  | 12.5   |                   |  |        | 17,119 |  |   | 1,345  |   |  | 8.5   |  
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|                                                   |  |                   |        |   |        |  
|Income before income taxes                         |  |                   | 192    |   |        |   | (1,057 | ) |  | (84.6  | )                 |  |        | 2,895  |  |   | (1,131 | ) |  | (28.1 | )
|Income tax provision                               |  |                   | (154   | ) |        |   | (394   | ) |  | (164.2 | )                 |  |        | 496    |  |   | (373   | ) |  | (42.9 | )
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|                                                   |  |                   |        |   |        |  
|Net income                                         |  |                   | 346    |   |        |   | (663   | ) |  | (65.7  | )                 |  |        | 2,399  |  |   | (758   | ) |  | (24.0 | )
|                                                   |  |                   |        |   |        |  
|Preferred stock dividend and accretion of discount |  |                   | 263    |   |        |   | 263    |   |  | NA     |                   |  |        | 738    |  |   | 738    |   |  | NA    |  
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  
|                                                   |  |                   |        |   |        |  
|Net income available to common shareholders        |  | $                 | 83     |   |        | $ | (926   | ) |  | (91.8  | )                 |  | $      | 1,661  |  | $ | (1,496 | ) |  | (47.4 | )
|                                                   |  |                   |        |   |        |   |        |   |  |        |                   |  |        |        |  |   |        |   |  |       |  

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on
liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended September 30, 2009 was $7.1 million, an increase of $1.8 million or 33.5% when compared to net
interest income of $5.3 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net interest income was $19.7 million, an increase of $4.1 million or 26.3% when compared to net interest income
of $15.6 million for the period in 2008

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

Interest
income increased $446 thousand or 4.5% for the three months ended September 30, 2009 compared to the same three months of 2008. Interest income increased $1.5 million or 5.0% for the nine months ended September 30, 2009 compared to the
same nine months in 2008. The increases for the three and nine months ended September 30, 2009 are due to the increase in the volume of our average earning assets which was partially offset by decreases in the rates earned on these earning
assets. The tax equivalent yield on average earning assets decreased 56 basis points for the quarter ended September 30, 2009 to 5.19% from 5.75% for the same period in 2008. For the first nine months of 2009, the yield on average earning
assets, on a tax-equivalent basis, decreased 87 basis points to 5.20% compared to 6.07% at September 30, 2008. Management attributes the decrease in the yield on our earning assets to the decrease in short-term market interest rates.
Approximately $335.4 million or 58.5% of our loan portfolio consists of variable rate loans that adjust with the movement of the Banks prime rate. As a result, composite yield



24



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##### Table of Contents

on our loans decreased approximately 54 basis points for the third quarter of 2009 compared to the third quarter of 2008 and 89 basis points for the nine-month periods ended September 30,
2009 and 2008. The increase in volume of the Banks investment portfolio during the three- and nine-month periods ended September 30, 2009 compared with the same periods of 2008 more than offset the reduction of interest income earned on
loans for the comparative periods due to a lower prime rate.

Our average cost of funds during the third quarter of 2009 was
1.90%, a decrease of 121 basis points when compared to 3.11% for the third quarter of 2008. Average rates paid on bank certificates of deposit decreased 156 basis points from 3.87% for the quarter ended September 30, 2008 to 2.31% for the
quarter ended September 30, 2009, while our average cost of borrowed funds decreased 121 basis points during the third quarter of 2009 compared to the same period in 2008. Total interest expense decreased $1.3 million or 29.1% during the third
quarter of 2009 compared to the same period in 2008, primarily the result of decreased market rates paid on these liabilities. For the nine months ended September 30, 2009, our cost of funds was 2.18% a decrease of 116 basis points when
compared to 3.34% for the same period in 2008. Average rates paid on bank certificates of deposit decreased 152 basis points from 4.22% to 2.70% for the first nine months of 2009, while our cost of borrowed funds decreased 135 basis points compared
to the same period a year ago. Total interest expense decreased $2.6 million or 19.2% during the first nine months of 2009 compared to the same period in 2008, primarily the result of decreased market rates paid on these liabilities. The volume of
average interest-bearing liabilities increased approximately $131.7 million for the first nine months of 2009 compared with the same period in 2008.

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

Margin continued to improve during the third quarter of 2009. Margins could continue to improve further over the next several months as a
result of low funding cost. We continue to experience the effect of repricing our interest-bearing liabilities at much lower rates while yields on our earning assets are remaining steady.

Our annualized net interest margin, on a tax-equivalent basis and net of the allowance for loan losses, for the three months ended
September 30, 2009 was 3.58% compared to 3.13% in the third quarter of 2008 while our net interest spread increased 65 basis points during the same period. For the nine months ended September 30, 2009, our net interest margin, on a
tax-equivalent basis and net of allowance for loan losses, was 3.36% compared to 3.28% in the first nine months of 2008 while our net interest spread increased 29 basis points.

Our funding growth year-over-year has been primarily in the form of CDs and we have experienced a decline in our percentage of transaction
accounts to total deposits. Average interest-bearing liabilities, as a percentage of interest-earning assets for the quarters ended September 30, 2009 and 2008 were 84.2% and 84.3%, respectively. For the nine months ended September 30,
2009, average interest-bearing liabilities as a percentage of interest-earning assets were 84.7% compared to 83.7% for the nine months ended September 30, 2008.

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

For the three months ended September 30, 2009 and 2008



|                   |  |                        |         |                   |      |   |                |   |                |  |                   |         |  |                |   |  |   |      
|------------------ |  | ---------------------- | ------- | ----------------- | ---- | - | -------------- | - | -------------- |  | ----------------- | ------- |  | -------------- | - |  | - | -----
|                   |  | AverageBalance         |         | 2009Yield/Rate(5) |      |   | Income/Expense |   | AverageBalance |  | 2008Yield/Rate(5) |         |  | Income/Expense
|                   |  | (Dollars in thousands)
|Assets             |  |                        |         |                   |      |   |                |   |                |  |                   |         |  |                |   |  |   |      
|Loans  net (1)    |  | $                      | 563,923 |                   | 5.49 | % |                | $ | 7,807          |  | $                 | 514,267 |  | 6.03           | % |  | $ | 7,812
|Taxable securities |  |                        | 189,796 |                   | 4.51 | % |                |   | 2,159          |  |                   | 127,083 |  | 5.18           | % |  |   | 1,659



