2008
  ANNUAL
  REPORT


LETTER
TO SHAREHOLDERS







March 13,
2009





Dear
Shareholders:





We want
to share with you the Annual Report for FPB Bancorp, Inc. (FPBI) for the year
ended December 31, 2008. It goes without saying that 2008 was a very sobering
and historical year, with many dramatic changes both economically and
politically in Florida, as well as the entire country. We have seen our area
greatly impacted by continued declines in real estate values and high
unemployment, resulting in a high number of business failures and residential
foreclosures, ranking Florida as one of the top five states in the country in
these categories.





By now we
all know what the phrase “sub-prime mortgage” means and how it has affected the
local, state, national and worldwide economies. Our subsidiary, First Peoples
Bank did not engage in any sub-prime lending, nor did we invest in any of the
exotic investment vehicles that were being offered industry wide. The economic
downturn has, however, negatively affected our Bank’s earnings and has impacted
not only our loan portfolio, but credit quality across the banking industry.
This has resulted in a number of our customers being unable to make the
scheduled payments on their loans. Banking regulations require us to downgrade
these loans and recognize any future potential losses in our loan portfolio,
causing us to have to significantly increase our loan loss reserves for these
potential future losses.





We opened
two branches in 2008, which were previously planned and budgeted in our
long-range growth strategy. The performance of those offices has been
dramatically affected by the economic downturn, which significantly reduced the
original growth projections. As the economy rebounds, we expect the growth at
those locations to resume.





FPBI and
First Peoples Bank continue to be well-capitalized. We were among the first
banks in the country to apply and receive funds under the U.S. Treasury
T.A.R.P.-Capital Purchase Program. Although we were well-capitalized before
applying, those funds will allow us to meet our customer’s borrowing needs and
provide for supplemental capital for additional reserves that might be required
should economic conditions continue to deteriorate.





We ended
2008 with a consolidated net loss of approximately $3.0 million compared to 2007
net earnings of $177,000. This dramatic change is a stark reminder of the impact
of the declining local and national economies. Our management team recognized
the downturn early on, electing to slow our loan growth in 2008. Net loans grew
by $12 million, an increase of only 7%, and ended the year with total loans of
$184.2 million. This was in contrast to loan growth in several prior years,
which averaged above 20%.


In
anticipation of the net loss for 2008, the Board and management took steps to
reduce costs and expenses throughout the Company which included reducing staff
in all areas by approximately 18%, freezing all executive and employee salaries,
suspending bonuses, and reducing director fees.





The
recession has impacted both loan and deposit rates. The Prime rate of interest
decreased from 7 1⁄4% to the current 31⁄4%, with a total of seven downward prime
rate decreases. This downward decrease in rates had a profound affect on our
income, as many of our loans are tied to an adjustable rate, and the income
earned on these loans decreased with the market.





FPBI
ended 2008 with total consolidated assets of $239 million, a 22% increase, or
$42 million over year-end. Deposits were up 16%, or $28 million for a total of
$200 million. All interest bearing accounts at First Peoples Bank are FDIC
insured for $250,000 per account title and all non-interest bearing accounts are
insured with no cap until December 31, 2009. We would like to emphasize that no
one has ever lost a penny on an account that is covered by FDIC
insurance.





Our
directors, officers and employees remain very active in many community
functions, charitable organizations and events, with over 3,000 volunteer hours
in 2008. As a local community bank we make quick decisions and are working with
our customers, some of whom are experiencing difficulties throughout these
trying times. This sometimes can mean lower performance scores for our bank when
compared with our peer banks in some of the media published rating services,
such as Bauer Financial. Our management team and directors, however, feel
compelled to assist our customers, protect their credit scores and keep local
businesses open rather than close them down. While our collection efforts have
had to be intensified, we continue to assist borrowers who are trying to work
their way through the current financial turmoil we are
experiencing.





We can
assure you that our management and Board of Directors are working diligently to
ensure the success and profitability of FPBI and First Peoples Bank. We will
continue to strive to keep your Company safe and sound throughout this downward
economic cycle and we are confident that we will be able to meet all challenges
and overcome them. On April 26, 2009, we will be celebrating the 10th
anniversary of First Peoples Bank. We will operate as we always have, proud of
our heritage and purpose, to serve our customers and community and strive to
enhance long-term shareholder value.





We
continue to be optimistic about the future of the bank in the communities that
we serve.  People will always be FIRSTat First Peoples Bank
and if you haven’t stopped in for a visit or to open your shareholder account,
or our new Advantage Checking Account, please do so at any of our six convenient
full service locations. On behalf of our directors, management and staff we
again want to thank you for your support, commitment and belief in our mission
to bring community and people centered banking to our area.







Sincerely,











David W.
Skiles                                                                                                           
Gary A. Berger


DWS sign     Berger sign




President
&
CEO                                                                                         Chairman of the
Board























CORPORATE
PROFILE





FPB
Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock
of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding
common stock of Treasure Coast Holdings, Inc., (collectively referred to as the
"Company"). The Holding Company operates as a one-bank holding company and its
only business activity is the operation of the Bank.  The Bank is a
state (Florida)-chartered commercial bank and its deposits are insured up to the
maximum amounts by the Federal Deposit Insurance Corporation, which are
currently $250,000 for all qualified deposits, and unlimited for non-interest
bearing transaction accounts, both through  December 31, 2009. The
Bank offers a variety of community banking services to individual and corporate
customers through its six banking offices located in Port St. Lucie, Stuart,
Fort Pierce, Vero Beach and Palm City, Florida.  The newest office
opened in May, 2008, on Gatlin Boulevard in Port St. Lucie,
Florida.  In addition, the Palm City, Florida office opened in January
of 2008 and an 11,000 square foot Operations Center in Jensen Beach, Florida,
opened in March of 2007.  The new subsidiary, Treasure Coast Holdings,
Inc., was incorporated in June 2008 for the sole purpose of managing foreclosed
assets.  At December 31, 2008, we had total consolidated assets of
$239 million and total consolidated stockholders' equity of $24.9
million.  For the year ended December 31, 2008, we had net losses of
$3.0 million.





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report contains certain forward-looking statements which represent our
expectations or beliefs, including, but not limited to, statements concerning
the banking industry and our operations, performance, financial condition and
growth.  For this purpose, any statements contained in this Report
that are not statements of historical fact may be deemed forward-looking
statements.  Without limiting the generality of the foregoing, words
such as "may," "will," "expect," "believe," "anticipate," "intend," "could,"
"should," "can," "estimate," or "continue" or the negative of other variations
thereof or comparable terminology are intended to identify forward-looking
statements.  These statements by their nature may involve substantial
risks and uncertainties, certain of which are beyond our control, and actual
results may differ materially depending on a variety of important factors,
including competition, general economic conditions, changes in interest rates,
and changes in the value of real estate and other collateral securing loans,
among other things.





This
statement has not been reviewed, or confirmed for accuracy or relevance, by the
Federal Deposit Insurance Corporation.







