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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 June 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 August 6, 2009, there were 2,844,489 outstanding shares of Registrants common stock.

This Form 10-Q has 44
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 June 30, 2009 (unaudited) and December 31, 2008                                     |  | 3            
|Consolidated Income Statements for Three and Six Months Ended June 30, 2009 and 2008 (unaudited)                   |  | 4            
|Consolidated Statements of Changes in Shareholders Equity for Six Months Ended June 30, 2009 and 2008
(unaudited) |  | 5            
|Consolidated Statements of Cash Flows for Six Months Ended June 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                                                                                    |  | 37           
|                                                                                                                   | 
|Part II  Other Information                                                                                        |  |              
|Item 1. Legal Proceedings                                                                                          |  | 37           
|Item 1A. Risk Factors                                                                                              |  | 37           
|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                                                                                                   |  | 38           
|Signatures                                                                                                         |  | 39           
|Exhibit Index                                                                                                      |  | 40           
|EX- 31.1                                                                                                           |  | 41           
|EX- 31.2                                                                                                           |  | 42           
|EX- 32.1                                                                                                           |  | 43           
|EX- 32.2                                                                                                           |  | 44           



2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2009
and December 31, 2008

(Dollars in thousands, except per share data)



|                                                                                                                         |  |              |            |   |                   |   |            |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                         |  | June 30,2009 |            |   | December 31,2008* |  
|                                                                                                                         |  | (unaudited)  |            |   |                   |  
|Assets                                                                                                                   |  |              |            |   |                   |   |            |  
|Non-interest bearing deposits and cash                                                                                   |  | $            | 13,688     |   |                   | $ | 15,897     |  
|Interest bearing deposits                                                                                                |  |              | 895        |   |                   |   | 902        |  
|Overnight investments                                                                                                    |  |              | 10,645     |   |                   |   |           |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total cash and cash equivalents                                                                                          |  |              | 25,228     |   |                   |   | 16,799     |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Investment securities                                                                                                    |  |              |            |   |                   |   |            |  
|Available-for-sale, at market value (cost of $231,683 and $237,638 at June 30, 2009 and December 31, 2008,
respectively) |  |              | 232,521    |   |                   |   | 239,709    |  
|                                                                                                                         |  |             
|Loans                                                                                                                    |  |              | 566,601    |   |                   |   | 538,836    |  
|Allowance for loan losses                                                                                                |  |              | (5,787     | ) |                   |   | (5,931     | )
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Loans, net                                                                                                               |  |              | 560,814    |   |                   |   | 532,905    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Real estate and repossessions acquired in settlement of loans, net                                                       |  |              | 7,200      |   |                   |   | 3,724      |  
|Federal Home Loan Bank common stock, at cost                                                                             |  |              | 5,116      |   |                   |   | 3,859      |  
|Bank premises and equipment, net                                                                                         |  |              | 25,340     |   |                   |   | 25,737     |  
|Accrued interest receivable                                                                                              |  |              | 4,577      |   |                   |   | 4,663      |  
|Bank owned life insurance                                                                                                |  |              | 8,511      |   |                   |   | 8,347      |  
|Other assets                                                                                                             |  |              | 8,158      |   |                   |   | 6,108      |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total                                                                                                                    |  | $            | 877,465    |   |                   | $ | 841,851    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Liabilities and Shareholders Equity                                                                                     |  |              |            |   |                   |   |            |  
|Deposits                                                                                                                 |  |              |            |   |                   |   |            |  
|Demand, noninterest bearing                                                                                              |  | $            | 96,023     |   |                   | $ | 90,197     |  
|Demand, interest bearing                                                                                                 |  |              | 115,738    |   |                   |   | 99,011     |  
|Savings                                                                                                                  |  |              | 18,341     |   |                   |   | 16,882     |  
|Time                                                                                                                     |  |              | 473,365    |   |                   |   | 423,062    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total deposits                                                                                                           |  |              | 703,467    |   |                   |   | 629,152    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Payable, settlement for securities purchased                                                                             |  |              |           |   |                   |   | 53,426     |  
|Accrued interest payable                                                                                                 |  |              | 1,646      |   |                   |   | 2,889      |  
|Short-term borrowings                                                                                                    |  |              | 60,191     |   |                   |   | 57,716     |  
|Long-term obligations                                                                                                    |  |              | 21,000     |   |                   |   | 26,000     |  
|Other liabilities                                                                                                        |  |              | 5,369      |   |                   |   | 4,725      |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total liabilities                                                                                                        |  |              | 791,673    |   |                   |   | 773,908    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Shareholders equity                                                                                                     |  |              |            |   |                   |   |            |  
|Preferred stock, Series A                                                                                                |  |              | 17,041     |   |                   |   |           |  
|Common stock, par value $3.50 per share                                                                                  |  |              | 9,956      |   |                   |   | 9,956      |  
|Capital surplus                                                                                                          |  |              | 25,746     |   |                   |   | 25,707     |  
|Warrant                                                                                                                  |  |              | 878        |   |                   |   |           |  
|Retained earnings                                                                                                        |  |              | 31,676     |   |                   |   | 31,026     |  
|Accumulated other comprehensive income                                                                                   |  |              | 495        |   |                   |   | 1,254      |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total shareholders equity                                                                                               |  |              | 85,792     |   |                   |   | 67,943     |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|Total                                                                                                                    |  | $            | 877,465    |   |                   | $ | 841,851    |  
|                                                                                                                         |  |              |            |   |                   |   |            |  
|                                                                                                                         |  |             
|Common shares outstanding                                                                                                |  |              | 2,844,489  |   |                   |   | 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 six months ended June 30, 2009 and 2008

(Dollars in thousands, except per share data)



|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|--------------------------------------------------- | ---- | -------------------------- | --------- | ------------------------ | ---- | ----------- | ---- | ----------- | --------- |  | - | ---------
|                                                    |      | Three months endedJune 30, |           | Six months endedJune 30,
|                                                    | 2009 |                            | 2008      |                          | 2009 |             | 2008
|                                                    |      | (unaudited)                |           | (unaudited)              |      | (unaudited) |      | (unaudited)
|Interest income:                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Interest and fees on loans                          |      | $                          | 7,666     |                          | $    | 7,805       |      | $           | 15,013    |  | $ | 15,762   
|Interest on investment securities:                  |      |                            |           |                          |      |             |      |             |           |  |   |          
|Interest exempt from federal income taxes           |      |                            | 332       |                          |      | 326         |      |             | 651       |  |   | 660      
|Taxable interest income                             |      |                            | 2,307     |                          |      | 1,565       |      |             | 4,837     |  |   | 2,824    
|Dividend income                                     |      |                            |          |                          |      | 87          |      |             | 30        |  |   | 151      
|Other interest income                               |      |                            |          |                          |      | 45          |      |             | 3         |  |   | 115      
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Total interest income                               |      |                            | 10,305    |                          |      | 9,828       |      |             | 20,534    |  |   | 19,512   
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Interest expense:                                   |      |                            |           |                          |      |             |      |             |           |  |   |          
|Deposits:                                           |      |                            |           |                          |      |             |      |             |           |  |   |          
|Demand accounts                                     |      |                            | 199       |                          |      | 185         |      |             | 385       |  |   | 481      
|Savings                                             |      |                            | 11        |                          |      | 22          |      |             | 22        |  |   | 45       
|Time                                                |      |                            | 3,173     |                          |      | 3,668       |      |             | 6,768     |  |   | 7,571    
|Short-term borrowings                               |      |                            | 112       |                          |      | 406         |      |             | 308       |  |   | 849      
|Long-term obligations                               |      |                            | 168       |                          |      | 200         |      |             | 367       |  |   | 249      
|Other interest expense                              |      |                            |          |                          |      |            |      |             | 30        |  |   |         
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Total interest expense                              |      |                            | 3,663     |                          |      | 4,481       |      |             | 7,880     |  |   | 9,195    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|                                                    |      |                            |           |                         
|Net interest income                                 |      |                            | 6,642     |                          |      | 5,347       |      |             | 12,654    |  |   | 10,317   
|Provision for loan losses                           |      |                            | 2,000     |                          |      | 570         |      |             | 2,750     |  |   | 900      
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Net interest income after provision for loan losses |      |                            | 4,642     |                          |      | 4,777       |      |             | 9,904     |  |   | 9,417    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|                                                    |      |                            |           |                         
|Noninterest income:                                 |      |                            |           |                          |      |             |      |             |           |  |   |          
|Service charges on deposit accounts                 |      |                            | 916       |                          |      | 859         |      |             | 1,792     |  |   | 1,705    
|Other service charges and fees                      |      |                            | 350       |                          |      | 405         |      |             | 617       |  |   | 674      
|Mortgage origination brokerage fees                 |      |                            | 236       |                          |      | 330         |      |             | 527       |  |   | 637      
|Net gain on sale of securities                      |      |                            | 183       |                          |      | 19          |      |             | 588       |  |   | 94       
|Income from bank owned life insurance               |      |                            | 82        |                          |      | 76          |      |             | 164       |  |   | 165      
|Other operating income                              |      |                            | 25        |                          |      | 38          |      |             | 67        |  |   | 450      
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Total noninterest income                            |      |                            | 1,792     |                          |      | 1,727       |      |             | 3,755     |  |   | 3,725    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|                                                    |      |                            |           |                         
|Noninterest expenses:                               |      |                            |           |                          |      |             |      |             |           |  |   |          
|Salaries                                            |      |                            | 2,005     |                          |      | 1,983       |      |             | 4,074     |  |   | 4,019    
|Retirement and other employee benefits              |      |                            | 702       |                          |      | 847         |      |             | 1,453     |  |   | 1,679    
|Occupancy                                           |      |                            | 449       |                          |      | 459         |      |             | 929       |  |   | 911      
|Equipment                                           |      |                            | 431       |                          |      | 414         |      |             | 819       |  |   | 836      
|Professional fees                                   |      |                            | 102       |                          |      | 86          |      |             | 399       |  |   | 296      
|Supplies                                            |      |                            | 55        |                          |      | 73          |      |             | 111       |  |   | 155      
|Telephone                                           |      |                            | 138       |                          |      | 161         |      |             | 290       |  |   | 338      
|FDIC insurance                                      |      |                            | 655       |                          |      | 91          |      |             | 910       |  |   | 167      
|Other operating expenses                            |      |                            | 947       |                          |      | 994         |      |             | 1,971     |  |   | 1,964    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Total noninterest expenses                          |      |                            | 5,484     |                          |      | 5,108       |      |             | 10,956    |  |   | 10,365   
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Income before income taxes                          |      |                            | 950       |                          |      | 1,396       |      |             | 2,703     |  |   | 2,777    
|Income taxes                                        |      |                            | 150       |                          |      | 294         |      |             | 650       |  |   | 629      
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Net income                                          |      |                            | 800       |                          |      | 1,102       |      |             | 2,053     |  |   | 2,148    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Preferred stock dividends                           |      |                            | 224       |                          |      |            |      |             | 406       |  |   |         
|Accretion of discount                               |      |                            | 44        |                          |      |            |      |             | 69        |  |   |         
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Income available to common shareholders             |      | $                          | 532       |                          | $    | 1,102       |      | $           | 1,578     |  | $ | 2,148    
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|                                                    |      |                            |           |                         
|Net income per sharebasic                          |      | $                          | 0.19      |                          | $    | 0.38        |      | $           | 0.55      |  | $ | 0.74     
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Net income per sharediluted                        |      | $                          | 0.19      |                          | $    | 0.38        |      | $           | 0.55      |  | $ | 0.74     
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Weighted average shares outstandingbasic           |      |                            | 2,844,489 |                          |      | 2,891,931   |      |             | 2,843,260 |  |   | 2,901,775
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          
|Weighted average shares outstandingdiluted         |      |                            | 2,846,359 |                          |      | 2,897,399   |      |             | 2,844,904 |  |   | 2,906,954
|                                                    |      |                            |           |                          |      |             |      |             |           |  |   |          