25



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|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|----------------------------------------------------- |  | - | ------- |  | ---- | - |  | - | ------ |  | - | ------- |  | ---- | - |  | - | ------
|Non-taxable securities (2)                            |  |   | 37,044  |  | 5.74 | % |  |   | 536    |  |   | 35,217  |  | 5.63 | % |  |   | 500   
|Other investments                                     |  |   | 12,791  |  | -    | % |  |   | -      |  |   | 16,238  |  | 1.78 | % |  |   | 73    
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total interest-earning assets                         |  |   | 803,554 |  | 5.19 | % |  | $ | 10,502 |  |   | 692,805 |  | 5.75 | % |  | $ | 10,044
|Cash and due from banks                               |  |   | 11,459  |  |      |   |  |   |        |  |   | 12,818  |  |      |   |  |   |       
|Bank premises and equipment, net                      |  |   | 25,490  |  |      |   |  |   |        |  |   | 25,300  |  |      |   |  |   |       
|Other assets                                          |  |   | 24,672  |  |      |   |  |   |        |  |   | 20,417  |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total assets                                          |  | $ | 865,175 |  |      |   |  |   |        |  | $ | 751,340 |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|                                                      |  |   |         |  |      |  
|Liabilities and Shareholders Equity                  |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Interest-bearing deposits                             |  | $ | 606,512 |  | 1.95 | % |  | $ | 2,978  |  | $ | 499,628 |  | 3.17 | % |  | $ | 3,998 
|Short-term borrowings                                 |  |   | 49,343  |  | 0.76 | % |  |   | 95     |  |   | 58,163  |  | 2.65 | % |  |   | 388   
|Long-term obligations                                 |  |   | 21,000  |  | 3.23 | % |  |   | 171    |  |   | 26,000  |  | 2.87 | % |  |   | 188   
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total interest-bearing liabilities                    |  |   | 676,855 |  | 1.90 | % |  |   | 3,244  |  |   | 583,791 |  | 3.11 | % |  |   | 4,574 
|Non-interest-bearing deposits                         |  |   | 97,068  |  |      |   |  |   |        |  |   | 96,061  |  |      |   |  |   |       
|Other liabilities                                     |  |   | 4,014   |  |      |   |  |   |        |  |   | 6,690   |  |      |   |  |   |       
|Shareholders equity                                  |  |   | 87,238  |  |      |   |  |   |        |  |   | 64,798  |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total liabilities and Shareholders equity            |  | $ | 865,175 |  |      |   |  |   |        |  | $ | 751,340 |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Net interest income and net interest margin (FTE) (3) |  |   |         |  | 3.58 | % |  | $ | 7,258  |  |   |         |  | 3.13 | % |  | $ | 5,470 
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Interest rate spread (FTE) (4)                        |  |   |         |  | 3.29 | % |  |   |        |  |   |         |  | 2.64 | % |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       



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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $182 thousand and $170 thousand for periods ended September 30, 2009 and 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

|(5) | Annualized
|--- | ----------

For the nine
months ended September 30, 2009 and 2008



|                           |  |                        |         |                   |      |   |                |   |                |  |                   |         |  |                |   |  |   |       
|-------------------------- |  | ---------------------- | ------- | ----------------- | ---- | - | -------------- | - | -------------- |  | ----------------- | ------- |  | -------------- | - |  | - | ------
|                           |  | AverageBalance         |         | 2009Yield/Rate(5) |      |   | Income/Expense |   | AverageBalance |  | 2008Yield/Rate(5) |         |  | Income/Expense
|                           |  | (Dollars in thousands)
|Assets                     |  |                        |         |                   |      |   |                |   |                |  |                   |         |  |                |   |  |   |       
|Loans  net (1)            |  | $                      | 552,479 |                   | 5.52 | % |                | $ | 22,820         |  | $                 | 491,543 |  | 6.41           | % |  | $ | 23,574
|Taxable securities         |  |                        | 210,383 |                   | 4.47 | % |                |   | 7,027          |  |                   | 121,744 |  | 5.09           | % |  |   | 4,634 
|Non-taxable securities (2) |  |                        | 35,280  |                   | 5.77 | % |                |   | 1,523          |  |                   | 35,190  |  | 5.70           | % |  |   | 1,500 
|Other investments          |  |                        | 8,024   |                   | 0.03 | % |                |   | 2              |  |                   | 9,507   |  | 2.64           | % |  |   | 188   
|                           |  |                        |         |                   |      |   |                |   |                |  |                   |         |  |                |   |  |   |       



26



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##### Table of Contents

|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|----------------------------------------------------- |  | - | ------- |  | ---- | - |  | - | ------ |  | - | ------- |  | ---- | - |  | - | ------
|Total interest-earning assets                         |  |   | 806,166 |  | 5.20 | % |  | $ | 31,372 |  |   | 657,984 |  | 6.07 | % |  | $ | 29,896
|Cash and due from banks                               |  |   | 10,538  |  |      |   |  |   |        |  |   | 12,652  |  |      |   |  |   |       
|Bank premises and equipment, net                      |  |   | 25,528  |  |      |   |  |   |        |  |   | 25,067  |  |      |   |  |   |       
|Other assets                                          |  |   | 23,808  |  |      |   |  |   |        |  |   | 19,170  |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total assets                                          |  | $ | 866,040 |  |      |   |  |   |        |  | $ | 714,873 |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|                                                      |  |   |         |  |      |  
|Liabilities and Shareholders Equity                  |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Interest-bearing deposits                             |  | $ | 598,681 |  | 2.27 | % |  | $ | 10,153 |  | $ | 473,603 |  | 3.41 | % |  | $ | 12,095
|Short-term borrowings                                 |  |   | 61,370  |  | 0.94 | % |  |   | 433    |  |   | 57,906  |  | 2.86 | % |  |   | 1,237 
|Long-term obligations                                 |  |   | 22,630  |  | 3.18 | % |  |   | 538    |  |   | 19,482  |  | 3.00 | % |  |   | 437   
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total interest-bearing liabilities                    |  |   | 682,681 |  | 2.18 | % |  |   | 11,124 |  |   | 550,991 |  | 3.34 | % |  |   | 13,769
|Non-interest-bearing deposits                         |  |   | 88,959  |  |      |   |  |   |        |  |   | 90,041  |  |      |   |  |   |       
|Other liabilities                                     |  |   | 8,175   |  |      |   |  |   |        |  |   | 7,123   |  |      |   |  |   |       
|Shareholders equity                                  |  |   | 86, 225 |  |      |   |  |   |        |  |   | 66,718  |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Total liabilities and Shareholders equity            |  | $ | 866,040 |  |      |   |  |   |        |  | $ | 714,873 |  |      |   |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Net interest income and net interest margin (FTE) (3) |  |   |         |  | 3.36 | % |  | $ | 20,248 |  |   |         |  | 3.28 | % |  | $ | 16,127
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       
|Interest rate spread (FTE) (4)                        |  |   |         |  | 3.02 | % |  |   |        |  |   |         |  | 2.73 | % |  |   |       
|                                                      |  |   |         |  |      |   |  |   |        |  |   |         |  |      |   |  |   |       