Contents
                  PageFinancial Highlights
                  1Selected Financial Data
                  2Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                  3-19Consolidated Financial Statements
                  20-52Report of Independent Registered Public Accounting
      Firm
                  53Board of Directors
                  54Non-Director Executive Officers
                  54First Peoples Bank Board of Directors and
      Officers
                  55Community Liaison Board
                  56General
      Information
                  57Common Stock Prices and Dividends
                  57


















FINANCIAL HIGHLIGHTS





December
31, 2008 and 2007 or the Years Then Ended


(Dollars
in thousands, except per share figures)





At Year End:
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          2006Assets
                                                                          
                                                                          $
                                                                          239,173
                                                                          
                                                                          
                                                                          $
                                                                          196,753
                                                                          
                                                                          
                                                                          $
                                                                          153,439Loans,
      net
                                                                          
                                                                          $
                                                                          184,182
                                                                          
                                                                          
                                                                          $
                                                                          172,251
                                                                          
                                                                          
                                                                          $
                                                                          130,133Securities
                                                                          
                                                                          $
                                                                          33,239
                                                                          
                                                                          
                                                                          $
                                                                          6,793
                                                                          
                                                                          
                                                                          $
                                                                          8,953Deposits
                                                                          
                                                                          $
                                                                          200,683
                                                                          
                                                                          
                                                                          $
                                                                          172,677
                                                                          
                                                                          
                                                                          $
                                                                          130,219Stockholders'
      equity
                                                                          
                                                                          $
                                                                          24,896
                                                                          
                                                                          
                                                                          $
                                                                          21,931
                                                                          
                                                                          
                                                                          $
                                                                          21,063Book
      value per share (1)
                                                                          
                                                                          $
                                                                          9.53
                                                                          
                                                                          
                                                                          $
                                                                          10.66
                                                                          
                                                                          
                                                                          $
                                                                          10.52Shares
      outstanding (1)
                                                                          
                                                                          
                                                                          2,058,047
                                                                          
                                                                          
                                                                          
                                                                          2,058,047
                                                                          
                                                                          
                                                                          
                                                                          2,001,513Equity
      as a percentage of assets
                                                                          
                                                                          
                                                                          10.41
                                                                          %
                                                                          
                                                                          
                                                                          11.15
                                                                          %
                                                                          
                                                                          
                                                                          13.73
                                                                          %Nonperforming
      assets as a percentage of total assets
                                                                          
                                                                          
                                                                          5.05
                                                                          %
                                                                          
                                                                          
                                                                          .89
                                                                          %
                                                                          
                                                                          
                                                                          .22
                                                                          %For
      The Year:Interest
      income
                                                                          
                                                                          $
                                                                          13,802
                                                                          
                                                                          
                                                                          $
                                                                          13,588
                                                                          
                                                                          
                                                                          $
                                                                          10,626Net
      (loss) earnings
                                                                          
                                                                          $
                                                                          (2,978
                                                                          )
                                                                          
                                                                          $
                                                                          177
                                                                          
                                                                          
                                                                          $
                                                                          631(Loss)
      earnings per common share, basic (1)
                                                                          
                                                                          $
                                                                          (1.46
                                                                          )
                                                                          
                                                                          $
                                                                          .09
                                                                          
                                                                          
                                                                          $
                                                                          .32(Loss)
      earnings per common share, diluted (1)
                                                                          
                                                                          $
                                                                          (1.46
                                                                          )
                                                                          
                                                                          $
                                                                          .09
                                                                          
                                                                          
                                                                          $
                                                                          .31Return
      on average assets
                                                                          
                                                                          
                                                                          (1.37
                                                                          )%
                                                                          
                                                                          
                                                                          .10
                                                                          %
                                                                          
                                                                          
                                                                          .43
                                                                          %Return
      on average equity
                                                                          
                                                                          
                                                                          (13.97
                                                                          )%
                                                                          
                                                                          
                                                                          .83
                                                                          %
                                                                          
                                                                          
                                                                          3.04
                                                                          %Average
      equity as a percentage of average assets
                                                                          
                                                                          
                                                                          9.79
                                                                          %
                                                                          
                                                                          
                                                                          12.11
                                                                          %
                                                                          
                                                                          
                                                                          14.08
                                                                          %Non-interest
      expenses to average assets
                                                                          
                                                                          
                                                                          3.89
                                                                          %
                                                                          
                                                                          
                                                                          4.18
                                                                          %
                                                                          
                                                                          
                                                                          4.12
                                                                          %Yields
      and Rates:Loan
      portfolio
                                                                          
                                                                          
                                                                          7.02
                                                                          %
                                                                          
                                                                          
                                                                          8.49
                                                                          %
                                                                          
                                                                          
                                                                          8.33
                                                                          %Securities
                                                                          
                                                                          
                                                                          4.95
                                                                          %
                                                                          
                                                                          
                                                                          4.87
                                                                          %
                                                                          
                                                                          
                                                                          3.97
                                                                          %Other
      interest-earning assets
                                                                          
                                                                          
                                                                          2.00
                                                                          %
                                                                          
                                                                          
                                                                          4.98
                                                                          %
                                                                          
                                                                          
                                                                          4.56
                                                                          %All
      interest-earning assets
                                                                          
                                                                          
                                                                          6.71
                                                                          %
                                                                          
                                                                          
                                                                          8.18
                                                                          %
                                                                          
                                                                          
                                                                          7.65
                                                                          %Deposits
                                                                          
                                                                          
                                                                          4.05
                                                                          %
                                                                          
                                                                          
                                                                          4.85
                                                                          %
                                                                          
                                                                          
                                                                          3.82
                                                                          %Borrowings
                                                                          
                                                                          
                                                                          2.54
                                                                          %
                                                                          
                                                                          
                                                                          4.00
                                                                          %
                                                                          
                                                                          
                                                                          4.74
                                                                          %All
      interest-bearing liabilities
                                                                          
                                                                          
                                                                          4.04
                                                                          %
                                                                          
                                                                          
                                                                          4.85
                                                                          %
                                                                          
                                                                          
                                                                          3.83
                                                                          %Interest-rate
      spread (2)
                                                                          
                                                                          
                                                                          2.67
                                                                          %
                                                                          
                                                                          
                                                                          3.33
                                                                          %
                                                                          
                                                                          
                                                                          3.82
                                                                          %Net
      yield on average interest earning assets (3)
                                                                          
                                                                          
                                                                          3.33
                                                                          %
                                                                          
                                                                          
                                                                          4.53
                                                                          %
                                                                          
                                                                          
                                                                          4.79
                                                                          %


_________________






(1)
            All
      per share amounts reflect the 5% stock dividends declared on May 16, 2007
      and paid on June 15, 2007.


(2)
            Average
      yield on all interest-earning assets less average rate paid on all
      interest-bearing liabilities.


(3)
            Net
      interest income divided by average interest-earning
  assets.







1
 Table of Contents








SELECTED FINANCIAL DATA


December
31, 2008, 2007, 2006, 2005 and 2004 and the


Years
Ended December 31, 2008, 2007, 2006, 2005 and 2004


(Dollars
in thousands, except per share figures)