4



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Six months ended June 30, 2009 and 2008

(Dollars in thousands, except per share data)



|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ------------ | --------- | - | ----------- | - | ------ | ------- |  | - | -------- | - |  | ----------------------------- | ------ | - | ------------- | - | ------ | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                             |  | Preferredstock, |        |   | Common Stock |           |   | Commonstock |   |        | Capital |  |   | Retained |   |  | Accumulatedothercomprehensive |        |   | Comprehensive |   |        |        | 
|                                                                                             |  | Series A        |        |   | Number       |           |   | Amount      |   |        | warrant |  |   | 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 $1,234                                         |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   | (1,970 | ) |  | $ | (1,970 | ) |  |   | (1,970 | )
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Net income                                                                                   |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   | 2,148  |        |  |   |        |   |  |   | 2,148  |   |  |   | 2,148  |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                   |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  | $ | 178    |   |  |   |        |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Stock options exercised                                                                      |  |                 |        |   |              |          |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |       |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Stock based compensation                                                                     |  |                 |        |   |              |           |   |             |   | 38     |         |  |   |          |   |  |                               | 61     |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   | 99     |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Repurchase of common stock                                                                   |  |                 |        |   |              | (34,373   | ) |             |   | (120   | )       |  |   |          |   |  |                               | (746   | ) |               |   |        |        |  |   |        |   |  |   |        |   |  |   | (866   | )
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Issuance of restricted stock                                                                 |  |                 |        |   |              | 2,500     |   |             |   | 9      |         |  |   |          |   |  |                               | (9     | ) |               |   |        |        |  |   |        |   |  |   |        |   |  |   |       |  
|Cash dividends ($0.365 per share)                                                            |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   | (1,059 | )      |  |   |        |   |  |   |        |   |  |   | (1,059 | )
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|Balance June 30, 2008                                                                        |  | $               |       |   |              | 2,888,896 |   |             | $ | 10,111 |         |  | $ |         |   |  | $                             | 26,332 |   |               | $ | 30,801 |        |  | $ | (2,438 | ) |  |   |        |   |  | $ | 64,806 |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                             |  |                 |        |   |              |           |   |            
|                                                                                             |  | Preferredstock, |        |   | Common Stock |           |   | Commonstock |   |        | Capital |  |   | Retained |   |  | Accumulatedothercomprehensive |        |   | Comprehensive |   |        |        | 
|                                                                                             |  | Series A        |        |   | Number       |           |   | Amount      |   |        | warrant |  |   | surplus  |   |  | earnings                      |        |   | income        |   |        | income |  |   | Total  |  
|Balance January 1, 2009                                                                      |  | $               |       |   |              | 2,844,489 |   |             | $ | 9,956  |         |  | $ |         |   |  | $                             | 25,707 |   |               | $ | 31,026 |        |  | $ | 1,254  |   |  |   |        |   |  | $ | 67,943 |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Unrealized loss, net of income tax benefit of $ 475                                          |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   | (759   | ) |  | $ | (759   | ) |  |   | (759   | )
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Net income                                                                                   |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   | 2,053  |        |  |   |        |   |  |   | 2,053  |   |  |   | 2,053  |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                   |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  | $ | 1,294  |   |  |   |        |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|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                                                                     |  |                 |        |   |              |           |   |             |   |       |         |  |   |          |   |  |                               | 39     |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   | 39     |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Preferred stock accretion                                                                    |  |                 | 69     |   |              |          |   |             |   |       |         |  |   |          |   |  |                               |       |   |               |   | (69    | )      |  |   |        |   |  |   |        |   |  |   |       |  
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Cash dividends on preferred stock                                                            |  |                 |        |   |              |          |   |             |   |        |         |  |   |          |   |  |                               |       |   |               |   | (296   | )      |  |   |        |   |  |   |        |   |  |   | (296   | )
|                                                                                             |  |                 |        |   |              |           |   |             |  
|Cash dividends ($0.365 per share)                                                            |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   | (1,038 | )      |  |   |        |   |  |   |        |   |  |   | (1,038 | )
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  
|Balance June 30, 2009                                                                        |  | $               | 17,041 |   |              | 2,844,489 |   |             | $ | 9,956  |         |  | $ | 878      |   |  | $                             | 25,746 |   |               | $ | 31,676 |        |  | $ | 495    |   |  |   |        |   |  | $ | 85,792 |  
|                                                                                             |  |                 |        |   |              |           |   |             |   |        |         |  |   |          |   |  |                               |        |   |               |   |        |        |  |   |        |   |  |   |        |   |  |   |        |  



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six
months ended June 30, 2009 and 2008

(Dollar amounts in thousands)



|                                                                                                                      |      |                           |          |      |             |   |          |  
|--------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | -------- | ---- | ----------- | - | -------- | -
|                                                                                                                      |      | Six months ended June 30, |         
|                                                                                                                      | 2009 |                           |          | 2008 |            
|                                                                                                                      |      | (unaudited)               |          |      | (unaudited) |  
|Cash flows from operating activities:                                                                                 |      |                           |          |      |             |   |          |  
|Net income                                                                                                            |      | $                         | 2,053    |      |             | $ | 2,148    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |      |                           |          |      |             |   |          |  
|Depreciation                                                                                                          |      |                           | 676      |      |             |   | 650      |  
|Amortization of premium on investment securities, net                                                                 |      |                           | 489      |      |             |   | 51       |  
|Provision for loan losses                                                                                             |      |                           | 2,750    |      |             |   | 900      |  
|Gain on sale of securities                                                                                            |      |                           | (588     | )    |             |   | (94      | )
|Stock based compensation                                                                                              |      |                           | 39       |      |             |   | 99       |  
|Impairment on equity investment                                                                                       |      |                           |         |      |             |   | 67       |  
|(Increase) decrease in accrued interest receivable                                                                    |      |                           | 86       |      |             |   | (8       | )
|Loss on disposal of premises and equipment                                                                            |      |                           | 7        |      |             |   | 11       |  
|Loss on sale of real estate and repossessions acquired in settlement of loans                                         |      |                           | 43       |      |             |   |         |  
|Income from Bank owned life insurance                                                                                 |      |                           | (164     | )    |             |   | (165     | )
|Increase in other assets                                                                                              |      |                           | (2,050   | )    |             |   | (2,605   | )
|(Decrease) increase in accrued interest payable                                                                       |      |                           | (1,243   | )    |             |   | 564      |  
|Increase in other liabilities, net                                                                                    |      |                           | 1,118    |      |             |   | 749      |  
|                                                                                                                      |      |                           |          |      |             |   |          |  
|Net cash provided by operating activities                                                                             |      |                           | 3,216    |      |             |   | 2,367    |  
|                                                                                                                      |      |                           |          |      |             |   |          |  
|                                                                                                                      |      |                          
|Cash flows from investing activities:                                                                                 |      |                           |          |      |             |   |          |  
|Proceeds from sales of investment securities classified as available-for-sale                                         |      |                           | 42,049   |      |             |   | 18,547   |  
|Proceeds from maturities of investment securities classified as available-for-sale                                    |      |                           | 34,540   |      |             |   | 21,470   |  
|Purchases of investment securities classified as available-for-sale                                                   |      |                           | (123,961 | )    |             |   | (74,879  | )
|Purchase of Federal Home Loan Bank common stock                                                                       |      |                           | (1,257   | )    |             |   | (1,927   | )
|Proceeds from disposal of premises and equipment                                                                      |      |                           | (8       | )    |             |   |         |  
|Purchases of premises and equipment                                                                                   |      |                           | (278     | )    |             |   | (1,354   | )
|Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale |      |                           | 272      |      |             |   | 35       |  
|Net loan originations                                                                                                 |      |                           | (34,450  | )    |             |   | (63,110  | )
|                                                                                                                      |      |                           |          |      |             |   |          |  
|Net cash used by investing activities                                                                                 |      |                           | (83,093  | )    |             |   | (101,218 | )
|                                                                                                                      |      |                           |          |      |             |   |          |  
|                                                                                                                      |      |                          
|Cash flows from financing activities:                                                                                 |      |                           |          |      |             |   |          |  
|Net increase in deposits                                                                                              |      |                           | 74,315   |      |             |   | 51,912   |  
|Net increase (decrease) in borrowings                                                                                 |      |                           | (2,525   | )    |             |   | 43,754   |  
|Dividends paid to common shareholders                                                                                 |      |                           | (1,038   | )    |             |   | (1,005   | )
|Dividends paid on preferred stock                                                                                     |      |                           | (296     | )    |             |   |         |  
|Net proceeds from issuance of preferred stock                                                                         |      |                           | 17,850   |      |             |   |         |  
|Repurchase of common stock                                                                                            |      |                           |         |      |             |   | (866     | )
|                                                                                                                      |      |                           |          |      |             |   |          |  
|Net cash provided by financing activities                                                                             |      |                           | 88,306   |      |             |   | 93,795   |  
|                                                                                                                      |      |                           |          |      |             |   |          |  
|                                                                                                                      |      |                          
|Increase (decrease) in cash and cash equivalents                                                                      |      |                           | 8,429    |      |             |   | (5,056   | )
|Cash and cash equivalents at beginning of period                                                                      |      |                           | 16,799   |      |             |   | 22,003   |  
|                                                                                                                      |      |                           |          |      |             |   |          |  
|Cash and cash equivalents at end of period                                                                            |      | $                         | 25,228   |      |             | $ | 16,947   |  
|                                                                                                                      |      |                           |          |      |             |   |          |  
|                                                                                                                      |      |                          
|Cash paid during the period:                                                                                          |      |                           |          |      |             |   |          |  
|Interest                                                                                                              |      | $                         | 9,123    |      |             | $ | 8,631    |  
|Taxes                                                                                                                 |      |                           | 1,631    |      |             |   | 843      |  
|Supplemental disclosures of noncash financing and investing activities:                                               |      |                           |          |      |             |   |          |  
|Cash dividends declared but not paid                                                                                  |      | $                         | 519      |      |             | $ | 527      |  
|Unrealized losses on available-for-sale securities, net of deferred taxes                                             |      |                           | (759     | )    |             |   | (1,970   | )
|Transfer from loans to real estate and reposessions acquired in settlement of loans                                   |      |                           | 3,791    |      |             |   | 572      |  
|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   |      |             |   |         |  



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

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. 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.