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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $518 thousand and $510 thousand for periods ended September 30, 2009 and 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

|(5) | Annualized
|--- | ----------

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

Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended September 30,
2009 and 2008

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



|                           |  |                        |     |   |          |   |      |     |  |   |     |  
|-------------------------- |  | ---------------------- | --- | - | -------- | - | ---- | --- |  | - | --- | -
|                           |  | 2009 compared to 2008  |    
|                           |  | Volume (1)             |     |   | Rate (1) |   |      | Net | 
|                           |  | (Dollars in thousands) |    
|Loans                      |  | $                      | 721 |   |          | $ | (726 | )   |  | $ | (5  | )
|Taxable securities         |  |                        | 766 |   |          |   | (266 | )   |  |   | 500 |  
|Non-taxable securities (2) |  |                        | 26  |   |          |   | 10   |     |  |   | 36  |  
|Other investments          |  |                        | (8  | ) |          |   | (65  | )   |  |   | (73 | )
|                           |  |                        |     |   |          |   |      |     |  |   |     |  



27



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##### Table of Contents

|                          |  |   |       |   |  |   |        |   |  |   |        |  
|------------------------- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|Interest income           |  |   | 1,505 |   |  |   | (1,047 | ) |  |   | 458    |  
|                          |  |   |      
|Interest-bearing deposits |  |   | 690   |   |  |   | (1,710 | ) |  |   | (1,020 | )
|Short-term borrowings     |  |   | (38   | ) |  |   | (255   | ) |  |   | (293   | )
|Long-term obligations     |  |   | (38   | ) |  |   | 21     |   |  |   | (17    | )
|                          |  |   |       |   |  |   |        |   |  |   |        |  
|Interest expense          |  |   | 614   |   |  |   | (1,944 | ) |  |   | (1,330 | )
|                          |  |   |       |   |  |   |        |   |  |   |        |  
|Net interest income       |  | $ | 891   |   |  | $ | 897    |   |  | $ | 1,788  |  
|                          |  |   |       |   |  |   |        |   |  |   |        |  



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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $182 thousand and $170 thousand for periods ended September 30, 2009 and 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the nine months ended September 30, 2009 and 2008

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



|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|-------------------------- |  | ---------------------- | ----- | - | -------- | - | ------ | --- |  | - | ------ | -
|                           |  | 2009 compared to 2008  |      
|                           |  | Volume (1)             |       |   | Rate (1) |   |        | Net | 
|                           |  | (Dollars in thousands) |      
|Loans                      |  | $                      | 2,720 |   |          | $ | (3,474 | )   |  | $ | (754   | )
|Taxable securities         |  |                        | 3,167 |   |          |   | (774   | )   |  |   | 2,393  |  
|Non-taxable securities (2) |  |                        | 4     |   |          |   | 19     |     |  |   | 23     |  
|Other investments          |  |                        | (15   | ) |          |   | (171   | )   |  |   | (186   | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest income            |  |                        | 5,876 |   |          |   | (4,400 | )   |  |   | 1,476  |  
|                           |  |                        |      
|Interest-bearing deposits  |  |                        | 2,658 |   |          |   | (4,600 | )   |  |   | (1,942 | )
|Short-term borrowings      |  |                        | 49    |   |          |   | (853   | )   |  |   | (804   | )
|Long-term obligations      |  |                        | 73    |   |          |   | 29     |     |  |   | 102    |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest expense           |  |                        | 2,780 |   |          |   | (5,424 | )   |  |   | (2,644 | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Net interest income        |  | $                      | 3,096 |   |          | $ | 1,024  |     |  | $ | 4,120  |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  



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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $518 thousand and $510 thousand for periods ended September 30, 2009 and 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision
for Loan Losses

The provision for loan losses charged to operations during the three- and nine-months ended
September 30, 2009 was $2.7 million and $5.4 million, respectively. The Bank had net charge-offs of $663 thousand for the quarter ended September 30, 2009 compared to net charge-offs of $102 thousand during the third quarter of 2008. For
the nine-month periods ended September 30, 2009 and 2008, the Bank had net charge-offs of $3.6 million and $346 thousand, respectively. Net charge-offs increased mainly due to the Bank writing-down several large collateral dependent loans. A
large portion of these loans had previously been identified and reserved for in the allowance for loan loss in the previous year. Declining economic conditions, particularly in our southern coastal markets, resulted in an increased number of
impaired collateral dependant loans. As a result the bank has been very proactive in recognizing the losses associated with these loans.

We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the
adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary. Additional information regarding our allowance for loan losses is contained in this discussion under the caption Asset Quality.



28



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##### Table of Contents

Noninterest Income

Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the
three- and nine-month periods ended September 30, 2009 and 2008.