At
      Year End:
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2006
                                                                  
                                                                  
                                                                  2005
                                                                  
                                                                  
                                                                  2004Cash and cash equivalents
                                                                  
                                                                  $
                                                                  5,457
                                                                  
                                                                  
                                                                  6,795
                                                                  
                                                                  
                                                                  5,422
                                                                  
                                                                  
                                                                  12,366
                                                                  
                                                                  
                                                                  9,759Securities
                                                                  
                                                                  
                                                                  33,239
                                                                  
                                                                  
                                                                  6,793
                                                                  
                                                                  
                                                                  8,953
                                                                  
                                                                  
                                                                  12,244
                                                                  
                                                                  
                                                                  11,371Loans, net
                                                                  
                                                                  
                                                                  184,182
                                                                  
                                                                  
                                                                  172,251
                                                                  
                                                                  
                                                                  130,133
                                                                  
                                                                  
                                                                  95,666
                                                                  
                                                                  
                                                                  68,794All other assets
                                                                  
                                                                  
                                                                  16,295
                                                                  
                                                                  
                                                                  10,914
                                                                  
                                                                  
                                                                  8,931
                                                                  
                                                                  
                                                                  7,033
                                                                  
                                                                  
                                                                  4,673Total assets
                                                                  
                                                                  $
                                                                  239,173
                                                                  
                                                                  
                                                                  196,753
                                                                  
                                                                  
                                                                  153,439
                                                                  
                                                                  
                                                                  127,309
                                                                  
                                                                  
                                                                  94,597Deposit accounts
                                                                  
                                                                  $
                                                                  200,683
                                                                  
                                                                  
                                                                  172,677
                                                                  
                                                                  
                                                                  130,219
                                                                  
                                                                  
                                                                  102,809
                                                                  
                                                                  
                                                                  81,936Federal Home Loan Bank advances
                                                                  
                                                                  
                                                                  11,100
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  2,600
                                                                  
                                                                  
                                                                  2,500All other liabilities
                                                                  
                                                                  
                                                                  2,494
                                                                  
                                                                  
                                                                  2,045
                                                                  
                                                                  
                                                                  2,057
                                                                  
                                                                  
                                                                  1,559
                                                                  
                                                                  
                                                                  2,741Stockholders' equity
                                                                  
                                                                  
                                                                  24,896
                                                                  
                                                                  
                                                                  21,931
                                                                  
                                                                  
                                                                  21,063
                                                                  
                                                                  
                                                                  20,341
                                                                  
                                                                  
                                                                  7,420Total liabilities and stockholders' equity
                                                                  
                                                                  $
                                                                  239,173
                                                                  
                                                                  
                                                                  196,753
                                                                  
                                                                  
                                                                  153,439
                                                                  
                                                                  
                                                                  127,309
                                                                  
                                                                  
                                                                  94,597For
      the Period:Total interest income
                                                                  
                                                                  $
                                                                  13,802
                                                                  
                                                                  
                                                                  13,588
                                                                  
                                                                  
                                                                  10,626
                                                                  
                                                                  
                                                                  7,243
                                                                  
                                                                  
                                                                  4,345Total interest expense
                                                                  
                                                                  
                                                                  6,951
                                                                  
                                                                  
                                                                  6,060
                                                                  
                                                                  
                                                                  3,976
                                                                  
                                                                  
                                                                  1,939
                                                                  
                                                                  
                                                                  1,074Net interest income
                                                                  
                                                                  
                                                                  6,851
                                                                  
                                                                  
                                                                  7,528
                                                                  
                                                                  
                                                                  6,650
                                                                  
                                                                  
                                                                  5,304
                                                                  
                                                                  
                                                                  3,271Provision for loan losses
                                                                  
                                                                  
                                                                  4,059
                                                                  
                                                                  
                                                                  885
                                                                  
                                                                  
                                                                  429
                                                                  
                                                                  
                                                                  352
                                                                  
                                                                  
                                                                  380Net interest income after provision for loan losses
                                                                  
                                                                  
                                                                  2,792
                                                                  
                                                                  
                                                                  6,643
                                                                  
                                                                  
                                                                  6,221
                                                                  
                                                                  
                                                                  4,952
                                                                  
                                                                  
                                                                  2,891Non-interest income
                                                                  
                                                                  
                                                                  874
                                                                  
                                                                  
                                                                  996
                                                                  
                                                                  
                                                                  824
                                                                  
                                                                  
                                                                  930
                                                                  
                                                                  
                                                                  759Non-interest expenses
                                                                  
                                                                  
                                                                  8,464
                                                                  
                                                                  
                                                                  7,385
                                                                  
                                                                  
                                                                  6,082
                                                                  
                                                                  
                                                                  4,639
                                                                  
                                                                  
                                                                  3,440(Loss) earnings before income taxes
                                                                  
                                                                  
                                                                  (4,798
                                                                  )
                                                                  
                                                                  254
                                                                  
                                                                  
                                                                  963
                                                                  
                                                                  
                                                                  1,243
                                                                  
                                                                  
                                                                  210Income tax (benefit)
                                                                  
                                                                  
                                                                  (1,820
                                                                  )
                                                                  
                                                                  77
                                                                  
                                                                  
                                                                  332
                                                                  
                                                                  
                                                                  478
                                                                  
                                                                  
                                                                  87Net (loss) earnings
                                                                  
                                                                  $
                                                                  (2,978
                                                                  )
                                                                  
                                                                  177
                                                                  
                                                                  
                                                                  631
                                                                  
                                                                  
                                                                  765
                                                                  
                                                                  
                                                                  123(Loss) earnings per basic common share (1)
                                                                  
                                                                  $
                                                                  (1.46
                                                                  )
                                                                  
                                                                  .09
                                                                  
                                                                  
                                                                  .32
                                                                  
                                                                  
                                                                  .50
                                                                  
                                                                  
                                                                  .14(Loss) earnings per diluted common share (1)
                                                                  
                                                                  $
                                                                  (1.46
                                                                  )
                                                                  
                                                                  .09
                                                                  
                                                                  
                                                                  .31
                                                                  
                                                                  
                                                                  .49
                                                                  
                                                                  
                                                                  .14Weighted-average number of common shares outstanding  for basic
      (1)
                                                                  
                                                                  
                                                                  2,058,047
                                                                  
                                                                  
                                                                  2,017,553
                                                                  
                                                                  
                                                                  1,998,871
                                                                  
                                                                  
                                                                  1,539,513
                                                                  
                                                                  
                                                                  902,068Weighted-average number of common shares outstanding for diluted (1)
                                                                  
                                                                  
                                                                  2,058,047
                                                                  
                                                                  
                                                                  2,034,070
                                                                  
                                                                  
                                                                  2,030,344
                                                                  
                                                                  
                                                                  1,553,623
                                                                  
                                                                  
                                                                  902,068Ratios
      and Other Data:Return on average assets
                                                                  
                                                                  
                                                                  (1.37
                                                                  )%
                                                                  
                                                                  .10
                                                                  %
                                                                  
                                                                  .43
                                                                  %
                                                                  
                                                                  .64
                                                                  %
                                                                  
                                                                  .15
                                                                  %Return on average equity
                                                                  
                                                                  
                                                                  (13.97
                                                                  )%
                                                                  
                                                                  .83
                                                                  %
                                                                  
                                                                  3.04
                                                                  %
                                                                  
                                                                  5.42
                                                                  %
                                                                  
                                                                  1.67
                                                                  %Average equity as a percentage of average assets
                                                                  
                                                                  
                                                                  9.79
                                                                  %
                                                                  
                                                                  12.11
                                                                  %
                                                                  
                                                                  14.08
                                                                  %
                                                                  
                                                                  11.85
                                                                  %
                                                                  
                                                                  9.02
                                                                  %Interest-rate spread during the period
                                                                  
                                                                  
                                                                  2.67
                                                                  %
                                                                  
                                                                  3.33
                                                                  %
                                                                  
                                                                  3.82
                                                                  %
                                                                  
                                                                  3.79
                                                                  %
                                                                  
                                                                  3.87
                                                                  %Net yield on average interest-earning assets
                                                                  
                                                                  
                                                                  3.33
                                                                  %
                                                                  
                                                                  4.53
                                                                  %
                                                                  
                                                                  4.79
                                                                  %
                                                                  
                                                                  4.67
                                                                  %
                                                                  
                                                                  4.36
                                                                  %Non-interest expenses to average assets
                                                                  
                                                                  
                                                                  3.89
                                                                  %
                                                                  
                                                                  4.18
                                                                  %
                                                                  
                                                                  4.12
                                                                  %
                                                                  
                                                                  3.89
                                                                  %
                                                                  
                                                                  4.23
                                                                  %Ratio of average interest-earning assets to average interest-bearing
      liabilities
                                                                  
                                                                  
                                                                  1.20
                                                                  
                                                                  
                                                                  1.33
                                                                  
                                                                  
                                                                  1.34
                                                                  
                                                                  
                                                                  1.51
                                                                  
                                                                  
                                                                  1.34Nonperforming loans and foreclosed real estate as a  percentage
      of total assets at end of year
                                                                  
                                                                  
                                                                  5.05
                                                                  %
                                                                  
                                                                  .89
                                                                  %
                                                                  
                                                                  .22
                                                                  %
                                                                  
                                                                  -
                                                                  %
                                                                  
                                                                  .52
                                                                  %Allowance for loan losses as a percentage of total loans at end of
      year
                                                                  
                                                                  
                                                                  1.36
                                                                  %
                                                                  
                                                                  1.36
                                                                  %
                                                                  
                                                                  1.36
                                                                  %
                                                                  
                                                                  1.42
                                                                  %
                                                                  
                                                                  1.56
                                                                  %Total number of banking offices
                                                                  
                                                                  
                                                                  6
                                                                  
                                                                  
                                                                  4
                                                                  
                                                                  
                                                                  4
                                                                  
                                                                  
                                                                  3
                                                                  
                                                                  
                                                                  3Total shares outstanding at end of year (1)
                                                                  
                                                                  
                                                                  2,058,047
                                                                  
                                                                  
                                                                  2,058,047
                                                                  
                                                                  
                                                                  2,001,513
                                                                  
                                                                  
                                                                  1,996,172
                                                                  
                                                                  
                                                                  903,079Book value per share at end of year (1)
                                                                  
                                                                  $
                                                                  9.53
                                                                  
                                                                  
                                                                  $
                                                                  10.66
                                                                  
                                                                  
                                                                  $
                                                                  10.52
                                                                  
                                                                  
                                                                  $
                                                                  10.19
                                                                  
                                                                  
                                                                  $
                                                                  8.22





(1)   All
per share amounts reflect the 5% stock dividends declared on May 16, 2007 and
paid on June 15, 2007.