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 June 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 August 10, 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 six or three-month periods ended June 30, 2009. For the six and three-month periods



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##### Table of Contents

ended June 30, 2008, diluted weighted average shares outstanding increased by 2,796 and 3,048, 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 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 six
months ended June 30, 2009 and 2008, diluted weighted average shares outstanding increased by 1,644 and 2,383, respectively, due to the dilutive impact of options. Stock options increased diluted weighted average shares by 1,870 for the three
months ended June 30, 2009 and 2,420 for the three months ended June 30, 2008. There were 53,675 and 52,699 anti-dilutive (not in the money) options outstanding for both the six and three-months ended June 30, 2009 and 2008,
respectively. As of June 30, 2009 the warrant, consisting of 144,984 shares issued to the U.S. Treasury Department was not included in the computation of net income per share for either the six 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 six months ended June 30.



|                              |                   |                                                                             |                     |  |                 |  |   |     
|----------------------------- | ----------------- | --------------------------------------------------------------------------- | ------------------- |  | --------------- |  | - | ----
|                              |                   | Six months ended June 30, 2009(dollars in thousands, except per share data)
|                              | Income(Numerator) |                                                                             | Shares(Denominator) |  | PerShareAmount 
|Basic net income per share    |                   | $                                                                           | 1,578               |  | 2,843,260       |  | $ | 0.55
|                              |                   |                                                                             |                     |  |                 |  |   |     
|Effect of dilutive securities |                   |                                                                             |                    |  | 1,644           |  |   |     
|                              |                   |                                                                             |                     |  |                 |  |   |     
|Diluted net income per share  |                   | $                                                                           | 1,578               |  | 2,844,904       |  | $ | 0.55
|                              |                   |                                                                             |                     |  |                 |  |   |     
|                              |                  
|                              |                   | Six months ended June 30, 2008(dollars in thousands, except per share data)
|                              | Income(Numerator) |                                                                             | Shares(Denominator) |  | Per ShareAmount
|Basic net income per share    |                   | $                                                                           | 2,148               |  | 2,901,775       |  | $ | 0.74
|                              |                   |                                                                             |                     |  |                 |  |   |     
|Effect of dilutive securities |                   |                                                                             |                    |  | 5,179           |  |   |     
|                              |                   |                                                                             |                     |  |                 |  |   |     
|Diluted net income per share  |                   | $                                                                           | 2,148               |  | 2,906,954       |  | $ | 0.74
|                              |                   |                                                                             |                     |  |                 |  |   |     



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 June 30.



|                              |                   |                                                                               |                     |  |                 |  |   |     
|----------------------------- | ----------------- | ----------------------------------------------------------------------------- | ------------------- |  | --------------- |  | - | ----
|                              |                   | Three months ended June 30, 2009(dollars in thousands, except per share data)
|                              | Income(Numerator) |                                                                               | Shares(Denominator) |  | Per ShareAmount
|Basic net income per share    |                   | $                                                                             | 532                 |  | 2,844,489       |  | $ | 0.19
|                              |                   |                                                                               |                     |  |                 |  |   |     
|Effect of dilutive securities |                   |                                                                               |                    |  | 1,870           |  |   |     
|                              |                   |                                                                               |                     |  |                 |  |   |     
|Diluted net income per share  |                   | $                                                                             | 532                 |  | 2,846,359       |  | $ | 0.19
|                              |                   |                                                                               |                     |  |                 |  |   |     
|                              |                  
|                              |                   | Three months ended June 30, 2008(dollars in thousands, except per share data)
|                              | Income(Numerator) |                                                                               | Shares(Denominator) |  | Per ShareAmount
|Basic net income per share    |                   | $                                                                             | 1,102               |  | 2,891,931       |  | $ | 0.38
|                              |                   |                                                                               |                     |  |                 |  |   |     
|Effect of dilutive securities |                   |                                                                               |                    |  | 5,468           |  |   |     
|                              |                   |                                                                               |                     |  |                 |  |   |     
|Diluted net income per share  |                   | $                                                                             | 1,102               |  | 2,897,399       |  | $ | 0.38
|                              |                   |                                                                               |                     |  |                 |  |   |     

(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 SFAS No. 123(R). Compensation cost charged to income was approximately $39 thousand and $99 thousand for the six months ended June 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

Stock options may be issued as incentive stock options or as nonqualified stock options. The term of the option will be
established at the time is it granted but shall not exceed ten years. Vesting will also be established at the time the option is granted. The exercise price 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 options granted during the six month period ending June 30, 2009. There were 6,100 shares granted during the six month period ending June 30, 2008.



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##### Table of Contents

A summary of option activity under the Plan as of June 30, 2009, and changes during the six-month
period ended June 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                        |                                               |                   |  | $                            |      |                                 |            |                         |   |   
|                                 |                                               |                    |  |                              |       |                                 |            |                         |   |   
|                                 |                                               |                    |  |                             
|Outstanding at June 30, 2009     |                                               | 59,227             |  | $                            | 27.79 |                                 | 6.49 years |                         | $ | 43
|                                 |                                               |                    |  |                              |       |                                 |            |                         |   |   
|                                 |                                               |                    |  |                             
|Exercisable at June 30, 2009     |                                               | 38,983             |  | $                            | 27.22 |                                 | 5.90 years |                         | $ | 43
|                                 |                                               |                    |  |                              |       |                                 |            |                         |   |   

No options were exercised during the six month period ended June 30, 2009 or during the six
month period ended June 30, 2008.

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. 2,597 shares
vested on January 1, 2009 and 2,500 vested on March 31, 2009 resulting in a zero balance of non-vested restricted stock as of June 30, 2009.

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)
|July 1  December 31, 2009 |                        | $             | 22
|                           |                       
|2010                       |                        |               | 36
|                           |                       
|2011                       |                        |               | 22
|                           |                       
|2012                       |                        |               | 9 
|                           |                       
|2013                       |                        |               | 2 
|                           |                        |               |   
|                           |                       
|Total                      |                        | $             | 91



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##### Table of Contents

(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 six-
and three-month periods ended June 30, 2009 and 2008 includes the following components.



|                                         |  |                                                   |    |   |      |   |    |  
|---------------------------------------- |  | ------------------------------------------------- | -- | - | ---- | - | -- | -
|                                         |  | Six months ended June 30,(Dollars in thousands)   |   
|                                         |  | 2009                                              |    |   | 2008 |  
|Components of net periodic cost:         |  |                                                   |    |   |      |   |    |  
|Service cost                             |  | $                                                 | 2  |   |      | $ | 2  |  
|Interest cost                            |  |                                                   | 24 |   |      |   | 22 |  
|Prior service cost                       |  |                                                   | (4 | ) |      |   | (4 | )
|                                         |  |                                                   |    |   |      |   |    |  
|                                         |  |                                                  
|Net periodic postretirement benefit cost |  | $                                                 | 22 |   |      | $ | 20 |  
|                                         |  |                                                   |    |   |      |   |    |  
|                                         | 
|                                         |  | Three months ended June 30,(Dollars in thousands) |   
|                                         |  | 2009                                              |    |   | 2008 |  
|Components of net periodic cost:         |  |                                                   |    |   |      |   |    |  
|Service cost                             |  | $                                                 | 1  |   |      | $ | 1  |  
|Interest cost                            |  |                                                   | 12 |   |      |   | 11 |  
|Prior service cost                       |  |                                                   | (2 | ) |      |   | (2 | )
|                                         |  |                                                   |    |   |      |   |    |  
|                                         |  |                                                  
|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 six 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 (dollars in thousands):



|                                                 |               |               |                      |  |                       |       |  |            |      |   |  |   |        
|------------------------------------------------ | ------------- | ------------- | -------------------- |  | --------------------- | ----- |  | ---------- | ---- | - |  | - | -------
|                                                 |               | June 30, 2009
|                                                 | AmortizedCost |               | GrossUnrealizedGains |  | GrossUnrealizedLosses |       |  | Fair Value
|Securities available-for-sale:                   |               |               |                      |  |                       |       |  |            |      |   |  |   |        
|                                                 |               |               |                      | 
|Government-sponsored enterprises and FFCB bonds  |               | $             | 33,231               |  | $                     | 51    |  | $          | (604 | ) |  | $ | 32,678 
|                                                 |               |               |                      | 
|Obligations of states and political subdivisions |               |               | 35,723               |  |                       | 528   |  |            | (423 | ) |  |   | 35,828 
|                                                 |               |               |                      | 
|Mortgage-backed securities                       |               |               | 152,177              |  |                       | 2,313 |  |            | (245 | ) |  |   | 154,245



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|                                                 |               |                   |                      |  |                       |       |  |            |        |   |  |   |        
|------------------------------------------------ | ------------- | ----------------- | -------------------- |  | --------------------- | ----- |  | ---------- | ------ | - |  | - | -------
|                                                 |               | June 30, 2009    
|                                                 | AmortizedCost |                   | GrossUnrealizedGains |  | GrossUnrealizedLosses |       |  | Fair Value
|Corporate Bonds                                  |               |                   | 9,552                |  |                       | 33    |  |            | (543   | ) |  |   | 9,042  
|                                                 |               |                   |                      | 
|Equity securities                                |               |                   | 1,000                |  |                       |      |  |            | (272   | ) |  |   | 728    
|                                                 |               |                   |                      |  |                       |       |  |            |        |   |  |   |        
|                                                 |               | $                 | 231,683              |  | $                     | 2,925 |  | $          | (2,087 | ) |  | $ | 232,521
|                                                 |               |                   |                      |  |                       |       |  |            |        |   |  |   |        
|                                                 |              
|                                                 |               | December 31, 2008
|                                                 | 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 six-month periods ended
June 30, 2009 and June 30, 2008 were as follows (dollars in thousands):



|                      |      |                                                   |     |      |  |   |     |  
|--------------------- | ---- | ------------------------------------------------- | --- | ---- |  | - | --- | -
|                      |      | Six months ended June 30,(Dollars in thousands)   |    
|                      | 2009 |                                                   |     | 2008 | 
|Gross realized gains  |      | $                                                 | 603 |      |  | $ | 132 |  
|                      |      |                                                  
|Gross realized losses |      |                                                   | (15 | )    |  |   | (38 | )
|                      |      |                                                   |     |      |  |   |     |  
|                      |      |                                                  
|Net realized gains    |      | $                                                 | 588 |      |  | $ | 94  |  
|                      |      |                                                   |     |      |  |   |     |  
|                      |     
|                      |      | Three months ended June 30,(Dollars in thousands) |    
|                      | 2009 |                                                   |     | 2008 | 
|Gross realized gains  |      | $                                                 | 198 |      |  | $ | 39  |  
|                      |      |                                                  
|Gross realized losses |      |                                                   | (15 | )    |  |   | (20 | )
|                      |      |                                                   |     |      |  |   |     |  
|                      |      |                                                  
|Net realized gains    |      | $                                                 | 183 |      |  | $ | 19  |  
|                      |      |                                                   |     |      |  |   |     |  