|                                      |  |                                        |       |                            |   |      |                                       |  |                            |      |  |        |       |  |   |      |   |  |       |  
|------------------------------------- |  | -------------------------------------- | ----- | -------------------------- | - | ---- | ------------------------------------- |  | -------------------------- | ---- |  | ------ | ----- |  | - | ---- | - |  | ----- | -
|                                      |  | For the ThreeMonths EndedSeptember 30, |       | Changes from thePrior Year |   |      | For the NineMonths EndedSeptember 30, |  | Changes from thePrior
Year |     
|                                      |  | 2009                                   |       | Amount                     |   |      | %                                     |  |                            | 2009 |  | Amount |       |  | % |     
|                                      |  | (Dollars in thousands)                 |      
|Service charges on deposit accounts   |  | $                                      | 932   |                            | $ | 50   |                                       |  | 5.7                        |      |  | $      | 2,724 |  | $ | 137  |   |  | 5.3   |  
|Other service charges and fees        |  |                                        | 330   |                            |   | (81  | )                                     |  | (19.7                      | )    |  |        | 947   |  |   | (138 | ) |  | (12.7 | )
|Mortgage origination brokerage fees   |  |                                        | 153   |                            |   | (54  | )                                     |  | (26.1                      | )    |  |        | 680   |  |   | (164 | ) |  | (19.4 | )
|Net gain on sale of securities        |  |                                        | 444   |                            |   | 326  |                                       |  | 276.3                      |      |  |        | 1,032 |  |   | 820  |   |  | 386.8 |  
|Income from bank owned life insurance |  |                                        | 82    |                            |   | 6    |                                       |  | 7.9                        |      |  |        | 246   |  |   | 5    |   |  | 2.1   |  
|Other operating income                |  |                                        | 13    |                            |   | (158 | )                                     |  | (92.4                      | )    |  |        | 80    |  |   | (474 | ) |  | (85.6 | )
|                                      |  |                                        |       |                            |   |      |                                       |  |                            |      |  |        |       |  |   |      |   |  |       |  
|                                      |  |                                        |       |                            |   |     
|Total noninterest income              |  | $                                      | 1,954 |                            | $ | 89   |                                       |  | 4.8                        |      |  | $      | 5,709 |  | $ | 186  |   |  | 3.4   |  
|                                      |  |                                        |       |                            |   |      |                                       |  |                            |      |  |        |       |  |   |      |   |  |       |  

Noninterest income increased $89 thousand or 4.8% to $2.0 million for the third
quarter of this year compared to $1.9 million for the same period in 2008. For the nine months ended September 30, 2009 noninterest income increased $186 thousand or 3.4% to $5.7 million compared to $5.5 million for the same period in 2008. The
increase in noninterest income in the third quarter of 2009 is primarily due to an increase in gains on the sale of securities. The year to date increase in noninterest income is also the result of gains on the sale of securities of $1.0 million in
2009 compared to $212 thousand in the nine month period ended September 30, 2008. Other service charges and fees decreased $81 thousand and $138 thousand, respectively for the three and nine months ended September 30, 2009 as compared to
the same periods in 2008. The primary reason for the decrease is that brokerage investment service fees were down during both periods. Mortgage loan origination brokerage fees decreased $54 thousand compared to the previous year three-month period
and $164 thousand for the nine months ended September 30, 2009 as compared to the same period in 2008. Other operating income decreased $158 thousand for the three-month period ended September 30, 2009 as compared to the same period in
2008 mainly due to a decline of $123 thousand in SBIC income. Other operating income decreased $474 thousand for the nine month period ending September 30, 2009. The reason for this decrease is that the nine month period ended
September 30, 2008 included a nonrecurring Visa distribution in the amount of $386 thousand. Also, there was a decline of $106 thousand in SBIC income in the nine month period ended September 30, 2009 as compared to the same period ended
September 30, 2008.

Noninterest Expense

Noninterest expense increased 12.5% and 8.5%, respectively for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The following table presents the components
of noninterest expense for the three and nine months ended September 30, 2009 and dollar and percentage changes from the prior year.



|                                       |  |                                        |       |                            |   |      |                                       |  |                            |      |  |        |       |  |   |      |   |  |       |  
|-------------------------------------- |  | -------------------------------------- | ----- | -------------------------- | - | ---- | ------------------------------------- |  | -------------------------- | ---- |  | ------ | ----- |  | - | ---- | - |  | ----- | -
|                                       |  | For the ThreeMonths EndedSeptember 30, |       | Changes from thePrior Year |   |      | For the NineMonths EndedSeptember 30, |  | Changes from thePrior Year |     
|                                       |  | 2009                                   |       | Amount                     |   |      | %                                     |  |                            | 2009 |  | Amount |       |  | % |     
|                                       |  | (Dollars in thousands)                 |      
|Salaries                               |  | $                                      | 2,061 |                            | $ | (3   | )                                     |  | (0.1                       | )    |  | $      | 6,135 |  | $ | 52   |   |  | 0.9   |  
|Retirement and other employee benefits |  |                                        | 416   |                            |   | (447 | )                                     |  | (51.8                      | )    |  |        | 1,869 |  |   | (673 | ) |  | (26.5 | )
|Occupancy                              |  |                                        | 474   |                            |   | (4   | )                                     |  | (0.8                       | )    |  |        | 1,403 |  |   | 14   |   |  | 1.0   |  



29



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##### Table of Contents

|                           |  |   |       |  |   |     |   |  |       |   |  |   |        |  |   |       |   |  |       |  
|-------------------------- |  | - | ----- |  | - | --- | - |  | ----- | - |  | - | ------ |  | - | ----- | - |  | ----- | -
|Equipment                  |  |   | 465   |  |   | 32  |   |  | 7.4   |   |  |   | 1,284  |  |   | 15    |   |  | 1.2   |  
|Professional fees          |  |   | 123   |  |   | (45 | ) |  | (26.8 | ) |  |   | 522    |  |   | 58    |   |  | 12.5  |  
|Supplies                   |  |   | 53    |  |   | (17 | ) |  | (24.3 | ) |  |   | 164    |  |   | (61   | ) |  | (27.1 | )
|Telephone                  |  |   | 168   |  |   | (9  | ) |  | (5.1  | ) |  |   | 458    |  |   | (57   | ) |  | (11.1 | )
|FDIC deposit insurance     |  |   | 306   |  |   | 208 |   |  | 212.2 |   |  |   | 1,216  |  |   | 951   |   |  | 358.9 |  
|Other operating expenses   |  |   | 2,097 |  |   | 972 |   |  | 86.4  |   |  |   | 4,068  |  |   | 1,046 |   |  | 34.6  |  
|                           |  |   |       |  |   |     |   |  |       |   |  |   |        |  |   |       |   |  |       |  
|                           |  |   |       |  |   |    
|Total noninterest expenses |  | $ | 6,163 |  | $ | 687 |   |  | 12.5  |   |  | $ | 17,119 |  | $ | 1,345 |   |  | 8.5   |  
|                           |  |   |       |  |   |     |   |  |       |   |  |   |        |  |   |       |   |  |       |  

Salary expense for the three and nine months ended September 30, 2009 decreased
$3 thousand and increased $52 thousand, respectively, compared to the same prior year periods.