2
 Table of Contents




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









The
following discussion of our financial condition and our results of operations
should be read in conjunction with the consolidated financial statements and the
related notes, as of December 31, 2008 and 2007, included elsewhere in this
Annual Report.  This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements.





General





FPB
Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock
of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding
common stock of Treasure Coast Holdings, Inc., (collectively referred to as the
"Company"). The Holding Company operates as a one-bank holding company and its
only business activity is the operation of the Bank.  The Bank is a
state (Florida)-chartered commercial bank and its deposits are insured up to the
maximum amounts by the Federal Deposit Insurance Corporation, which are
currently $250,000 for all qualified deposits, and unlimited for non-interest
bearing transaction accounts, both through  December 31, 2009. The
Bank offers a variety of community banking services to individual and corporate
customers through its six banking offices located in Port St. Lucie, Stuart,
Fort Pierce, Vero Beach and Palm City, Florida.  The newest office
opened in May, 2008, on Gatlin Boulevard in Port St. Lucie,
Florida.  In addition, the Palm City, Florida office opened in January
of 2008 and an 11,000 square foot Operations Center in Jensen Beach, Florida,
opened in March of 2007.  The new subsidiary, Treasure Coast Holdings,
Inc., was incorporated in June 2008 for the sole purpose of managing foreclosed
assets.  At December 31, 2008, we had total consolidated assets of
$239 million and total consolidated stockholders' equity of $24.9
million.  For the year ended December 31, 2008, we had net losses of
$3.0 million.





Management’s
Strategy





We are
organized as a locally-owned, locally managed community financial institution,
owned and managed by people who are actively involved in our market area and are
committed to our economic growth and development.  With local
ownership, management, and directors, we believe that we can be more responsive
to the communities that we serve.  Local ownership allows faster, more
responsive and flexible decision-making, which is not available at the majority
of the financial institutions in or near our market area which consist primarily
of branch offices of large regional holding company banks with headquarters
located elsewhere in the United States.





Our
principal business is to attract deposits from the general public and to invest
those funds in various types of loans and other interest-earning
assets.  Funds are provided for the operations by the proceeds from
the sale of investments, from amortization and repayment of outstanding loans
and investments, from net deposit inflow, and from borrowings.  Our
earnings depend primarily upon the difference between: (1) non-interest income,
and the interest and fees we receive from loans, the securities held in our
investment portfolio and other investments; and (2) the expenses we incur in
connection with obtaining funds for lending (including interest paid on deposits
and other borrowings) and expenses relating to day-to-day
operations.





To the
extent market conditions permit, our strategy is intended to insulate our
interest rate gap from adverse changes in interest rates by maintaining spreads
through the adjustability of our interest-earning assets and interest-bearing
liabilities.  Our ability to reduce interest-rate risk in our loan and
investment portfolios depends upon a number of factors, many of which are beyond
our control, including among others, competition for loans and deposits in our
market area and conditions prevailing in the economy.




(continued)


3
 Table of Contents




Our
primary sources of funds for loans and for other general business purposes are
our capital, deposits and loan repayments.  We expect that loan
repayments will be relatively stable sources of funds, while deposit inflows and
outflows will be significantly influenced by prevailing interest rates, money
market rates, and general economic conditions.  Generally, short-term
borrowings may be used to compensate for reductions in normal sources of funds
while longer-term borrowings may be used to support expanded lending
activities.




Our
customers are primarily individuals, professionals, small and medium-size
businesses, and seasonal retirees located predominantly in St. Lucie, Martin and
Indian River Counties, Florida.  Our offices are currently located in
Stuart, Palm City, Port St. Lucie, Fort Pierce and Vero Beach,
Florida.  The Gatlin Boulevard office in Port St. Lucie, Florida
opened in May of 2008 and the Palm City office in Palm City, Florida opened in
January of 2008.  An 11,000 square foot Operations Center opened in
March, 2007 in Jensen Beach, Florida.





We
continually seek to develop new business through an ongoing program of personal
calls on both present and potential customers. As a local independent bank, we
utilize traditional local advertising media to promote and develop loans and
deposits.  In addition, all of our directors have worked and lived in
or near our market area for a number of years.  We believe that these
factors, coupled with the past and continued involvement of the directors,
officers and staff in various local community activities, will further promote
our image as a locally owned independent institution, which we believe is an
important factor to our targeted customer base.




Critical
Accounting Policies





Our
financial condition and results of operations are sensitive to accounting
measurements and estimates of matters that are inherently
uncertain.  When applying accounting policies in areas that are
subjective in nature, we must use our best judgment to arrive at the carrying
value of certain assets.  The most critical accounting policy we apply
is related to the valuation of the loan portfolio.





A variety
of estimates impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization of
loan fees and deferred origination costs.





Establishing
allowance for loan losses requires the most difficult and subjective judgment of
all.  The allowance is established and maintained at a level we
believe is adequate to cover losses resulting from the inability of borrowers to
make required payments on loans.  Estimates for loan losses are
arrived at by analyzing risks associated with specific loans and with the entire
loan portfolio, current trends in delinquencies and charge-offs, the views of
our regulators, changes in the size and composition of the loan portfolio and
peer comparisons.  The analysis also requires consideration of both
the local and national economic climate and direction, and changes in the
interest rate environment, which may impact a borrower’s ability to pay,
legislation impacting the banking industry and economic conditions specific to
the bank’s service area.  Because the calculation of the allowance for
loan losses relies on our estimates and judgments relating to inherently
uncertain events, results may differ from our estimates.





The
allowance for loan losses is also discussed as part of “Results of Operations”
and in Note 3 to the consolidated financial statements.  The
significant accounting policies are discussed in Note 1 to the consolidated
financial statements.





4
 Table of Contents




Regulation





As a bank
holding company, we are regulated by the Board of Governors of the Federal
Reserve System. As a Florida state chartered commercial bank, we are subject to
extensive regulation by the Florida Office of Financial Regulation, Department
of Financial Services (the “Department”), and the Federal Deposit Insurance
Corporation (“FDIC”).  We file reports with the Department and the
FDIC concerning our activities and financial condition, in addition to obtaining
regulatory approvals from all three agencies prior to entering into certain
transactions such as mergers with or acquisitions of other financial
institutions.  Periodic examinations are performed by the Department
and the FDIC to monitor our compliance with the various regulatory
requirements.





Credit
Risk





Our
primary business is making business and consumer loans.  That activity
entails potential loan losses, the magnitude of which depends on a variety of
economic factors affecting borrowers which are beyond our
control.  While underwriting guidelines have been instituted and
credit review procedures have been put in place to protect us from avoidable
credit losses, some losses will inevitably occur.  At December 31,
2008, we had nonperforming assets of $12.1 million.