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



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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 June 30, 2009 and December 31, 2008:

June 30, 2009



|                                                 |                        |                     |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|------------------------------------------------ | ---------------------- | ------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                                 |                        | Less than 12 months |        | 12 months or longer |   | Total    
|                                                 | (Dollars in thousands)
|Description of Securities                        |                        | FairValue           |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|Government-Sponsored enterprises                 |                        | $                   | 29,444 |                     | $ | 604       |  | $                |      |           | $ |                 |  | $ | 29,444 |  | $ | 604  
|Obligations of states and political subdivisions |                        |                     | 9,124  |                     |   | 196       |  |                  | 2,769 |           |   | 227              |  |   | 11,893 |  |   | 423  
|Mortgage-backed securities                       |                        |                     | 31,514 |                     |   | 245       |  |                  |      |           |   |                 |  |   | 31,514 |  |   | 245  
|Equity securities                                |                        |                     |       |                     |   |          |  |                  | 728   |           |   | 272              |  |   | 728    |  |   | 272  
|Corporate bonds                                  |                        |                     | 2,314  |                     |   | 202       |  |                  | 2,196 |           |   | 341              |  |   | 4,510  |  |   | 543  
|                                                 |                        |                     |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|Total                                            |                        | $                   | 72,396 |                     | $ | 1,247     |  | $                | 5,693 |           | $ | 840              |  | $ | 78,089 |  | $ | 2,087
|                                                 |                        |                     |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      

December 31, 2008



|                                                 |                        |                     |        |                     |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|------------------------------------------------ | ---------------------- | ------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                                 |                        | Less than 12 months |        | 12 months or longer |   | Total    
|                                                 | (Dollars in thousands)
|Description of Securities                        |                        | FairValue           |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|Government-Sponsored enterprises                 |                        | $                   | 3,989  |                     | $ | 8         |  | $                |      |           | $ |                 |  | $ | 3,989  |  | $ | 8    
|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 June 30, 2009, management has concluded that the unrealized losses above (which
consisted of 79 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 nine
(9) 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.

During the first quarter 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 an increase in net investment income per share of $1.54 in 2008 compared to $0.95 in 2007. TCAP also continued to increase its quarterly
dividend during the past year and announced a $0.40 dividend for the second quarter of 2009 which resulted in a dividend yield of over fifteen percent on an annualized basis as of June 30, 2009. Based upon the analysis performed and 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.



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

June 30,
2009



|                                                  |  |                |         |            |   |        
|------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------
|                                                  |  | Amortized Cost |         | Fair Value
|Government-sponsored enterprises and FFCB bonds:  |  |                |         |            |   |        
|                                                  |  |               
|Due in one through five years                     |  | $              | 2,191   |            | $ | 2,154  
|                                                  |  |               
|Due in five through ten years                     |  |                | 15,707  |            |   | 15,514 
|                                                  |  |               
|Due after ten years                               |  |                | 15,333  |            |   | 15,010 
|                                                  |  |               
|Obligations of states and political subdivisions: |  |                |         |            |   |        
|                                                  |  |               
|Due in one year or less                           |  |                | 1,071   |            |   | 1,081  
|                                                  |  |               
|Due in one through five years                     |  |                | 7,018   |            |   | 7,228  
|                                                  |  |               
|Due in five through ten years                     |  |                | 16,649  |            |   | 16,815 
|                                                  |  |               
|Due after ten years                               |  |                | 10,985  |            |   | 10,704 
|                                                  |  |               
|Mortgage-backed securities:                       |  |                |         |            |   |        
|                                                  |  |               
|Due in five through ten years                     |  |                | 8,097   |            |   | 8,327  
|                                                  |  |               
|Due after ten years                               |  |                | 144,080 |            |   | 145,918
|                                                  |  |               
|Corporate Bonds:                                  |  |                |         |            |   |        
|                                                  |  |               
|Due in one year or less                           |  |                | 2,500   |            |   | 2,533  
|                                                  |  |               
|Due in five through ten years                     |  |                | 7,052   |            |   | 6,509  
|                                                  |  |               
|Equity securities:                                |  |                |         |            |   |        
|Due after ten years                               |  |                | 1,000   |            |   | 728    
|                                                  |  |                |         |            |   |        
|                                                  |  |               
|Total securities                                  |  | $              | 231,683 |            | $ | 232,521
|                                                  |  |                |         |            |   |        

Securities with an amortized cost of $184.5 million at June 30, 2009 were pledged as
collateral. Of this total, amortized cost of $105.2 million and fair value of $105.8 million are pledged as collateral for FHLB advances.



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December 31, 2008



|                                                  |  |                |         |            |   |        
|------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------
|                                                  |  | Amortized Cost |         | Fair Value
|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    
|                                                  |  |                |         |            |   |        
|                                                  |  |               
|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 endedJune 30, |        |      | Six months endedJune 30, |  
|                                            | 2009                   |                            |        | 2008 |                          |   | 2009   |   |  | 2008 |      
|                                            | (Dollars in thousands) |                           
|Net income                                  |                        | $                          | 800    |      |                          | $ | 1,102  |   |  | $    | 2,053 |   |  | $ | 2,148  |  
|                                            |                        |                            |        |     
|Other comprehensive loss:                   |                        |                            |        |      |                          |   |        |   |  |      |       |   |  |   |        |  
|                                            |                        |                            |        |     
|Unrealized losses arising during the period |                        |                            | (1,770 | )    |                          |   | (4,886 | ) |  |      | (646  | ) |  |   | (3,111 | )
|                                            |                        |                            |        |     
|Tax benefit                                 |                        |                            | 682    |      |                          |   | 1,883  |   |  |      | 249   |   |  |   | 1,199  |  
|                                            |                        |                            |        |     
|Reclassification to realized gains          |                        |                            | (183   | )    |                          |   | (19    | ) |  |      | (588  | ) |  |   | (94    | )
|                                            |                        |                            |        |     
|Tax benefit                                 |                        |                            | 70     |      |                          |   | 7      |   |  |      | 226   |   |  |   | 36     |  
|                                            |                        |                            |        |      |                          |   |        |   |  |      |       |   |  |   |        |  
|                                            |                        |                            |        |     
|Other comprehensive loss                    |                        |                            | (1,201 | )    |                          |   | (3,015 | ) |  |      | (759  | ) |  |   | (1,970 | )
|                                            |                        |                            |        |      |                          |   |        |   |  |      |       |   |  |   |        |  
|                                            |                        |                            |        |     
|Total comprehensive (loss) income           |                        | $                          | (401   | )    |                          | $ | (1,913 | ) |  | $    | 1,294 |   |  | $ | 178    |  
|                                            |                        |                            |        |      |                          |   |        |   |  |      |       |   |  |   |        |  



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(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.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements.
SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 became effective beginning January 1, 2008 and did not have a material effect on the Companys financial position, results of
operations or cash flows. In February 2008, Financial Accounting Standards Board Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, was issued that delayed the application of SFAS No. 157
for non-financial assets and non-financial liabilities, until January 1, 2009. See disclosures about fair value measurements in note 8 below.

In September 2006, the FASB ratified the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common
types of life insurance arrangements are endorsement split dollar life and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 (which does not apply to the Company) covers the latter. EITF 06-4 states that entities
with endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967 (if the
arrangement is, in substance, an individual deferred compensation contract). Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained
earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. EITF 06-4
was effective for the Company on January 1, 2008. The Company recorded a liability of $387 thousand on January 1, 2008 to record the postretirement benefit related to split-dollar life insurance arrangements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 was effective for the Company on January 1, 2009. Earlier adoption is prohibited. The adoption of SFAS 160 had no material effect on the Companys consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations  a replacement of FASB No. 141. SFAS 141R
replaces SFAS 141, Business Combinations, and applies to all transaction and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another
entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required



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under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless
it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5,
Accounting for Contingencies. SFAS 141R is expected to have an impact on the Companys accounting for business combinations closing on or after January 1, 2009.

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.

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



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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 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 for 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



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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 will not have an impact on the Companys financial position but will change the referencing system for accounting standards.

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.

(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 SFAS 157. 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 June 30, 2009 and December 31, 2008 (dollars in thousands):



|                            |  |               |         |                     |   |               |  |                     |         |  |   |        
|--------------------------- |  | ------------- | ------- | ------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                            |  | June 30, 2009 |         | December 31, 2008  
|                            |  | CarryingValue |         | Estimated FairValue |   | CarryingValue |  | Estimated FairValue
|Financial assets:           |  |               |         |                     |   |               |  |                     |         |  |   |        
|                            |  |               |         |                    
|Cash and cash equivalents   |  | $             | 25,228  |                     | $ | 25,228        |  | $                   | 16,799  |  | $ | 16,799 
|                            |  |               |         |                    
|Investment securities       |  |               | 232,521 |                     |   | 232,521       |  |                     | 239,709 |  |   | 239,709
|                            |  |               |         |                    
|FHLB stock                  |  |               | 5,116   |                     |   | 5,116         |  |                     | 3,859   |  |   | 3,859  
|                            |  |               |         |                    
|Accrued interest receivable |  |               | 4,577   |                     |   | 4,577         |  |                     | 4,663   |  |   | 4,663  
|                            |  |               |         |                    
|Net loans                   |  |               | 560,814 |                     |   | 557,960       |  |                     | 532,905 |  |   | 531,166
|                            |  |               |         |                    
|Financial liabilities:      |  |               |         |                     |   |               |  |                     |         |  |   |        
|                            |  |               |         |                    
|Deposits                    |  | $             | 703,467 |                     | $ | 701,444       |  | $                   | 629,152 |  | $ | 632,152
|                            |  |               |         |                    
|Short-term borrowings       |  |               | 60,191  |                     |   | 60,191        |  |                     | 57,716  |  |   | 57,716 
|                            |  |               |         |                    
|Accrued interest payable    |  |               | 1,646   |                     |   | 1,646         |  |                     | 2,889   |  |   | 2,889  
|                            |  |               |         |                    
|Long-term obligations       |  |               | 21,000  |                     |   | 20,982        |  |                     | 26,000  |  |   | 26,254 

Fair Value Hierarchy



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Under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



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

The Company adopted SFAS 157 on January 1, 2008 and had no material impact on the
Companys financial statements. 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 SFAS 114, Accounting by Creditors for Impairment of a Loan,(SFAS 114). 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 June 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS
157, 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.