Employee related benefits
expense for the three and nine months ended September 30, 2009 decreased $447 and $673 thousand, respectively, over the same prior year periods. The two main components of this decrease were supplemental employee retirement plan expense and
employee incentive expense. Supplemental employee retirement plan expense decreased $78 thousand during the third quarter of 2009 when compared to the third quarter of 2008 and decreased $226 thousand for the nine months ended September 30,
2009 compared to the first nine months of 2008. Employee incentive program expense decreased $350 thousand during the third quarter of 2009 when compared to the third quarter of 2008 and decreased $500 thousand for the nine months ended
September 30, 2009 compared to the first nine months of 2008. Incentive pay declined because certain goals set by the board under the Companys incentive plan are not expected to be met. Employee related insurance benefits increased by $13
thousand for the quarter ended September 30, 2009 compared to the same three-month period of 2008 and for the nine-month period ended September 30, 2009 employee related insurance benefits increased $66 thousand due to increased health
insurance premiums. As of September 30, 2009, we had 219 full time equivalent employees and operated 24 full service banking offices, one loan production office and one mortgage loan origination office.

Professional fees, which include consulting, audit and legal fees, decreased $45 thousand for the three months ended September 30, 2009
compared to the same period of 2008 and increased $58 thousand when compared on a year to date basis to the prior year period. The year to date increase is due to an increase in legal fees related to loans and an increase in audit fees.

FDIC deposit insurance expenses increased $208 thousand for the three months ended September 30, 2009 compared to the three months
ended September 30, 2008. For the nine-month period ended September 30, 2009, FDIC deposit insurance expense increased $951 thousand over the nine-month period ended September 30, 2008. Of this increase $405 thousand is related to the
special assessment that was levied on all banks by the FDIC.

Other operating expenses increased $972 thousand for the three
months ended September 30, 2009 compared to the three months ended September 30, 2008 as losses on other real estate owned increased $941 thousand in the current three-month period. For the nine-month period ended September 30, 2009,
other operating expenses increased $1.0 million over the nine-month period ended September 30, 2008 as losses on other real estate owned increased $948 thousand year to date.

Income Taxes

Income tax expense for the three months ended
September 30, 2009 and 2008 was $(154) thousand and $240 thousand, respectively, resulting in effective tax rates of (80.2)% and 19.2%, respectively. The effective tax rate for the quarter ended September 30, 2009 decreased and was
negative principally due to a larger percentage of tax exempt income to taxable income during the 2009 period. For the nine-month period ending September 30, 2009, tax expense was $496 thousand compared to $869 thousand for the same period of
2008, which resulted in effective tax rates of 17.1% and 21.6%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Balance Sheet



30



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##### Table of Contents

Our total assets were $858.7 million at September 30, 2009, $841.9 million at
December 31, 2008 and $767.8 million at September 30, 2008. Deposit growth primarily funded our year-over-year asset growth. For the twelve months ended September 30, 2009, we grew our loans $49.5 million or 9.4% while our deposits
grew by approximately $77.6 million or 12.5%. Year-over-year, our earning assets grew by $95.5 million through loan originations and additions to our available-for-sale investment securities portfolio. For the nine months ended September 30,
2009, we experienced increased loan demand as loans outstanding increased $35.0 million and deposits increased by $67.5 million.

Loans

As of September 30, 2009, total loans had increased to $573.8 million, up 6.5% from total loans of $538.8 million at
December 31, 2008 and up 9.4% from total loans of $524.3 million at September 30, 2008. Loan growth can be attributed to our branching efforts, the efforts of our lending team and the overall decline in interest rates for loans.

Asset Quality

At September 30, 2009, our allowance for loan losses as a percentage of loans was 1.36%, up from 1.10% at December 31, 2008. The increase in part reflects the increase in our historical loss rate as our charge-offs have increased
during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through the use of historical loss
rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and
overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are
based on a weighted average loss ratio calculation. The most recent quarters loss history is included in the model and carries the highest weight over a five year average. Current losses translate into a higher loss ratio which is further
increased by the associated risk grades within the group. The impact is to more quickly recognize and increase the loss history in a respective grouping, resulting in an increase in the allowance for that particular homogeneous group. For those
groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their
respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Banks exposure in that particular group of loans. The Bank utilizes a system of eight possible
risk ratings. The risk ratings are established based on perceived probability of loss. All loans risk rated doubtful and loss are removed from their homogeneous group and individually analyzed for impairment as detailed in
FASB ASC Topic 310. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the bank will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows
discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar
assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Banks
allowance for loan losses is not allocated to any specific category of loans. This unallocated portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the
subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance considered unallocated may fluctuate from period to period based on managements evaluation of the factors affecting the
assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. The Bank has identified an acceptable range for this unallocated portion to be 5%15% of
the total reserve.

While we believe that our management uses the best information available to determine the allowance for
loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final
determination. Because these factors and managements assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

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



31



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##### Table of Contents

The following table presents an analysis of the changes in the allowance for loan losses for
the nine months ended September 30, 2009 and 2008.

Analysis of Changes in Allowance for Loan Losses



|                                                               |  |                                        |         |   |      |   |         |  
|-------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                               |  | For the nine monthsEnded September 30, |        
|                                                               |  | 2009                                   |         |   | 2008 |  
|                                                               |  | (Dollars in thousands)                 |        
|Total loans outstanding at end of period-gross                 |  | $                                      | 573,837 |   |      | $ | 524,337 |  
|                                                               |  |                                        |         |   |      |   |         |  
|Average loans outstanding-gross                                |  | $                                      | 557,984 |   |      | $ | 496,002 |  
|                                                               |  |                                        |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |  | $                                      | 5,931   |   |      | $ | 4,083   |  
|Loans charged off:                                             |  |                                        |         |   |      |   |         |  
|Real estate                                                    |  |                                        | (3,395  | ) |      |   | (201    | )
|Installment loans                                              |  |                                        | (13     | ) |      |   | (21     | )
|Demand Deposit overdraft program                               |  |                                        | (153    | ) |      |   | (131    | )
|Commercial and all other loans                                 |  |                                        | (158    | ) |      |   | (52     | )
|                                                               |  |                                        |         |   |      |   |         |  
|Total charge-offs                                              |  |                                        | (3,719  | ) |      |   | (405    | )
|                                                               |  |                                        |         |   |      |   |         |  
|Recoveries of loans previously charged off:                    |  |                                        |         |   |      |   |         |  
|Real estate                                                    |  |                                        | -       |   |      |   | 1       |  
|Installment loans                                              |  |                                        | 5       |   |      |   | 4       |  
|Credit cards and related plans                                 |  |                                        | -       |   |      |   | 7       |  
|Demand Deposit overdraft program                               |  |                                        | 90      |   |      |   | 47      |  
|Commercial and all other loans                                 |  |                                        | 68      |   |      |   | -       |  
|                                                               |  |                                        |         |   |      |   |         |  
|Total recoveries                                               |  |                                        | 163     |   |      |   | 59      |  
|                                                               |  |                                        |         |   |      |   |         |  
|Net charge-offs                                                |  |                                        | (3,556  | ) |      |   | (346    | )
|                                                               |  |                                        |         |   |      |   |         |  
|Provision for loan losses                                      |  |                                        | 5,425   |   |      |   | 1,340   |  
|                                                               |  |                                        |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |  | $                                      | 7,800   |   |      | $ | 5,077   |  
|                                                               |  |                                        |         |   |      |   |         |  
|Ratios                                                         |  |                                        |         |   |      |   |         |  
|Annualized net charge-offs to average loans during the period  |  |                                        | 0.85    | % |      |   | 0.09    | %
|Allowance for loan losses to loans at period end               |  |                                        | 1.36    | % |      |   | 0.97    | %
|Allowance for loan losses to nonperforming loans at period end |  |                                        | 62.4    | % |      |   | 42.7    | %
|Allowance for loan losses to impaired loans at period end      |  |                                        | 34.5    | % |      |   | 32.9    | %