Allowance
for Loan Losses





The
following table presents information regarding our total allowance for loan
losses as well as the allocation of such amounts to the various categories of
loans at December 31, (dollars in thousands):





2008
                                                                    
                                                                    2007
                                                                    
                                                                    2006
                                                                    
                                                                    2005
                                                                    
                                                                    2004Loans
      to
                                                                      Total
      Loans
                                                                    
                                                                    
                                                                    
                                                                    Loans
      to
                                                                      Total
      Loans
                                                                    
                                                                    
                                                                    
                                                                    Loans
      to
                                                                      Total
      Loans
                                                                    
                                                                    
                                                                    
                                                                    Loans
      to
                                                                      Total
      Loans
                                                                    
                                                                    
                                                                    
                                                                    Loans
      to
                                                                      Total
      LoansAmount
                                                                    
                                                                    Amount
                                                                    
                                                                    Amount
                                                                    
                                                                    Amount
                                                                    
                                                                    AmountCommercial
                                                                    $
                                                                    1,292
                                                                    
                                                                    34.04
                                                                    %
                                                                    $
                                                                    1,156
                                                                    
                                                                    34.15
                                                                    %
                                                                    $
                                                                    811
                                                                    
                                                                    38.13
                                                                    %
                                                                    $
                                                                    576
                                                                    
                                                                    37.42
                                                                    %
                                                                    $
                                                                    468
                                                                    
                                                                    32.27
                                                                    %Commercialreal
      estate
                                                                    
                                                                    916
                                                                    
                                                                    50.54
                                                                    
                                                                    
                                                                    857
                                                                    
                                                                    47.31
                                                                    
                                                                    
                                                                    631
                                                                    
                                                                    42.24
                                                                    
                                                                    
                                                                    478
                                                                    
                                                                    40.79
                                                                    
                                                                    
                                                                    312
                                                                    
                                                                    43.90Construction
                                                                    
                                                                    113
                                                                    
                                                                    5.23
                                                                    
                                                                    
                                                                    145
                                                                    
                                                                    6.38
                                                                    
                                                                    
                                                                    65
                                                                    
                                                                    4.59
                                                                    
                                                                    
                                                                    53
                                                                    
                                                                    4.47
                                                                    
                                                                    
                                                                    36
                                                                    
                                                                    2.47Consumer
                                                                    
                                                                    228
                                                                    
                                                                    10.02
                                                                    
                                                                    
                                                                    234
                                                                    
                                                                    12.13
                                                                    
                                                                    
                                                                    293
                                                                    
                                                                    14.80
                                                                    
                                                                    
                                                                    274
                                                                    
                                                                    17.11
                                                                    
                                                                    
                                                                    255
                                                                    
                                                                    21.10Residentialreal
      estate
                                                                    
                                                                    3
                                                                    
                                                                    .17
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    .03
                                                                    
                                                                    
                                                                    1
                                                                    
                                                                    .24
                                                                    
                                                                    
                                                                    2
                                                                    
                                                                    .21
                                                                    
                                                                    
                                                                    26
                                                                    
                                                                    .26Total
      allowance for loan losses
                                                                    $
                                                                    2,552
                                                                    
                                                                    100.00
                                                                    %
                                                                    $
                                                                    2,393
                                                                    
                                                                    100.00
                                                                    %
                                                                    $
                                                                    1,801
                                                                    
                                                                    100.00
                                                                    %
                                                                    $
                                                                    1,383
                                                                    
                                                                    100.00
                                                                    %
                                                                    $
                                                                    1,097
                                                                    
                                                                    100.00
                                                                    %Allowance
      for loan losses as a percentage oftotal
                                                                      loans outstanding
                                                                    
                                                                    
                                                                    
                                                                    1.36
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    1.36
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    1.36
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    1.42
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    1.56
                                                                    %






5
 Table of Contents




Loan
Portfolio





The
following table sets forth the composition of our loan portfolio at December 31,
(dollars in thousands):





2008
                                                                              
                                                                              2007
                                                                              
                                                                              2006
                                                                              
                                                                              2005
                                                                              
                                                                              2004%
      of
                                                                                Total
                                                                              
                                                                              
                                                                              
                                                                              %
      of
                                                                                Total
                                                                              
                                                                              
                                                                              
                                                                              %
      of
                                                                                Total
                                                                              
                                                                              
                                                                              
                                                                              %
      of
                                                                                Total
                                                                              
                                                                              
                                                                              
                                                                              %
      of
                                                                                TotalAmount
                                                                              
                                                                              Amount
                                                                              
                                                                              Amount
                                                                              
                                                                              Amount
                                                                              
                                                                              AmountCommercial
                                                                              $
                                                                              63,768
                                                                              
                                                                              34.04
                                                                              %
                                                                              $
                                                                              59,878
                                                                              
                                                                              34.15
                                                                              %
                                                                              $
                                                                              50,521
                                                                              
                                                                              38.13
                                                                              %
                                                                              $
                                                                              36,510
                                                                              
                                                                              37.42
                                                                              %
                                                                              $
                                                                              22,640
                                                                              
                                                                              32.27
                                                                              %Commercial
      real estate
                                                                              
                                                                              94,675
                                                                              
                                                                              50.54
                                                                              
                                                                              
                                                                              82,951
                                                                              
                                                                              47.31
                                                                              
                                                                              
                                                                              55,967
                                                                              
                                                                              42.24
                                                                              
                                                                              
                                                                              39,794
                                                                              
                                                                              40.79
                                                                              
                                                                              
                                                                              30,803
                                                                              
                                                                              43.90Construction
                                                                              
                                                                              9,793
                                                                              
                                                                              5.23
                                                                              
                                                                              
                                                                              11,186
                                                                              
                                                                              6.38
                                                                              
                                                                              
                                                                              6,089
                                                                              
                                                                              4.59
                                                                              
                                                                              
                                                                              4,365
                                                                              
                                                                              4.47
                                                                              
                                                                              
                                                                              1,731
                                                                              
                                                                              2.47Consumer
                                                                              
                                                                              18,762
                                                                              
                                                                              10.02
                                                                              
                                                                              
                                                                              21,279
                                                                              
                                                                              12.13
                                                                              
                                                                              
                                                                              19,618
                                                                              
                                                                              14.80
                                                                              
                                                                              
                                                                              16,688
                                                                              
                                                                              17.11
                                                                              
                                                                              
                                                                              14,803
                                                                              
                                                                              21.10Residential
      real estate
                                                                              
                                                                              324
                                                                              
                                                                              .17
                                                                              
                                                                              
                                                                              48
                                                                              
                                                                              .03
                                                                              
                                                                              
                                                                              315
                                                                              
                                                                              .24
                                                                              
                                                                              
                                                                              206
                                                                              
                                                                              .21
                                                                              
                                                                              
                                                                              181
                                                                              
                                                                              .26187,322
                                                                              
                                                                              100.00
                                                                              %
                                                                              
                                                                              175,342
                                                                              
                                                                              100.00
                                                                              %
                                                                              
                                                                              132,510
                                                                              
                                                                              100.00
                                                                              %
                                                                              
                                                                              97,563
                                                                              
                                                                              100.00
                                                                              %
                                                                              
                                                                              70,158
                                                                              
                                                                              100.00
                                                                              %Less:Deferred
      loan costs and fees, net
                                                                              
                                                                              (588
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (698
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (576
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (514
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (267
                                                                              )Allowance
      for loan losses
                                                                              
                                                                              (2,552
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (2,393
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (1,801
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (1,383
                                                                              )
                                                                              
                                                                              
                                                                              
                                                                              (1,097
                                                                              )Loans,
      net
                                                                              $
                                                                              184,182
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              172,251
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              130,133
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              95,666
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              68,794







6
 Table of Contents





The
following table sets forth certain information on non-accrual loans and
foreclosed assets, the ratio of such loans and foreclosed assets to total assets
as of the dates indicated, and certain other related information (dollars in
thousands).  The increase in non-accrual loans is primarily
attributable to the downturn in the economy, and the expectations for a
lengthened period of economic weakness.