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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 June 30, 2009



|                                                                                              |  |       |         |         |   |         |  |         |         |  |   |       
|--------------------------------------------------------------------------------------------- |  | ----- | ------- | ------- | - | ------- |  | ------- | ------- |  | - | ------
|(Dollars in thousands)                                                                        |  | Total |         | Level 1 |   | Level 2 |  | Level 3
|Investment securities available-for-sale                                                      |  | $     | 232,521 |         | $ | 19,002  |  | $       | 210,918 |  | $ | 2,601 
|Total assets at fair value                                                                    |  | $     | 232,521 |         | $ | 19,002  |  | $       | 210,918 |  | $ | 2,601 
|                                                                                              |  |       |         |        
|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 June 30, 2009    
|                                                                                              |  |       |         |        
|(Dollars in thousands)                                                                        |  | Total |         | Level 1 |   | Level 2 |  | Level 3
|Impaired loans in accordance with SFAS 114                                                    |  | $     | 10,777  |         | $ |        |  | $       | 9,151   |  | $ | 1,626 
|Real estate and repossessions acquired in settlement of loans                                 |  |       | 4,374   |         |   |        |  |         | 1,606   |  |   | 2,768 
|Total assets at fair value                                                                    |  | $     | 15,151  |         | $ |        |  | $       | 10,757  |  | $ | 4,394 
|                                                                                              |  |       |         |        
|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 in accordance with SFAS 114                                                    |  | $     | 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



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|                                             |  |                                  |        |  
|-------------------------------------------- |  | -------------------------------- | ------ | -
|(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         |  |                                  | (97    | )
|                                             | 
|Purchases, issuances, and settlements        |  |                                  |       |  
|                                             | 
|Transfers in to/out of Level 3               |  |                                  | (8,374 | )
|                                             | 
|Balance, June 30, 2009                       |  | $                                | 2,601  |  

(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 these securities sold under the TARP Capital Purchase Program, the compensation arrangements for senior executive officers must comply in all respects with the U.S. Emergency
Economic Stabilization Act of 2008 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 Rick 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



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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

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 June 30, 2009, we had consolidated assets of
approximately $877.5 million, total loans of approximately $566.6 million, total deposits of approximately $703.5 million and shareholders equity of approximately $85.8 million. For the three months ended June 30, 2009, we had income
available to common shareholders of $532 thousand or $0.19 basic and diluted earnings per share, compared to income available to common shareholders of $1.1 million, or $0.38 basic and diluted earnings per share for the three months ended
June 30, 2008. For the six months ended June 30, 2009, we had income available to common shareholders of $1.6 million or $0.55 basic and diluted earnings per share, compared to income available to common shareholders of $2.1 million or
$0.74 basic and diluted earnings per share for the six months ended June 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 to our financial condition or results of
operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the
periodic benefit cost in the following year. 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 Six-Month Periods Ended June 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 six-month periods ended June 30, 2009 as compared to the same periods in 2008.



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Condensed Consolidated Statements of Income

(Dollars in thousands)



|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|-------------------------------------------------- |  | -------------------------------------- | ------ | -------------------------- | - | ----- | ------------------------------------ |  | -------------------------- | - |  | - | ------ |  | - | ------ | - |  | ----- | -
|                                                   |  | For the ThreeMonths EndedJune 30, 2009 |        | Changes from thePrior Year |   |       | For the SixMonths EndedJune 30, 2009 |  | Changes from thePrior Year |  
|                                                   |  | Amount                                 |        |                            | % |       |                                      |  | Amount                     |   |  | % |       
|Total interest income                              |  | $                                      | 10,305 |                            | $ | 477   |                                      |  | 4.9                        |   |  | $ | 20,534 |  | $ | 1,022  |   |  | 5.2   |  
|Total interest expense                             |  |                                        | 3,663  |                            |   | (818  | )                                    |  | (18.3                      | ) |  |   | 7,880  |  |   | (1,315 | ) |  | (14.3 | )
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|                                                   |  |                                        |        |                            |   |      
|Net interest income                                |  |                                        | 6,642  |                            |   | 1,295 |                                      |  | 24.2                       |   |  |   | 12,654 |  |   | 2,337  |   |  | 22.7  |  
|Provision for loan losses                          |  |                                        | 2,000  |                            |   | 1,430 |                                      |  | 250.9                      |   |  |   | 2,750  |  |   | 1,850  |   |  | 205.6 |  
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|Net interest income after                          |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|Provision for loan losses                          |  |                                        | 4,642  |                            |   | (135  | )                                    |  | (2.8                       | ) |  |   | 9,904  |  |   | 487    |   |  | 5.2   |  
|                                                   |  |                                        |        |                            |   |      
|Noninterest income                                 |  |                                        | 1,792  |                            |   | 65    |                                      |  | 3.8                        |   |  |   | 3,755  |  |   | 30     |   |  | 0.8   |  
|Noninterest expense                                |  |                                        | 5,484  |                            |   | 376   |                                      |  | 7.4                        |   |  |   | 10,956 |  |   | 591    |   |  | 5.7   |  
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|                                                   |  |                                        |        |                            |   |      
|Income before income taxes                         |  |                                        | 950    |                            |   | (446  | )                                    |  | (31.9                      | ) |  |   | 2,703  |  |   | (74    | ) |  | (2.7  | )
|Income tax provision                               |  |                                        | 150    |                            |   | (144  | )                                    |  | (49.0                      | ) |  |   | 650    |  |   | 21     |   |  | 3.3   |  
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|                                                   |  |                                        |        |                            |   |      
|Net income                                         |  |                                        | 800    |                            |   | (302  | )                                    |  | (27.4                      | ) |  |   | 2,053  |  |   | (95    | ) |  | (4.4  | )
|                                                   |  |                                        |        |                            |   |      
|Preferred stock dividend and accretion of discount |  |                                        | 268    |                            |   | 268   |                                      |  | NA                         |   |  |   | 475    |  |   | 475    |   |  | NA    |  
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  
|                                                   |  |                                        |        |                            |   |      
|Net income available to common shareholders        |  | $                                      | 532    |                            | $ | (570  | )                                    |  | (51.7                      | ) |  | $ | 1,578  |  | $ | (570   | ) |  | (26.5 | )
|                                                   |  |                                        |        |                            |   |       |                                      |  |                            |   |  |   |        |  |   |        |   |  |       |  

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 June 30, 2009 was $6.6 million, an increase of $1.3 million or 24.2% when compared to net interest income of $5.3 million for the three months ended June 30, 2008.
For the six months ended June 30, 2009, net interest income was $12.7 million, an increase of $2.3 million or 22.7% when compared to net interest income of $10.3 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 $477 thousand or 4.9% for the three months ended June 30, 2009
compared to the same three months of 2008. Interest income increased $1.0 million or 5.2% for the six months ended June 30, 2009 compared to the same six months in 2008. The increases for the three and six months ended June 30, 2009 are
due to the increase in the volume of our average earning assets which was partially offset by decreases in the rates paid on these earning assets. The tax equivalent yield on average earning assets decreased 85 basis points for the



24



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quarter ended June 30, 2009 to 5.17% from 6.02% for the same period in 2008. For the first six months of 2009, the yield on average earning assets, on a
tax-equivalent basis, decreased 104 basis points to 5.21% compared to 6.25% at June 30, 2008. Management attributes the decrease in the yield on our earning assets to the decrease in short-term market interest rates. Approximately $322.8
million or 56.9% of our loan portfolio consists of variable rate loans that adjust with the movement of the national prime rate. As a result, composite yield on our loans decreased approximately 80 basis points for the second quarter of 2009
compared to the second quarter of 2008 and 108 basis points for the six-month periods ended June 30, 2009 and 2008. The increase in volume of the Banks investment portfolio during the three- and six-month periods ended June 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 a lower prime rate.

Our average cost of funds during the second quarter of 2009 was 2.12%, a decrease of 109 basis points when compared to 3.21% for the second quarter of 2008. Average rates paid on bank certificates of deposit decreased
150 basis points from 4.13% for the quarter ended June 30, 2008 to 2.63% for the quarter ended June 30, 2009, while our average cost of borrowed funds decreased 133 basis points during the second quarter of 2009 compared to the same period
in 2008. Total interest expense decreased $818 thousand or 18.3% during the second quarter of 2009 compared to the same period in 2008, primarily the result of decreased market rates paid on these liabilities. For the six months ended June 30,
2009, our cost of funds was 2.32% a decrease of 115 basis points when compared to 3.47% for the same period in 2008. Average rates paid on bank certificates of deposit decreased 153 basis points from 4.42% to 2.89% for the first six months of 2009,
while our cost of borrowed funds decreased 144 basis points compared to the same period a year ago. Total interest expense decreased $1.3 million or 14.3% during the six 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 $151.1 million for the six 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 pressure continued to ease during the second quarter of 2009 as our net interest margin
improved from the first quarter of 2009. Margins could continue to improve further over the next several months as low funding cost continues to improve our margin. 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 June 30, 2009 was 3.37% compared to 3.32% in the second quarter of 2008 while our net interest spread increased 24 basis points during the same period. For the six months
ended June 30, 2009, our net interest margin, on a tax-equivalent basis and net of allowance for loan losses, was 3.24% compared to 3.36% in the six months of 2008 while our net interest spread increased 11 basis points.

Our funding growth year-over-year has been, primarily, in the form of CDs 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 June 30, 2009 and 2008 were 85.4% and 84.0%, respectively. For the six months ended June 30, 2009, average
interest-bearing liabilities as a percentage of interest-earning assets were 84.9% compared to 83.5% for the six months ended June 30, 2008.

Management plans to continue to improve net interest income by growing our balance sheet while maintaining a constant or improving interest margin.



25



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

For the three months ended June 30, 2009 and 2008



|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|---------------------------------------------------- |  | ---------------------- | ------- | ------------- | ---- | - | -------------- | - | -------------- |  | ------------- | ------- |  | -------------- | - |  | - | -----
|                                                     |  | 2009                   |         | 2008         
|                                                     |  | AverageBalance         |         | Yield/Rate(5) |      |   | Income/Expense |   | AverageBalance |  | Yield/Rate(5) |         |  | Income/Expense
|                                                     |  | (Dollars in thousands)
|Assets                                               |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Loans  net (1)                                      |  | $                      | 557,169 |               | 5.52 | % |                | $ | 7,666          |  | $             | 495,092 |  | 6.32           | % |  | $ | 7,805
|Taxable securities                                   |  |                        | 211,735 |               | 4.37 | % |                |   | 2,307          |  |               | 130,252 |  | 5.09           | % |  |   | 1,652
|Non-taxable securities (2)                           |  |                        | 34,733  |               | 5.81 | % |                |   | 503            |  |               | 35,145  |  | 5.64           | % |  |   | 494  
|Other investments                                    |  |                        | 8,395   |               |     | % |                |   |               |  |               | 5,678   |  | 3.18           | % |  |   | 45   
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Total interest- earning assets                       |  |                        | 812,032 |               | 5.17 | % |                | $ | 10,476         |  |               | 666,167 |  | 6.02           | % |  | $ | 9,996
|Cash and due from banks                              |  |                        | 10,856  |               |      |   |                |   |                |  |               | 12,670  |  |                |   |  |   |      
|Bank premises and equipment, net                     |  |                        | 25,407  |               |      |   |                |   |                |  |               | 25,122  |  |                |   |  |   |      
|Other assets                                         |  |                        | 24,179  |               |      |   |                |   |                |  |               | 19,121  |  |                |   |  |   |      
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Total assets                                         |  | $                      | 872,474 |               |      |   |                |   |                |  | $             | 723,080 |  |                |   |  |   |      
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|                                                     |  |                        |         |               |      |  
|Liabilities and Shareholders Equity                 |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Interest-bearing deposits                            |  | $                      | 611,259 |               | 2.22 | % |                | $ | 3,383          |  | $             | 469,531 |  | 3.31           | % |  | $ | 3,875
|Short-term borrowings                                |  |                        | 60,947  |               | 0.74 | % |                |   | 112            |  |               | 63,997  |  | 2.54           | % |  |   | 406  
|Long-term obligations                                |  |                        | 21,000  |               | 3.21 | % |                |   | 168            |  |               | 26,000  |  | 3.09           | % |  |   | 200  
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Total interest- bearing liabilities                  |  |                        | 693,206 |               | 2.12 | % |                |   | 3,663          |  |               | 559,528 |  | 3.21           | % |  |   | 4,481
|Non-interest-bearing deposits                        |  |                        | 86,849  |               |      |   |                |   |                |  |               | 88,553  |  |                |   |  |   |      
|Other liabilities                                    |  |                        | 4,579   |               |      |   |                |   |                |  |               | 7,442   |  |                |   |  |   |      
|Shareholders equity                                 |  |                        | 87,840  |               |      |   |                |   |                |  |               | 67,557  |  |                |   |  |   |      
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Total liabilities and Shareholders equity           |  | $                      | 872,474 |               |      |   |                |   |                |  | $             | 723,080 |  |                |   |  |   |      
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Net interest income and net interest margin (FTE)(3) |  |                        |         |               | 3.37 | % |                | $ | 6,813          |  |               |         |  | 3.32           | % |  | $ | 5,515
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      
|Interest rate spread (FTE)(4)                        |  |                        |         |               | 3.05 | % |                |   |                |  |               |         |  | 2.81           | % |  |   |      
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |      