The ratio of annualized net charge-offs to average loans increased to 0.85% at
September 30, 2009 from 0.09% at September 30, 2008 mainly due to the Bank writing-down several large collateral dependent loans. Declining economic conditions, particularly in our southern coastal markets, resulted in an increased number
of impaired collateral dependant loans which resulted in a portion of these loans being charged-off. The increase in the allowance for loan losses to loans to 1.36% at September 30, 2009 from 0.97% at September 30, 2008 reflects the
increase in our historical loss rate as our charge-offs have increased during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. The ratio of our allowance for loan losses to nonperforming
loans increased to 62.4% as of September 30, 2009 compared to 42.7% at September 30, 2008. The increase is the result of our allowance increasing approximately 54% year over year while our nonperforming loans have only increased
approximately 5% year over year.

Construction, land and development (CLD) loans make up 22.2% of the Banks
loan portfolio. This sector of the economy has been particularly impacted by declines in housing activity, and has had a disproportionate impact on the credit quality of the Company. The table below shows trends of CLD loans, along with ratios
relating to their relative credit quality.



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|                               |  |           |         |   |                 |      |   |         |   |         |            |  |      |       |  |   |         |  
|------------------------------ |  | --------- | ------- | - | --------------- | ---- | - | ------- | - | ------- | ---------- |  | ---- | ----- |  | - | ------- | -
|                               |  | CLD Loans |         |   | All Other Loans |      |   | Total   |  
|Dollars in thousands           |  | Balance   |         |   | % of Total      |      |   | Balance |   |         | % of Total |  |      | Loans | 
|Balances at September 30, 2009 |  | $         | 127,554 |   |                 | 22.2 | % |         | $ | 446,283 |            |  | 77.8 | %     |  | $ | 573,837 |  
|Impaired loans                 |  |           | 8,842   |   |                 | 39.2 | % |         |   | 13,731  |            |  | 60.8 | %     |  |   | 22,573  |  
|Allocated Reserves             |  |           | 3,858   |   |                 | 49.5 | % |         |   | 3,942   |            |  | 50.5 | %     |  |   | 7,800   |  
|YTD Net Charge-offs            |  |           | 2,980   |   |                 | 83.8 | % |         |   | 576     |            |  | 16.2 | %     |  |   | 3,556   |  
|Nonperforming loans (NPL)      |  |           | 7,347   |   |                 | 58.7 | % |         |   | 5,177   |            |  | 41.3 | %     |  |   | 12,524  |  
|NPL as % of loans              |  |           | 5.8     | % |                 |      |   |         |   | 1.2     | %          |  |      |       |  |   | 2.2     | %

While balances of CLD loans make up 22.2% of the Banks loan portfolio, they
represent 39.2% and 83.8% of the Banks impaired loans and YTD net charge-offs, respectively. CLD loans represent 58.7% of the Banks nonperforming loans and 49.5% of the Banks allowance for loan loss is allocated to CLD loans.

Nonperforming Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of
principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period.
Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both
principal and interest and when the collectability of principal or interest is no longer doubtful. Nonperforming assets were $18.5 million and $13.7 million, or 3.22% and 2.54% of loans outstanding at September 30, 2009 and December 31,
2008, respectively. Declining economic conditions, particularly in our southern coastal markets, resulted in an increased number of nonperforming assets. On September 30, 2009, our nonperforming loans (consisting of nonaccruing and restructured
loans) amounted to approximately $12.5 million compared to $10.0 million as of December 31, 2008. We had $6.0 million in other real estate owned and repossessions at September 30, 2009 compared to $3.7 million at December 31, 2008. On
October 10, 2009 the Bank sold other real estate owned property for $2.3 million in gross proceeds. The sales must be closed in 45 days from sales date and the Bank anticipates receiving $2.0 million in net proceeds. The carrying value of the
property at September 30, 2009 was approximately $2.0 million.

Loans Considered Impaired under SFAS No. 114

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment under FASB ASC Topic 310. At
September 30, 2009, we had loans totaling $22.6 million (which includes $12.2 million in nonperforming loans) which were considered to be impaired under FASB ASC Topic 310 compared to $16.5 million at December 31, 2008. Loans are
considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However,
treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans may include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that
a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a
loss is probable on an impaired loan, a portion of our reserve is allocated to that probable loss.