At December 31,2008
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                2006
                                                                                                                                                
                                                                                                                                                2005
                                                                                                                                                
                                                                                                                                                2004Non-accrual
      loans:Real
      estate loans
                                                                                                                                                $
                                                                                                                                                6,627
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                1,077
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                172
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                465Consumer
      loans
                                                                                                                                                
                                                                                                                                                224
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                27
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                18
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1Commercial
      and all other loans
                                                                                                                                                
                                                                                                                                                3,254
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                297
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                154
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                30Total
      non-accrual loans
                                                                                                                                                
                                                                                                                                                10,105
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,401
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                344
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                496Accruing
      loans over 90 days delinquent:Real
      estate loans
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                243
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -Consumer
      loans
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -Commercial
      and all other loans
                                                                                                                                                
                                                                                                                                                250
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                106
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -Total
      accrual loans over 90 days delinquent
                                                                                                                                                
                                                                                                                                                250
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                349
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -Total
      nonperforming loans
                                                                                                                                                
                                                                                                                                                10,355
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,750
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                344
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                496Foreclosed
      assets
                                                                                                                                                
                                                                                                                                                1,714
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                -Total
      non-performing loans and foreclosed assets
                                                                                                                                                $
                                                                                                                                                12,069
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                1,750
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                344
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                496Total
      non-performing loans as a percentage of total loans
                                                                                                                                                
                                                                                                                                                5.53
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                1.00
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .26
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .71
                                                                                                                                                %Total
      non-performing loans as a percentage of total assets
                                                                                                                                                
                                                                                                                                                4.33
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .89
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .22
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .52
                                                                                                                                                %Total
      non-performing loans and foreclosed assets as a percentage
      of
                                                                                                                                                  total
      assets
                                                                                                                                                
                                                                                                                                                5.05
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .89
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .22
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                -
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                .52
                                                                                                                                                %Restructured
      troubled debt
                                                                                                                                                $
                                                                                                                                                12,279
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                -





As of
December 31, 2008, the $12.3 million in restructured troubled debt are
performing loans.





7
 Table of Contents




Allowance for Credit
Losses





In
originating loans, we recognize that credit losses will be experienced and that
the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, and, in
the case of a collateralized loan, the quality of the collateral for the loan as
well as general economic conditions.  It is management’s policy to
maintain an adequate allowance for loan losses based on, among other things,
management’s loan loss experience, evaluation of economic conditions, and
regular reviews of delinquencies and loan portfolio quality. We consider several
factors in determining the allowances, including charge-off history, the
relative level of nonperforming assets, and the value of the underlying
collateral.





The
calculation of the allowance for loan losses is divided into two primary
allocation groups: (1) impaired loans; and (2) all other loans.  For
impaired loans, we have determined an allowance amount to set aside which we
believe is sufficient to cover any potential collateral
shortfall.  Problem loans are identified by the loan officer, by our
loan review process, by our Bank’s loan committee, or by the Bank’s regulatory
examiners.  All other loans are multiplied by an historical experience
factor adjusted for qualitative factors to determine the appropriate level of
the allowance for loan losses.





We
actively monitor our asset quality to charge-off loans against the allowance for
loan losses when appropriate or to provide specific loss allowances when
necessary. Although we believe we use the best information available to make
determinations with respect to the allowance for credit losses, future
adjustments may be necessary if economic conditions differ from the economic
conditions in the assumptions used in making the initial
determinations.  We consider several factors in determining the
allowances, including charge-off history, the relative level of nonperforming
assets, and the value of the underlying collateral.  Nonperforming
loans  at December 31, 2008, increased to 5.53% of total loans,
compared to 1.00% at December 31, 2007.  During 2008, our allowance
increased by $159,000 or 6.6%, and totaled $2.6 million at December 31, 2008, as
well as the increase in non-performing loans. Additional allowance was made to
cover the loan growth of 32% in 2008, as well as the increase in non-performing
loans. We believe that the allowance for loan losses was adequate at December
31, 2008.





The
following table sets forth information with respect to activity in our allowance
for loan losses during the years indicated (dollars in thousands):





Year Ended December
    31,2008
                                                                                                                              
                                                                                                                              2007
                                                                                                                              
                                                                                                                              2006
                                                                                                                              
                                                                                                                              2005
                                                                                                                              
                                                                                                                              2004Allowance
      at beginning of year
                                                                                                                              $
                                                                                                                              2,393
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,801
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,383
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,097
                                                                                                                              
                                                                                                                              $
                                                                                                                              852Charge-offs:Real
      estate loans
                                                                                                                              
                                                                                                                              2,898
                                                                                                                              
                                                                                                                              
                                                                                                                              123
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              -Consumer
      loans
                                                                                                                              
                                                                                                                              394
                                                                                                                              
                                                                                                                              
                                                                                                                              49
                                                                                                                              
                                                                                                                              
                                                                                                                              19
                                                                                                                              
                                                                                                                              
                                                                                                                              17
                                                                                                                              
                                                                                                                              
                                                                                                                              36Commercial
      and all other loans
                                                                                                                              
                                                                                                                              631
                                                                                                                              
                                                                                                                              
                                                                                                                              128
                                                                                                                              
                                                                                                                              
                                                                                                                              14
                                                                                                                              
                                                                                                                              
                                                                                                                              55
                                                                                                                              
                                                                                                                              
                                                                                                                              111Total
      charge-offs
                                                                                                                              
                                                                                                                              3,923
                                                                                                                              
                                                                                                                              
                                                                                                                              300
                                                                                                                              
                                                                                                                              
                                                                                                                              33
                                                                                                                              
                                                                                                                              
                                                                                                                              72
                                                                                                                              
                                                                                                                              
                                                                                                                              147Recoveries:Real
      estate loans
                                                                                                                              
                                                                                                                              10
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              -Consumer
      loans
                                                                                                                              
                                                                                                                              6
                                                                                                                              
                                                                                                                              
                                                                                                                              6
                                                                                                                              
                                                                                                                              
                                                                                                                              10
                                                                                                                              
                                                                                                                              
                                                                                                                              1
                                                                                                                              
                                                                                                                              
                                                                                                                              3Commercial
      and all other loans
                                                                                                                              
                                                                                                                              7
                                                                                                                              
                                                                                                                              
                                                                                                                              1
                                                                                                                              
                                                                                                                              
                                                                                                                              12
                                                                                                                              
                                                                                                                              
                                                                                                                              5
                                                                                                                              
                                                                                                                              
                                                                                                                              9Total
      recoveries
                                                                                                                              
                                                                                                                              23
                                                                                                                              
                                                                                                                              
                                                                                                                              7
                                                                                                                              
                                                                                                                              
                                                                                                                              22
                                                                                                                              
                                                                                                                              
                                                                                                                              6
                                                                                                                              
                                                                                                                              
                                                                                                                              12Provision
      for loan losses charged to operations
                                                                                                                              
                                                                                                                              4,059
                                                                                                                              
                                                                                                                              
                                                                                                                              885
                                                                                                                              
                                                                                                                              
                                                                                                                              429
                                                                                                                              
                                                                                                                              
                                                                                                                              352
                                                                                                                              
                                                                                                                              
                                                                                                                              380Allowance
      at end of year
                                                                                                                              $
                                                                                                                              2,552
                                                                                                                              
                                                                                                                              $
                                                                                                                              2,393
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,801
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,383
                                                                                                                              
                                                                                                                              $
                                                                                                                              1097Ratio
      of net charge-offs during the year to average loans
      outstanding
                                                                                                                                during
      the year
                                                                                                                              
                                                                                                                              2.11
                                                                                                                              %
                                                                                                                              
                                                                                                                              .19
                                                                                                                              %
                                                                                                                              
                                                                                                                              .01
                                                                                                                              %
                                                                                                                              
                                                                                                                              .08
                                                                                                                              %
                                                                                                                              
                                                                                                                              .25
                                                                                                                              %Allowance
      for loan losses as a percentage of total loans at end of
    year
                                                                                                                              
                                                                                                                              1.36
                                                                                                                              %
                                                                                                                              
                                                                                                                              1.36
                                                                                                                              %
                                                                                                                              
                                                                                                                              1.36
                                                                                                                              %
                                                                                                                              
                                                                                                                              1.42
                                                                                                                              %
                                                                                                                              
                                                                                                                              1.56
                                                                                                                              %Allowance
      for loan losses as a percentage of non-performing loans
                                                                                                                              
                                                                                                                              24.65
                                                                                                                              %
                                                                                                                              
                                                                                                                              136.74
                                                                                                                              %
                                                                                                                              
                                                                                                                              523.55
                                                                                                                              %
                                                                                                                              
                                                                                                                              -
                                                                                                                              %
                                                                                                                              
                                                                                                                              221.17
                                                                                                                              %








8
 Table of Contents




Capital
Resources and Liquidity





In
managing liquidity, our objective is to ensure the availability of sufficient
cash flows to meet all financial commitments and to capitalize on opportunities
for expansion.  Liquidity management addresses the ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities
arise.  Our primary sources of internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operations, and cash flows generated by investments.  External sources
of funds include increases in deposits and advances from the FHLB.  We
also have “Fed Funds” lines of credit extended by our correspondent banks to
utilize for overnight cash flow needs.  Longer term funding sources
include brokered CD's and repurchase agreements both with our primary
correspondent bank.