|(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 $171
thousand and $168 thousand for periods ended June 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
|--- | ----------



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##### Table of Contents

For the six months ended June 30, 2009 and 2008



|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|---------------------------------------------------- |  | ---------------------- | ------- | ------------- | ---- | - | -------------- | - | -------------- |  | ------------- | ------- |  | -------------- | - |  | - | ------
|                                                     |  | 2009                   |         | 2008         
|                                                     |  | AverageBalance         |         | Yield/Rate(5) |      |   | Income/Expense |   | AverageBalance |  | Yield/Rate(5) |         |  | Income/Expense
|                                                     |  | (Dollars in thousands)
|Assets                                               |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Loans  net (1)                                      |  | $                      | 546,654 |               | 5.54 | % |                | $ | 15,013         |  | $             | 479,950 |  | 6.62           | % |  | $ | 15,762
|Taxable securities                                   |  |                        | 217,921 |               | 4.50 | % |                |   | 4,867          |  |               | 119,047 |  | 5.04           | % |  |   | 2,975 
|Non-taxable securities (2)                           |  |                        | 34,395  |               | 5.78 | % |                |   | 986            |  |               | 35,172  |  | 5.73           | % |  |   | 1,000 
|Other investments                                    |  |                        | 8,495   |               | 0.07 | % |                |   | 3              |  |               | 6,127   |  | 3.78           | % |  |   | 115   
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Total interest- earning assets                       |  |                        | 807,465 |               | 5.21 | % |                | $ | 20,869         |  |               | 640,296 |  | 6.25           | % |  | $ | 19,852
|Cash and due from banks                              |  |                        | 10,063  |               |      |   |                |   |                |  |               | 12,552  |  |                |   |  |   |       
|Bank premises and equipment, net                     |  |                        | 25,547  |               |      |   |                |   |                |  |               | 24,950  |  |                |   |  |   |       
|Other assets                                         |  |                        | 23,370  |               |      |   |                |   |                |  |               | 18,537  |  |                |   |  |   |       
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Total assets                                         |  | $                      | 866,445 |               |      |   |                |   |                |  | $             | 696,335 |  |                |   |  |   |       
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|                                                     |  |                        |         |               |      |  
|Liabilities and Shareholders Equity                 |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Interest-bearing deposits                            |  | $                      | 594,642 |               | 2.43 | % |                | $ | 7,175          |  | $             | 460,604 |  | 3.54           | % |  | $ | 8,097 
|Short-term borrowings                                |  |                        | 67,485  |               | 0.92 | % |                |   | 308            |  |               | 57,704  |  | 2.97           | % |  |   | 849   
|Long-term obligations                                |  |                        | 23,459  |               | 3.41 | % |                |   | 397            |  |               | 16,187  |  | 3.10           | % |  |   | 249   
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Total interest- bearing liabilities                  |  |                        | 685,586 |               | 2.32 | % |                |   | 7,880          |  |               | 534,495 |  | 3.47           | % |  |   | 9,195 
|Non-interest-bearing deposits                        |  |                        | 84,756  |               |      |   |                |   |                |  |               | 86,938  |  |                |   |  |   |       
|Other liabilities                                    |  |                        | 10,289  |               |      |   |                |   |                |  |               | 7,207   |  |                |   |  |   |       
|Shareholders equity                                 |  |                        | 85,814  |               |      |   |                |   |                |  |               | 67,695  |  |                |   |  |   |       
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Total liabilities and Shareholders equity           |  | $                      | 866,445 |               |      |   |                |   |                |  | $             | 696,335 |  |                |   |  |   |       
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Net interest income and net interest margin (FTE)(3) |  |                        |         |               | 3.24 | % |                | $ | 12,989         |  |               |         |  | 3.36           | % |  | $ | 10,657
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       
|Interest rate spread (FTE)(4)                        |  |                        |         |               | 2.89 | % |                |   |                |  |               |         |  | 2.78           | % |  |   |       
|                                                     |  |                        |         |               |      |   |                |   |                |  |               |         |  |                |   |  |   |       



|(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 $335
thousand and $340 thousand for periods ended June 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.



27



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##### Table of Contents

Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended June 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                      |  | $                      | 916   |   |          | $ | (1,055 | )   |  | $ | (139  | )
|Taxable securities         |  |                        | 961   |   |          |   | (306   | )   |  |   | 655   |  
|Non-taxable securities (2) |  |                        | (6    | ) |          |   | 15     |     |  |   | 9     |  
|Other investments          |  |                        | 11    |   |          |   | (56    | )   |  |   | (45   | )
|                           |  |                        |       |   |          |   |        |     |  |   |       |  
|Interest income            |  |                        | 1,882 |   |          |   | (1,402 | )   |  |   | 480   |  
|                           |  |                        |      
|Interest-bearing deposits  |  |                        | 977   |   |          |   | (1,469 | )   |  |   | (492  | )
|Short-term borrowings      |  |                        | (12   | ) |          |   | (282   | )   |  |   | (294  | )
|Long-term obligations      |  |                        | (39   | ) |          |   | 7      |     |  |   | (32   | )
|                           |  |                        |       |   |          |   |        |     |  |   |       |  
|Interest expense           |  |                        | 926   |   |          |   | (1,744 | )   |  |   | (818  | )
|                           |  |                        |       |   |          |   |        |     |  |   |       |  
|Net interest income        |  | $                      | 956   |   |          | $ | 342    |     |  | $ | 1,298 |  
|                           |  |                        |       |   |          |   |        |     |  |   |       |  



|(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 $171
thousand and $168 thousand for periods ended June 30, 2009 and 2008, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the six months ended
June 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                      |  | $                      | 2011  |   |          | $ | (2,760 | )   |  | $ | (749   | )
|Taxable securities         |  |                        | 2,340 |   |          |   | (448   | )   |  |   | 1,892  |  
|Non-taxable securities (2) |  |                        | (22   | ) |          |   | 8      |     |  |   | (14    | )
|Other investments          |  |                        | 23    |   |          |   | (135   | )   |  |   | (112   | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest income            |  |                        | 4,352 |   |          |   | (3,335 | )   |  |   | 1,017  |  
|                           |  |                        |      
|Interest-bearing deposits  |  |                        | 1,987 |   |          |   | (2,909 | )   |  |   | (922   | )
|Short-term borrowings      |  |                        | 94    |   |          |   | (635   | )   |  |   | (541   | )
|Long-term obligations      |  |                        | 117   |   |          |   | 31     |     |  |   | 148    |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest expense           |  |                        | 2,198 |   |          |   | (3,513 | )   |  |   | (1,315 | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Net interest income        |  | $                      | 2,154 |   |          | $ | 178    |     |  | $ | 2,332  |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  



|(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 $335
thousand and $340 thousand for periods ended June 30, 2009 and 2008, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for Loan Losses

The provision for loan losses charged to operations during the three- and six-months ended June 30, 2009 was $2.0 million and $2.8 million,
respectively. The Bank had net charge-offs of $1.0 million for the quarter ended June 30, 2009 compared to net charge-offs of $210 thousand during the second quarter of 2008. For the six-month periods ended June 30, 2009 and 2008, the Bank
had net charge-offs of $2.9 million and $244 thousand, respectively. Net charge-offs increased mainly due to the Bank writing-down several large collateral dependent



28



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##### Table of Contents

loans. A large portion of these loans had previously been identified and reserved for in the allowance for loan loss in the previous year. 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.

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 six-month periods ended June 30, 2009 and 2008.



|                                      |                        |                                        |       |                            |   |     |                                      |  |                            |   |  |   |       |  |   |      |   |  |       |  
|------------------------------------- | ---------------------- | -------------------------------------- | ----- | -------------------------- | - | --- | ------------------------------------ |  | -------------------------- | - |  | - | ----- |  | - | ---- | - |  | ----- | -
|                                      |                        | For the ThreeMonths EndedJune 30, 2009 |       | Changes from thePrior Year |   |     | For the SixMonths EndedJune 30, 2009 |  | Changes from thePrior Year |  
|                                      |                        | Amount                                 |       |                            | % |     |                                      |  | Amount                     |   |  | % |      
|                                      | (Dollars in thousands) |                                       
|Service charges on deposit accounts   |                        | $                                      | 916   |                            | $ | 57  |                                      |  | 6.6                        |   |  | $ | 1,792 |  | $ | 87   |   |  | 5.1   |  
|Other service charges and fees        |                        |                                        | 350   |                            |   | (55 | )                                    |  | (13.6                      | ) |  |   | 617   |  |   | (57  | ) |  | (8.5  | )
|Mortgage origination brokerage fees   |                        |                                        | 236   |                            |   | (94 | )                                    |  | (28.5                      | ) |  |   | 527   |  |   | (110 | ) |  | (17.3 | )
|Net gain on sale of securities        |                        |                                        | 183   |                            |   | 164 |                                      |  | 863.2                      |   |  |   | 588   |  |   | 494  |   |  | 525.5 |  
|Income from bank owned life insurance |                        |                                        | 82    |                            |   | 6   |                                      |  | 7.9                        |   |  |   | 164   |  |   | (1   | ) |  | (0.6  | )
|Other operating income                |                        |                                        | 25    |                            |   | (13 | )                                    |  | (34.2                      | ) |  |   | 67    |  |   | (383 | ) |  | (85.1 | )
|                                      |                        |                                        |       |                            |   |     |                                      |  |                            |   |  |   |       |  |   |      |   |  |       |  
|                                      |                        |                                        |       |                            |   |    
|Total noninterest income              |                        | $                                      | 1,792 |                            | $ | 65  |                                      |  | 3.8                        |   |  | $ | 3,755 |  | $ | 30   |   |  | 0.8   |  
|                                      |                        |                                        |       |                            |   |     |                                      |  |                            |   |  |   |       |  |   |      |   |  |       |  

Noninterest income increased $65 thousand or 3.8% to $1.8 million for the second quarter of this
year compared to $1.7 million for the same period in 2008. For the six months ended June 30, 2009 noninterest income increased $30 thousand or 0.8% to $3.8 million compared to $3.7 million for the same period in 2008. The increase in
noninterest income in the second 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 $494 thousand which
compares to an income distribution from Visa Internationals initial public offering in the amount of $386 thousand during the same period in 2008. As a member bank of Visa, we received the proceeds for the redemption of approximately
9 thousand shares of class B common stock. Other service charges and fees decreased $55 thousand and $57 thousand, respectively for the three and six months ended June 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. Year to date mortgage loan origination brokerage fees decreased $94 thousand compared to the previous year three-month period. Other operating income decreased
$383 thousand or 85.1% for the six month period ending June 30, 2009 due to the nonrecurring Visa distribution mentioned above that was received in the June 30, 2008 six month period.