The following table sets
forth the number and volume of loans considered impaired under FASB ASC Topic 310 and their associated reserve allocation, if any, at September 30, 2009.



| |  |                |  |                         |  |                  
| |  | -------------- |  | ----------------------- |  | -----------------
| |  | Numberof Loans |  | LoanBalancesOutstanding |  | AllocatedReserves



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##### Table of Contents

|                                             |  |                       |  |   |      |  |   |    
|-------------------------------------------- |  | --------------------- |  | - | ---- |  | - | ---
|                                             |  | (Dollars in millions)
|Non-accrual loans                            |  | 36                    |  | $ | 12.2 |  | $ | 1.4
|Restructured loans                           |  | 1                     |  |   | -    |  |   | -  
|                                             |  |                       |  |   |      |  |   |    
|Total nonperforming loans                    |  | 37                    |  | $ | 12.2 |  | $ | 1.4
|                                             |  |                       |  |   |      |  |   |    
|Other impaired loans with allocated reserves |  | 13                    |  |   | 5.8  |  |   | 0.7
|Impaired loans without allocated reserves    |  | 13                    |  |   | 4.6  |  |   | -  
|                                             |  |                       |  |   |      |  |   |    
|Total impaired loans                         |  | 63                    |  | $ | 22.6 |  | $ | 2.1
|                                             |  |                       |  |   |      |  |   |    

Investment Securities and Other Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing
a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and
supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: held-to-maturity and available-for-sale. Currently, none of our investments are
classified as held-to-maturity.

Our investment securities totaled $218.6 million at September 30, 2009, $239.7 million
at December 31, 2008 and $154.1 million at September 30, 2008. The increase in investment securities of $64.5 million or 41.9% when compared to September 30, 2008 is principally due to leverage strategies implemented to take advantage
of favorable spreads between yields on securities and borrowing cost from the Federal Home Loan Bank. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to
satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity
needs.

Subsequent to September 30, 2009, we sold approximately $53 million of our mortgage-backed securities to reduce
price volatility within the investment portfolio and realized a gain of approximately $1.5 million which will be recognized in the fourth quarter.

At September 30, 2009, the securities portfolio had unrealized net gains of approximately $3.0 million, which are reported in accumulated other comprehensive income on the consolidated statement of
shareholders equity, net of tax. Our securities portfolio at September 30, 2009 consisted of U.S. government sponsored agency securities, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), corporate bonds,
equity securities and tax-exempt municipal securities.

We currently have the ability to hold our available-for-sale
investment securities to maturity except for equity securities. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of September 30, 2009, we owned
securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our common shareholders equity. As of September 30, 2009 the amortized cost and market value of the securities from such issuers were as
follows:



|                                         |  |                        |        |             |   |       
|---------------------------------------- |  | ---------------------- | ------ | ----------- | - | ------
|                                         |  | Amortized Cost         |        | MarketValue
|                                         |  | (Dollars in thousands)
|Federal National Mortgage Corporation    |  | $                      | 63,668 |             | $ | 65,493
|Federal Home Loan Mortgage Corporation   |  |                        | 35,748 |             |   | 36,605
|Federal Home Loan Banks                  |  |                        | 15,489 |             |   | 15,567
|Government National Mortgage Association |  |                        | 30,723 |             |   | 31,707
|Federal Farm Credit Banks                |  |                        | 7,826  |             |   | 7,898 
|Small Business Administration            |  |                        | 13,849 |             |   | 13,916

At September 30, 2009, we held $8.6 million in bank owned life insurance,
compared to $8.3 million at both December 31, 2008 and September 30, 2008.



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Deposits and Other Borrowings

Deposits

Deposits totaled $696.6 million as of September 30,
2009 compared to deposits of $629.2 million at December 31, 2008 and $619.0 million at September 30, 2008, which reflects a year-over-year increase of 12.5%. We attribute our deposit growth during the nine months and twelve months ended
September 30, 2009 to an increase in wholesale time deposits. We believe that we can improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us. We anticipate
that our deposits will continue to increase during 2009.

Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the FHLB) having
maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $47.0 million at September 30, 2009, compared to $57.7 million on December 31, 2008, a net decrease of $10.7 million.

The following table details the maturities and rates of our borrowings from the Federal Home Loan Bank of Atlanta
(FHLB), as of September 30, 2009.



|                       |  |            |  |           |  |         |  |      |  |                  
|---------------------- |  | ---------- |  | --------- |  | ------- |  | ---- |  | -----------------
|Borrow Date            |  | Type       |  | Principal |  | Term    |  | Rate |  | Maturity         
|(Dollars in thousands)
|September 3, 2009      |  | Fixed rate |  | 5,000     |  | 1 month |  | 0.40 |  | October 2, 2009  
|September 17, 2009     |  | Fixed rate |  | 25,000    |  | 1 month |  | 0.36 |  | October 19, 2009 
|March 12, 2008         |  | Fixed rate |  | 5,000     |  | 2 years |  | 2.56 |  | March 12, 2010   
|March 12, 2008         |  | Fixed rate |  | 6,500     |  | 3 years |  | 2.89 |  | March 14, 2011   
|February 29, 2008      |  | Fixed rate |  | 5,000     |  | 4 years |  | 3.18 |  | February 29, 2012
|March 12, 2008         |  | Fixed rate |  | 2,000     |  | 4 years |  | 3.25 |  | March 12, 2012   
|March 12, 2008         |  | Fixed rate |  | 7,500     |  | 5 years |  | 3.54 |  | March 12, 2013   



|                  |  |   |        |  |  |  |                 |  |      |  
|----------------- |  | - | ------ |  |  |  | --------------- |  | ---- | -
|Total Borrowings: |  | $ | 56,000 |  |  |  | Composite rate: |  | 1.63 | %

Long-Term Obligations

Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowing from the FHLB totaled
$21.0 million on September 30, 2009, compared to $26.0 million of FHLB advances on both December 31, 2008 and September 30, 2008. The decrease of $5.0 million in long-term FHLB advances as of September 30, 2009, is the result of
an FHLB advance being reclassified to short-term borrowing because the current time to maturity is less than a year.

Liquidity

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

Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using a core of local
deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by FHLB advances and a modest amount of brokered deposits, have been adequate to fund loan demand in our market areas, while
maintaining the desired level of immediate liquidity and an investment



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securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and,
additionally, institutional deposits obtained through the Internet.

We are a member of the FHLB. Membership, along with a
blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $171.9 million, $168.6 million and $153.6 million of advances
from the FHLB at September 30, 2009, December 31, 2008 and September 30, 2008, respectively. At September 30, 2009, we had outstanding FHLB advances totaling $56.0 million compared to $60.0 million at both December 31,
2008 and September 30, 2008.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our
outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At September 30, 2009, we owned 51,160 shares of the FHLBs $100
par value capital stock, compared to 38,591 shares at both December 31, 2008 and September 30, 2008. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $36.0 million available to us at September 30, 2009 under which we
can borrow funds to meet short-term liquidity needs. At September 30, 2009, we had no borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain
the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.