Our
management team monitors our liquidity position on an on-going basis and reports
regularly to our Board of Directors the level of liquidity compared to minimum
levels established by Board policy.  As of December 31, 2008, our
level of liquidity was within the established guidelines of Board
policy.





We are
subject to various regulatory capital adequacy requirements promulgated by each
of the FDIC and the Department.  Failure to meet minimum capital
requirements can result in certain mandatory and, possibly, additional
discretionary actions by federal and state regulators that, if undertaken, could
have a direct material effect on our financial condition and results of
operations.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices.





Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 capital to risk weighted assets and Tier 1 capital to average
assets.  As of December 31, 2008, we exceeded all applicable capital
adequacy requirements.  See "Regulation and
Supervision - Capital Requirements."





As of
December 31, 2008, our actual and required minimum capital ratios were as
follows (dollars in thousands):





Actual
                                  
                                  
                                  Minimum
                                    For
      Capital Adequacy
                                    Purposes
                                  
                                  
                                  MinimumTo
      Be Well
                                    Capitalized
      Under
                                    Prompt
      Corrective
                                    Action ProvisionsAs
      of December 31, 2008:
                                  Amount
                                  
                                  %
                                  
                                  
                                  Amount
                                  
                                  %
                                  
                                  
                                  Amount
                                  
                                  %Total
      Capital to Risk-Weighted Assets
                                  $
                                  21,280
                                  
                                  
                                  10.88
                                  %
                                  
                                  $
                                  15,647
                                  
                                  
                                  8.00
                                  %
                                  
                                  $
                                  19,559
                                  
                                  
                                  10.00
                                  %Tier
      1 Capital to Risk-Weighted Assets
                                  
                                  18,834
                                  
                                  
                                  9.63
                                  
                                  
                                  
                                  7,824
                                  
                                  
                                  4.00
                                  
                                  
                                  
                                  11,736
                                  
                                  
                                  6.00Tier
      1 Capital to Total Assets
                                  
                                  18,834
                                  
                                  
                                  8.27
                                  
                                  
                                  
                                  9,111
                                  
                                  
                                  4.00
                                  
                                  
                                  
                                  11,389
                                  
                                  
                                  5.00






Our
primary source of cash during the year ended December 31, 2008, was from the
proceeds from net deposit inflows of $28 million, proceeds from Federal Home
Loan Bank advances of $11.0 million, net proceeds from the sale and repayment of
securities totaling $7.9 million, and proceeds from the issuance of preferred
stock and common stock warrants to the US Treasury of $5.8 million. Cash was
used primarily to purchase securities, premises and equipment and originate
loans. At December 31, 2008, we had outstanding commitments to originate loans
totaling $700,000, available lines of credit of $16.2 million, and standby
letters of credit of $148,000.




Investment
Activities





Our
securities portfolio is managed by our Funds Management Committee in accordance
with a written investment policy of the Board of Directors that addresses
strategies, types and levels of permitted investments.  At December
31, 2008, our securities portfolio equaled $33.2 million, or 13.9% of total
assets. Our investment portfolio is comprised of agency securities and
mortgage-backed securities.





We
classify securities as either available for sale or held to maturity based upon
our intent and ability to hold such securities.  Securities available
for sale include debt and equity securities that are held for an indefinite
period of time and are not intended to be held to
maturity.  Securities available for sale include securities that we
intend to use as part of our overall asset/liability management strategy and
that may be sold in response to changes in interest rates and resultant
prepayment risk and other factors related thereto.





Securities
available for sale are carried at fair value, and unrealized gains and losses
(net of related tax effects) on such securities are excluded from operations but
are included in stockholders’ equity.  Upon realization, such gains
and losses will be included in our operations.  Investment securities
and mortgage-backed securities, other than those designated as available for
sale are comprised of debt securities that we have the affirmative intent and
ability to hold to maturity.  Securities held to maturity are carried
at cost, and are adjusted for amortization of premiums and accretion of
discounts over the estimated lives of the securities.





9
 Table of Contents




Securities





The
following table sets forth the carrying value of our securities portfolio at
December 31, 2008 (in thousands):





2008
                                                              
                                                              2007
                                                              
                                                              2006Securities
      available for sale:U.S.
      Government agency securities
                                                              $
                                                              16,375
                                                              
                                                              $
                                                              6,061
                                                              
                                                              $
                                                              5,445Mortgage-backed
      securities
                                                              
                                                              16,863
                                                              
                                                              
                                                              728
                                                              
                                                              
                                                              99933,238
                                                              
                                                              
                                                              6,789
                                                              
                                                              
                                                              6,444Securities
      held to maturity:U.S.
      Government agency securities
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              2,500Mortgage-backed
      securities
                                                              
                                                              1
                                                              
                                                              
                                                              4
                                                              
                                                              
                                                              91
                                                              
                                                              
                                                              4
                                                              
                                                              
                                                              2,509Total
                                                              $
                                                              33,239
                                                              
                                                              $
                                                              6,793
                                                              
                                                              $
                                                              8,953






The
following table sets forth, by maturity distribution, certain information
pertaining to the securities portfolio as follows (dollars in
thousands):





Due
      in
                                                                                              
                                                                                              From
      One Year
                                                                                              
                                                                                              From
      Five Years
                                                                                              
                                                                                              Due
      in More ThanOne Year or Less
                                                                                              
                                                                                              to Five Years
                                                                                              
                                                                                              to Ten Years
                                                                                              
                                                                                              Ten Years
                                                                                              
                                                                                              TotalCarrying
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              Carrying
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              Carrying
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              Carrying
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              Carrying
                                                                                              
                                                                                              AverageValue
                                                                                              
                                                                                              Yield
                                                                                              
                                                                                              Value
                                                                                              
                                                                                              Yield
                                                                                              
                                                                                              Value
                                                                                              
                                                                                              Yield
                                                                                              
                                                                                              Value
                                                                                              
                                                                                              Yield
                                                                                              
                                                                                              Value
                                                                                              
                                                                                              YieldDecember
      31,  2008:U.S.
      Government agency securities
                                                                                              $
                                                                                              1,000
                                                                                              
                                                                                              2.46
                                                                                              %
                                                                                              $
                                                                                              1,002
                                                                                              
                                                                                              4.32
                                                                                              %
                                                                                              $
                                                                                              3,577
                                                                                              
                                                                                              4.94
                                                                                              %
                                                                                              $
                                                                                              10,796
                                                                                              
                                                                                              5.39
                                                                                              %
                                                                                              $
                                                                                              16,375
                                                                                              
                                                                                              5.05
                                                                                              %Mortgage-backed
      securities
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              16,864
                                                                                              
                                                                                              5.49Total
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              33,239
                                                                                              
                                                                                              5.27
                                                                                              %December
      31, 2007:U.S.
      Government agency securities
                                                                                              $
                                                                                              1,499
                                                                                              
                                                                                              4.26
                                                                                              %
                                                                                              $
                                                                                              1,003
                                                                                              
                                                                                              5 00
                                                                                              %
                                                                                              $
                                                                                              3,559
                                                                                              
                                                                                              5.71
                                                                                              %
                                                                                              
                                                                                              -
                                                                                              
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              6,061
                                                                                              
                                                                                              5.24
                                                                                              %Mortgage-backed
      securities
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              732
                                                                                              
                                                                                              4.03Total
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,793
                                                                                              
                                                                                              5.11
                                                                                              %December
      31, 2006:U.S.
      Government agency securities
                                                                                              $
                                                                                              3,986
                                                                                              
                                                                                              3.20
                                                                                              %
                                                                                              $
                                                                                              2,964
                                                                                              
                                                                                              4.69
                                                                                              %
                                                                                              $
                                                                                              995
                                                                                              
                                                                                              5.62
                                                                                              %
                                                                                              
                                                                                              -
                                                                                              
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              7,945
                                                                                              
                                                                                              4.06
                                                                                              %Mortgage-backed
      securities
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,008
                                                                                              
                                                                                              3.96Total
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,953
                                                                                              
                                                                                              4.05
                                                                                              %







Regulatory
Capital Requirements





Under
FDIC regulations, we are required to meet certain minimum regulatory capital
requirements.  This is not a valuation allowance and has not been
created by charges against operations.  It represents a restriction on
stockholders’ equity.