Noninterest Expense

Noninterest expense increased
7.4% and 5.7%, respectively for the three and six months ended June 30, 2009, as compared to the same periods in 2008. The following table presents the components of noninterest expense for the three and six months ended June 30, 2009 and
dollar and percentage changes from the prior year.



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|                                       |  |                                       |       |                            |   |      |                                     |  |                            |   |  |   |        |  |   |      |   |  |       |  
|-------------------------------------- |  | ------------------------------------- | ----- | -------------------------- | - | ---- | ----------------------------------- |  | -------------------------- | - |  | - | ------ |  | - | ---- | - |  | ----- | -
|                                       |  | For theThree MonthsEndedJune 30, 2009 |       | Changes from thePrior Year |   |      | For theSix MonthsEndedJune 30, 2009 |  | Changes from thePrior Year |  
|                                       |  | Amount                                |       |                            | % |      |                                     |  | Amount                     |   |  | % |       
|                                       |  | (Dollars in thousands)                |      
|Salaries                               |  | $                                     | 2,005 |                            | $ | 22   |                                     |  | 1.1                        |   |  | $ | 4,074  |  | $ | 55   |   |  | 1.4   |  
|Retirement and other employee benefits |  |                                       | 702   |                            |   | (145 | )                                   |  | (17.1                      | ) |  |   | 1,453  |  |   | (226 | ) |  | (13.5 | )
|Occupancy                              |  |                                       | 449   |                            |   | (10  | )                                   |  | (2.2                       | ) |  |   | 929    |  |   | 18   |   |  | 2.0   |  
|Equipment                              |  |                                       | 431   |                            |   | 17   |                                     |  | 4.1                        |   |  |   | 819    |  |   | (17  | ) |  | (2.0  | )
|Professional fees                      |  |                                       | 102   |                            |   | 16   |                                     |  | 18.6                       |   |  |   | 399    |  |   | 103  |   |  | 34.8  |  
|Supplies                               |  |                                       | 55    |                            |   | (18  | )                                   |  | (24.7                      | ) |  |   | 111    |  |   | (44  | ) |  | (28.4 | )
|Telephone                              |  |                                       | 138   |                            |   | (23  | )                                   |  | (14.3                      | ) |  |   | 290    |  |   | (48  | ) |  | (14.2 | )
|FDIC deposit insurance                 |  |                                       | 655   |                            |   | 564  |                                     |  | 619.8                      |   |  |   | 910    |  |   | 743  |   |  | 444.9 |  
|Other operating expenses               |  |                                       | 947   |                            |   | (47  | )                                   |  | (4.7                       | ) |  |   | 1,971  |  |   | 7    |   |  | 0.4   |  
|                                       |  |                                       |       |                            |   |      |                                     |  |                            |   |  |   |        |  |   |      |   |  |       |  
|                                       |  |                                       |       |                            |   |     
|Total noninterest expenses             |  | $                                     | 5,484 |                            | $ | 376  |                                     |  | 7.4                        |   |  | $ | 10,956 |  | $ | 591  |   |  | 5.7   |  
|                                       |  |                                       |       |                            |   |      |                                     |  |                            |   |  |   |        |  |   |      |   |  |       |  

Salary expense for the three and six months ended June 30, 2009 increased $22 thousand and
$55 thousand, respectively, compared to the same prior year periods.

Employee related benefits expense for the three and six months ended
June 30, 2009 decreased $145 and $226 thousand, respectively, over the same prior year periods. The two main components of this decrease was supplemental employee retirement plan expense and employee incentive expense. Supplemental employee
retirement plan expense decreased $61 thousand during the second quarter of 2009 when compared to the second quarter of 2008 and decreased $148 thousand for the six months ended June 30, 2009 compared to the first six months of 2008. Employee
incentive program expense decreased $75 thousand during the second quarter of 2009 when compared to the second quarter of 2008 and decreased $150 thousand for the six months ended June 30, 2009 compared to the first six months of 2008. Employee
related insurance benefits increased by $25 thousand for the quarter ended June 30, 2009 compared to the same three-month period of 2008 and for the six-month period ended June 30, 2009 employee related insurance benefits increased $81
thousand due to increased health insurance premiums. As of June 30, 2009, we had 218 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, increased $16 thousand for the three months ended June 30, 2009 compared to
the same period of 2008 and increased $103 thousand when compared on a year to date basis to the prior year period. Consulting expense during the second quarter decreased $6 thousand and on a year to date basis, consulting expense increased $29
thousand in 2009 when compared to the same period in 2008. Audit and accounting fees in the second quarter of 2009 increased $1 thousand over audit fees incurred during the second quarter of 2008 and for the six-month period ended June 30, 2009
audit fees increased $25 thousand over the prior year six month period. Legal expense during the second quarter increased $21 thousand and on a year to date basis, legal expense increased $48 thousand in 2009 when compared to the same period in
2008.

FDIC deposit insurance expenses increased $564 thousand or 619.8% for the three months ended June 30, 2009 compared to the
three months ended June 30, 2008. Of this increase $400 thousand is related to the accrual for the special assessment that was levied on all banks by the FDIC which is to be paid in September of this year. For the six-month period ended
June 30, 2009, FDIC deposit insurance expense increased $743 thousand or 444.9% over the six-month period ended June 30, 2008.

Income Taxes

Income tax expense for the three months ended June 30, 2009 and 2008 was $150 thousand and $294 thousand, respectively, resulting
in effective tax rates of 15.8% and 21.1%, respectively. The effective tax rate for the quarter ended June 30, 2009 decreased principally due to a larger percentage of tax exempt income to taxable income during the 2009 period. For the
six-month period ending June 30, 2009, tax expense was $650 thousand compared to $629 thousand for the same period of 2008, which resulted in effective tax rates of 24.0% and 22.7%, respectively. The increased effective tax rate in 2009 is due
to a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset during 2008 that reduced taxes during the 2008 period. 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



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Our total assets were $877.5 million at June 30, 2009, $841.9 million at December 31, 2008 and
$738.0 million at June 30, 2008. Deposit growth primarily funded our year-over-year asset growth. For the twelve months ended June 30, 2009, we grew our loans $50.1 million or 9.7% while our deposits grew by approximately $125.2 million or
21.6%. Year-over-year, our earning assets grew by $136.1 million through loan originations and additions to our available-for-sale investment securities portfolio. For the six months ended June 30, 2009, we experienced increased loan demand as
loans outstanding increased $27.8 million and deposits increased by $74.3 million.

Loans

As of June 30, 2009, total loans had increased to $566.6 million, up 5.2% from total loans of $538.8 million at December 31, 2008 and up 9.7%
from total loans of $516.5 million at June 30, 2008. Loan growth can also be attributed to our branching efforts, the efforts of our lending team and the overall decline in interest rates for loans.

Asset Quality

At June 30, 2009, our allowance
for loan losses as a percentage of loans was 1.02%, up from 0.88% at March 31, 2009 and down from 1.10% at December 31, 2008. 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.

Homogeneous loan groups are assigned risk factors
based on their perceived loss potential and on their respective risk ratings. The Bank utilizes a system of nine 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 FAS 114. 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.

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



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Analysis of Changes in Allowance for Loan Losses



|                                                               |                        |                                  |         |   |      |   |         |  
|-------------------------------------------------------------- | ---------------------- | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                               |                        | For the six monthsEnded June 30, |        
|                                                               |                        | 2009                             |         |   | 2008 |  
|                                                               | (Dollars in thousands) |                                 
|Total loans outstanding at end of period-gross                 |                        | $                                | 566,601 |   |      | $ | 516,492 |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Average loans outstanding-gross                                |                        | $                                | 551,874 |   |      | $ | 484,212 |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |                        | $                                | 5,931   |   |      | $ | 4,083   |  
|Loans charged off:                                             |                        |                                  |         |   |      |   |         |  
|Real estate                                                    |                        |                                  | (2,842  | ) |      |   | (189    | )
|Installment loans                                              |                        |                                  | (13     | ) |      |   | (6      | )
|Credit cards and related plans                                 |                        |                                  |        |   |      |   |        |  
|Demand Deposit overdraft program                               |                        |                                  | (113    | ) |      |   |        |  
|Commercial and all other loans                                 |                        |                                  | (65     | ) |      |   | (81     | )
|                                                               |                        |                                  |         |   |      |   |         |  
|Total charge-offs                                              |                        |                                  | (3,033  | ) |      |   | (276    | )
|                                                               |                        |                                  |         |   |      |   |         |  
|Recoveries of loans previously charged off:                    |                        |                                  |         |   |      |   |         |  
|Real estate                                                    |                        |                                  |        |   |      |   | 1       |  
|Installment loans                                              |                        |                                  | 5       |   |      |   | 3       |  
|Credit cards and related plans                                 |                        |                                  |        |   |      |   | 2       |  
|Demand Deposit overdraft program                               |                        |                                  | 66      |   |      |   |        |  
|Commercial and all other loans                                 |                        |                                  | 68      |   |      |   | 26      |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Total recoveries                                               |                        |                                  | 139     |   |      |   | 32      |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Net charge offs                                                |                        |                                  | (2,894  | ) |      |   | (244    | )
|                                                               |                        |                                  |         |   |      |   |         |  
|Provision for loan losses                                      |                        |                                  | 2,750   |   |      |   | 900     |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |                        | $                                | 5,787   |   |      | $ | 4,739   |  
|                                                               |                        |                                  |         |   |      |   |         |  
|Ratios                                                         |                        |                                  |         |   |      |   |         |  
|Annualized net charge offs to average loans during the period  |                        |                                  | 1.05    | % |      |   | 0.10    | %
|Allowance for loan losses to loans at period end               |                        |                                  | 1.02    | % |      |   | 0.92    | %
|Allowance for loan losses to nonperforming loans at period end |                        |                                  | 56      | % |      |   | 752     | %
|Allowance for loan losses to impaired loans at period end      |                        |                                  | 28.3    | % |      |   | 33.1    | %

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 $17.5 million and $13.7 million, or 3.09% and 2.54% of loans outstanding at June 30, 2009 and
December 31, 2008, respectively. On June 30, 2009, our nonperforming loans (consisting of nonaccruing and restructured loans) amounted to approximately $10.1 million compared to $10.0 million as of December 31, 2008. We had $7.2
million in other real estate owned and repossessions at June 30, 2009 compared to $3.7 million at December 31, 2008.