Net cash provided by
operations during the nine months ended September 30, 2009 totaled $5.1 million, compared to net cash provided by operations of $4.4 million for the same period in 2008. Net cash used in investing activities totaled $73.1 million for the nine
months ended September 30, 2009, as compared to $107.2 million for the same period in 2008. Net cash provided by financing activities was $67.5 million for the first nine months of 2009, compared to net cash provided of $118.7 million for the
same period in 2008. Cash and cash equivalents at September 30, 2009 were $16.4 million compared to $37.9 million at September 30, 2008.

Capital Resources

Shareholders Equity

As of September 30, 2009, our total shareholders equity was $87.9 million (consisting of common shareholders equity of $70.8
million and preferred stock of $17.1 million) compared with total shareholders equity of $67.9 million as of December 31, 2008 (consisting of common shareholders equity of $67.9 million and no preferred stock). On January 16,
2009, the Company entered into an agreement with the United States Department of the Treasury (Treasury). The Company issued and sold to the Treasury 17,949 shares of the Companys Series A Preferred Stock. The preferred stock calls
for cumulative dividends at a rate of 5% per year for the first five years, and at a rate of 9% per year in following years. The Company also issued a warrant to purchase 144,984 shares of the Companys common stock. The Company
received $17,949,000 in cash.

Common shareholders equity increased by approximately $2.9 million to $70.8 million at
September 30, 2009 from $67.9 million at December 31, 2008. We generated net income of $2.4 million, experienced an increase in net unrealized gains on available-for-sale securities of $1.7 million and recognized stock based compensation
of $74 thousand on incentive stock awards. We declared cash dividends of $1.6 million on our common shares or $0.5475 per share during the first nine months of 2009 and dividends of $521 thousand on preferred shares.

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



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calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other
factors.

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated
basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of September 30, 2009, we and the Bank met all capital
adequacy requirements to which we are subject.

During the first nine months of 2009, we experienced an increase in our
capital ratios when compared to the periods ending December 31, 2008 and September 30, 2008. This increase is primarily due to the preferred stock issued in January 2009.

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

Our and the Banks actual capital ratios are presented in the following
table:



|                                         |  |                                                                    |   |  |                                                   |   |  |          |   |  |             |  
|---------------------------------------- |  | ------------------------------------------------------------------ | - |  | ------------------------------------------------- | - |  | -------- | - |  | ----------- | -
|                                         |  | To be well capitalizedunder promptcorrective actionprovisionsRatio |   |  | Minimum requiredfor capitaladequacy purposesRatio |   |  | OurRatio |   |  | BanksRatio |  
|As of September 30, 2009:                |  |                                                                    |   |  |                                                   |   |  |          |   |  |             |  
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Average Assets)       |  | 3   5.00                                                           | % |  | 3 3.00                                            | % |  | 9.81     | % |  | 7.74        | %
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Risk Weighted Assets) |  | 3   6.00                                                           | % |  | 3 4.00                                            | % |  | 13.16    |   |  | 10.39       |  
|                                         |  |                                                                    |   | 
|Total Capital (to Risk Weighted Assets)  |  | 3 10.00                                                            | % |  | 3 8.00                                            | % |  | 14.37    |   |  | 11.60       |  
|                                         |  |                                                                    |   | 
|As of December 31, 2008:                 |  |                                                                    |   |  |                                                   |   |  |          |   |  |             |  
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Average Assets)       |  | 3   5.00                                                           | % |  | 3 3.00                                            | % |  | 8.65     | % |  | 8.65        | %
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Risk Weighted Assets) |  | 3   6.00                                                           | % |  | 3 4.00                                            | % |  | 10.83    |   |  | 10.83       |  
|                                         |  |                                                                    |   | 
|Total Capital (to Risk Weighted Assets)  |  | 3 10.00                                                            | % |  | 3 8.00                                            | % |  | 11.80    |   |  | 11.80       |  
|                                         |  |                                                                    |   | 
|As of September 30, 2008:                |  |                                                                    |   |  |                                                   |   |  |          |   |  |             |  
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Average Assets)       |  | 3   5.00                                                           | % |  | 3 3.00                                            | % |  | 9.00     | % |  | 9.00        | %
|                                         |  |                                                                    |   | 
|Tier 1 Capital (to Risk Weighted Assets) |  | 3   6.00                                                           | % |  | 3 4.00                                            | % |  | 11.30    |   |  | 11.30       |  
|                                         |  |                                                                    |   | 
|Total Capital (to Risk Weighted Assets)  |  | 3 10.00                                                            | % |  | 3 8.00                                            | % |  | 12.15    |   |  | 12.15       |  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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



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

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk
sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31,
2008.

Item 4. Controls and Procedures

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

We review our disclosure controls and procedures,
including our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change
in our internal control over financial reporting was identified that occurred during the quarterly period ended September 30, 2009, and that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information



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##### Table of Contents

None.

Item 6. Exhibits

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



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SIGNATURES

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



|                       |  |  |  |                   |  |                                                  
|---------------------- |  |  |  | ----------------- |  | -------------------------------------------------
|                       |  |  |  | ECB BANCORP, INC.
|                       |  |  |  | (Registrant)     
|                       |  |  | 
|Date: November 9, 2009 |  |  |  | By:               |  | /S/    A. DWIGHT
UTZ                             
|                       |  |  |  |                   |  | A. Dwight Utz                                    
|                       |  |  |  |                   |  | President and Chief Executive Officer            
|                       |  |  | 
|Date: November 9, 2009 |  |  |  | By:               |  | /S/    GARY M.
ADAMS                             
|                       |  |  |  |                   |  | Gary M. Adams                                    
|                       |  |  |  |                   |  | Senior Vice President and Chief Financial Officer



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EXHIBIT INDEX



|              |  |                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                       
|              | 
|10.01         |  | Employment Agreement between the Bank and A. Dwight Utz (incorporated by reference from Exhibits to Registrants Current Report on Form 8-K dated August 26,
2009)
|              | 
|10.02         |  | Restricted Stock Award Agreement between Registrant and A. Dwight Utz (filed herewith)                                                                            
|              | 
|31.01         |  | Certification of Chief Executive Officer required by Rule 13a-14(a) (furnished herewith)                                                                          
|              | 
|31.02         |  | Certification of Chief Financial Officer required by Rule 13a-14(a) (furnished herewith)                                                                          
|              | 
|32.01         |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)                                                                  
|              | 
|32.02         |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)                                                                  



41