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 SFAS No. 114. At June 30, 2009, we had loans totaling $20.4 million (which includes $10.1 million in nonperforming loans) which were considered to be impaired under SFAS No. 114 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



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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 SFAS No. 114 and their associated reserve allocation, if any, at June 30, 2009.



|                                             |                       |                |  |                         |      |                   |   |    
|-------------------------------------------- | --------------------- | -------------- |  | ----------------------- | ---- | ----------------- | - | ---
|                                             |                       | Numberof Loans |  | LoanBalancesOutstanding |      | AllocatedReserves
|                                             | (Dollars in millions)
|Non-accrual loans                            |                       | 26             |  | $                       | 10.1 |                   | $ | 0.4
|Restructured loans                           |                       | 1              |  |                         |     |                   |   |   
|                                             |                       |                |  |                         |      |                   |   |    
|Total nonperforming loans                    |                       | 27             |  | $                       | 10.1 |                   | $ | 0.4
|                                             |                       |                |  |                         |      |                   |   |    
|Other impaired loans with allocated reserves |                       | 6              |  |                         | 3.4  |                   |   | 0.4
|Impaired loans without allocated reserves    |                       | 16             |  |                         | 6.9  |                   |   |   
|                                             |                       |                |  |                         |      |                   |   |    
|Total impaired loans                         |                       | 49             |  | $                       | 20.4 |                   | $ | 0.8
|                                             |                       |                |  |                         |      |                   |   |    

Investment Securities and Other Assets

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

Our investment securities totaled $232.5 million at June 30, 2009, $239.7 million at December 31, 2008 and $157.6 million at June 30,
2008. The increase in investment securities of $74.9 million or 47.5% when compared to June 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.

At June 30, 2009, the securities portfolio had unrealized net gains of approximately $838 thousand, which are reported in accumulated other
comprehensive income on the consolidated statement of shareholders equity, net of tax. Our securities portfolio at June 30, 2009 consisted of U.S. government sponsored agencies, 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 June 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 June 30, 2009 the amortized cost and market value of the securities from such issuers were as
follows:



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|                                         |                        |                |        |              |   |       
|---------------------------------------- | ---------------------- | -------------- | ------ | ------------ | - | ------
|                                         |                        | Amortized Cost |        | Market Value
|                                         | (Dollars in thousands)
|Federal National Mortgage Corporation    |                        | $              | 68,812 |              | $ | 69,746
|Federal Home Loan Mortgage Corporation   |                        |                | 45,878 |              |   | 46,300
|Federal Home Loan Banks                  |                        |                | 13,307 |              |   | 12,986
|Government National Mortgage Association |                        |                | 35,906 |              |   | 36,505
|Federal Farm Credit Banks                |                        |                | 9,978  |              |   | 9,901 
|Small Business Administration            |                        |                | 11,526 |              |   | 11,486

At June 30, 2009, we held $8.5 million in bank owned life insurance, compared to $8.3 million
and $8.2 million at December 31, 2008 and June 30, 2008, respectively.

Deposits and Other Borrowings

Deposits

Deposits totaled $703.5 million as of
June 30, 2009 compared to deposits of $629.2 million at December 31, 2008 and up 21.6% compared to deposits of $578.3 million at June 30, 2008. We attribute our deposit growth during the six months and twelve months ended
June 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 $60.2 million at June 30, 2009, compared to $57.7 million on December 31, 2008, a net increase of $2.5 million.

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



|                  |                        |            |  |           |  |         |  |      |  |                  
|----------------- | ---------------------- | ---------- |  | --------- |  | ------- |  | ---- |  | -----------------
|Borrow Date       |                        | Type       |  | Principal |  | Term    |  | Rate |  | Maturity         
|                  | (Dollars in thousands)
|June 3, 2009      |                        | Fixed rate |  | 10,000    |  | 1 month |  | 0.36 |  | July 2, 2009     
|June17, 2009      |                        | Fixed rate |  | 34,000    |  | 1 month |  | 0.43 |  | July 17, 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: $ 70,000    Composite rate: 1.41%

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 June 30, 2009, compared to $26.0 million FHLB advances on December 31, 2008 and $26.0 million on
June 30, 2008. The decrease of $5.0 million in long-term FHLB advances as of June 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.



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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 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
$175.5 million, $168.6 million and $147.6 million of advances from the FHLB at June 30, 2009, December 31, 2008 and June 30, 2008, respectively. At June 30, 2009, we had outstanding FHLB advances totaling $70.0 million
compared to $60.0 million and $70.0 million at December 31, 2008 and June 30, 2008, respectively.

As a requirement for
membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At
June 30, 2009, we owned 51,160 shares of the FHLBs $100 par value capital stock, compared to 38,591 and 43,091 shares at December 31, 2008 and June 30, 2008, respectively. No ready market exists for such stock, which is carried
at cost.

We also had unsecured federal funds lines in the aggregate amount of $26.0 million available to us at June 30, 2009 under
which we can borrow funds to meet short-term liquidity needs. At June 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 six months ended June 30, 2009 totaled $3.2 million, compared to net cash provided by operations of $2.4 million for the same period in 2008. Net cash used in investing activities decreased to $83.1 million for the six
months ended June 30, 2009, as compared to $101.0 million for the same period in 2008. Net cash provided by financing activities was $88.3 million for the first half of 2009, compared to net cash provided of $93.8 million for the same period in
2008. Cash and cash equivalents at June 30, 2009 were $25.2 million compared to $16.9 million at June 30, 2008.

Capital Resources

Shareholders Equity

As of
June 30, 2009, our total shareholders equity was $85.8 million (consisting of common shareholders equity of $68.8 million and preferred stock of $17.0 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 fixed rate cumulative preferred stock, series A. 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 warrants to purchase



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144,984 shares of the Companys common stock. The Company received $17,949,000 in cash. Common shareholders equity increased by approximately $0.9
million to $68.8 million at June 30, 2009 from $67.9 million at December 31, 2008. We generated net income of $2.1 million, experienced a decrease in net unrealized gains on available-for-sale securities of $0.8 million and recognized
stock based compensation of $39 thousand on incentive stock awards. We declared cash dividends of $1.0 million on our common shares or $0.365 per share during the first half of 2009 and dividends of $296 thousand on preferred shares.

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

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

During the first half of 2009, we experienced an increase in our capital ratios when compared to the periods ending December 31, 2008 and June 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 June 30, 2009:                     |  |                                                                    |  |                                                   |  |          |   |  |             |  
|                                         |  |                                                                    |  |                                                  
|Tier 1 Capital (to Average Assets)       |  | 3    5.00%                                                         |  | 3  3.00%                                          |  | 9.76     | % |  | 7.71        | %
|                                         |  |                                                                    |  |                                                  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3    6.00%                                                         |  | 3  4.00%                                          |  | 13.20    |   |  | 10.43       |  
|                                         |  |                                                                    |  |                                                  
|Total Capital (to Risk Weighted Assets)  |  | 3  10.00%                                                          |  | 3  8.00%                                          |  | 14.09    |   |  | 11.33       |  
|                                         |  |                                                                    |  |                                                  
|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 June 30, 2008:                     |  |                                                                    |  |                                                   |  |          |   |  |             |  
|                                         |  |                                                                    |  |                                                  
|Tier 1 Capital (to Average Assets)       |  | 3    5.00%                                                         |  | 3  3.00%                                          |  | 9.28     | % |  | 7.82        | %
|                                         |  |                                                                    |  |                                                  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3    6.00%                                                         |  | 3  4.00%                                          |  | 11.52    |   |  | 9.70        |  
|                                         |  |                                                                    |  |                                                  
|Total Capital (to Risk Weighted Assets)  |  | 3  10.00%                                                          |  | 3  8.00%                                          |  | 12.33    |   |  | 10.52       |  



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|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

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

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 June 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.



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##### Table of Contents

|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
|------- | ---------------------------------------------------

Our annual
meeting of shareholders was held on April 21, 2009. At the meeting, our shareholders:



| |  |  | elected three directors for terms of three years each; and
| | - |  | ----------------------------------------------------------



| |  |  | approved a non-binding say on pay resolution regarding our executive compensation policies and practices; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | ratified the appointment of our independent public accountants for 2009.
| | - |  | ------------------------------------------------------------------------

The following table describes the results of the voting at the meeting.



|                                                          |  |                   |  |                                    |  |                 |  |                 
|--------------------------------------------------------- |  | ----------------- |  | ---------------------------------- |  | --------------- |  | ----------------
|Name of Nominee or Description of Other Matter Voted On   |  | SharesVoted For |  | SharesWithheld orVoted Against |  | SharesAbstained |  | BrokerNonvotes
|Election of Directors:                                    |  |                   |  |                                    |  |                 |  |                 
|George T. Davis Jr.                                       |  | 2,013,177         |  | 19,080                             |  | -0-             |  | -0-             
|Gregory C. Gibbs                                          |  | 2,017,713         |  | 14,544                             |  | -0-             |  | -0-             
|John F. Hughes, Jr.                                       |  | 2,005,971         |  | 26,286                             |  | -0-             |  | -0-             
|                                                          |  |                   |  |                                   
|Proposal to vote on Non-Binding Advisory Resolution       |  | 1,842,456         |  | 55,608                             |  | 134,193         |  | -0-             
|Proposal to Ratify Appointment of Independent Accountants |  | 2,027,851         |  | 4,278                              |  | 128             |  | -0-             



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

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



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SIGNATURES

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



|                      |  |  |  |                   |  |                                                  
|--------------------- |  |  |  | ----------------- |  | -------------------------------------------------
|                      |  |  |  | ECB BANCORP, INC.
|                      |  |  |  | (Registrant)     
|                      |  |  | 
|Date: August 10, 2009 |  |  |  | By:               |  | /s/ A. Dwight Utz                                
|                      |  |  |  |                   |  | A. Dwight Utz                                    
|                      |  |  |  |                   |  | President and Chief Executive Officer            
|                      |  |  | 
|Date: August 10, 2009 |  |  |  | By:               |  | /s/ Gary M. Adams                                
|                      |  |  |  |                   |  | Gary M. Adams                                    
|                      |  |  |  |                   |  | Senior Vice President and Chief Financial Officer



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EXHIBIT INDEX



|              |  |                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                     
|31.1          |  | Certification of Chief Executive Officer required by Rule 13a-14(a) (furnished herewith)        
|              | 
|31.2          |  | Certification of Chief Financial Officer required by Rule 13a-14(a) (furnished herewith)        
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)



40