Quantitative
measures established by regulation to ensure capital adequacy require financial
institutions to maintain minimum amounts and ratios of total and Tier 1 capital,
as defined in the regulations, to risk-weighted assets, also as defined in the
regulations, and of Tier 1 capital to average assets.  We believe, as
of December 31, 2008, that we met all capital adequacy requirements to which we
are subject.  See Note 16 to our consolidated financial statements for
the actual capital amounts and ratios.






10
 Table of Contents




Market
Risk





Market
risk is the risk of loss from adverse changes in market prices and
rates.  We do not engage in securities trading or hedging activities
and do not invest in interest-rate derivatives or enter into interest rate
swaps.  Our market risk arises primarily from interest-rate risk
inherent in our loan and deposit-taking activities.  To that end, we
actively monitor and manage our interest-rate risk exposure.  The
measurement of market risk associated with financial instruments is meaningful
only when all related and offsetting on- and off-balance-sheet transactions are
aggregated, and the resulting net positions are
identified.  Disclosures about the fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 7 of Notes to Consolidated Financial Statements.





The primary objective in managing interest-rate risk is to maximize earnings and
minimize the potential adverse impact of changes in interest rates on our net
interest income and capital, while adjusting our asset-liability structure to
obtain the maximum yield-cost spread on that structure.  We rely
primarily on our asset-liability structure to manage interest-rate
risk.  However, a sudden and substantial decrease in interest rates
may adversely impact our earnings, to the extent that the interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent, or on the same basis.





Asset
and Liability Structure





Our asset
and liability management program establishes and implements various internal
asset-liability decision processes, as well as communications and control
procedures to aid us in managing our operations.  We believe that
these processes and procedures provide us with better capital planning, asset
mix and volume controls, loan-pricing guidelines, and deposit interest-rate
guidelines which should result in tighter controls and less exposure to
interest-rate risk.





The
matching of assets and liabilities may be accomplished in part by examining the
extent to which such assets and liabilities are “interest rate sensitive” and by
monitoring an institution’s interest rate sensitivity “gap.”  An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period.  The
interest-rate sensitivity gap is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period.  The gap ratio is computed as the amount
of rate sensitive assets less the amount of rate sensitive liabilities divided
by total assets.  A gap is considered positive when the amount of
interest-rate sensitive assets exceeds interest-rate sensitive
liabilities.  A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive
assets.  During a period of rising interest rates, a negative gap
would adversely affect net interest income, while a positive gap would result in
an increase in net interest income.  During a period of falling
interest rates, a negative gap would result in an increase in net interest
income, while a positive gap would adversely affect net interest
income.





In order
to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the results of operations, we continue to monitor
asset and liability management policies to better match the maturities and
repricing terms of our interest-earning assets and interest-bearing
liabilities.  Such policies have consisted primarily of emphasizing
the origination of adjustable-rate loans; maintaining a stable core deposit
base; and maintaining a significant portion of liquid assets consisting
primarily of cash and short-term securities.





11
 Table of Contents








The
following table sets forth certain information relating to interest-earning
assets and interest-bearing liabilities at December 31, 2008, that are estimated
to mature or are scheduled to reprice within the period shown (dollars in
thousands):








More
      than One
                                                                                                                            
                                                                                                                            More than FiveYear and
                                                                                                                            
                                                                                                                            Years
      and
                                                                                                                            
                                                                                                                            OverOne Year
                                                                                                                            
                                                                                                                            Less than
                                                                                                                            
                                                                                                                            Less
      than
                                                                                                                            
                                                                                                                            Fifteenor Less
                                                                                                                            
                                                                                                                            Five
      Years
                                                                                                                            
                                                                                                                            Fifteen Years
                                                                                                                            
                                                                                                                            Years
                                                                                                                            
                                                                                                                            TotalMortgage
      and commercial loans (1):Commercial
                                                                                                                            $
                                                                                                                            29,604
                                                                                                                            
                                                                                                                            $
                                                                                                                            30,263
                                                                                                                            
                                                                                                                            $
                                                                                                                            3,901
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            $
                                                                                                                            63,768Commercial
      real estate
                                                                                                                            
                                                                                                                            15,939
                                                                                                                            
                                                                                                                            
                                                                                                                            63,795
                                                                                                                            
                                                                                                                            
                                                                                                                            14,351
                                                                                                                            
                                                                                                                            
                                                                                                                            590
                                                                                                                            
                                                                                                                            
                                                                                                                            94,675Construction
                                                                                                                            
                                                                                                                            1,633
                                                                                                                            
                                                                                                                            
                                                                                                                            5,164
                                                                                                                            
                                                                                                                            
                                                                                                                            2,979
                                                                                                                            
                                                                                                                            
                                                                                                                            17
                                                                                                                            
                                                                                                                            
                                                                                                                            9,793Consumer
                                                                                                                            
                                                                                                                            6,952
                                                                                                                            
                                                                                                                            
                                                                                                                            11,184
                                                                                                                            
                                                                                                                            
                                                                                                                            478
                                                                                                                            
                                                                                                                            
                                                                                                                            148
                                                                                                                            
                                                                                                                            
                                                                                                                            18,762Residential
      mortgage
                                                                                                                            
                                                                                                                            195
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            129
                                                                                                                            
                                                                                                                            
                                                                                                                            324Total
      loans
                                                                                                                            
                                                                                                                            54,323
                                                                                                                            
                                                                                                                            
                                                                                                                            110,406
                                                                                                                            
                                                                                                                            
                                                                                                                            21,709
                                                                                                                            
                                                                                                                            
                                                                                                                            884
                                                                                                                            
                                                                                                                            
                                                                                                                            187,322Interest-bearing
      deposits with banks
                                                                                                                            
                                                                                                                            247
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            247Federal
      funds sold
                                                                                                                            
                                                                                                                            2,384
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            2,384Federal
      Home Loan Bank stock
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            853
                                                                                                                            
                                                                                                                            
                                                                                                                            853Securities
      (2)
                                                                                                                            
                                                                                                                            11,997
                                                                                                                            
                                                                                                                            
                                                                                                                            3,045
                                                                                                                            
                                                                                                                            
                                                                                                                            2,814
                                                                                                                            
                                                                                                                            
                                                                                                                            15,383
                                                                                                                            
                                                                                                                            
                                                                                                                            33,239Total
      rate-sensitive assets
                                                                                                                            
                                                                                                                            68,951
                                                                                                                            
                                                                                                                            
                                                                                                                            113,451
                                                                                                                            
                                                                                                                            
                                                                                                                            24,523
                                                                                                                            
                                                                                                                            
                                                                                                                            17,120
                                                                                                                            
                                                                                                                            
                                                                                                                            224,045Deposit
      accounts (3):Money
      market deposits
                                                                                                                            $
                                                                                                                            30,262
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            $
                                                                                                                            -
                                                                                                                            
                                                                                                                            $
                                                                                                                            30,262NOW
      deposits
                                                                                                                            
                                                                                                                            5,039
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            5,039Savings
      deposits
                                                                                                                            
                                                                                                                            4,157
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            4,157Certificates
      of deposit
                                                                                                                            
                                                                                                                            107,016
                                                                                                                            
                                                                                                                            
                                                                                                                            34,717
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            141,733Total
      deposit accounts
                                                                                                                            
                                                                                                                            146,474
                                                                                                                            
                                                                                                                            
                                                                                                                            34,717
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            181,191Federal
      Home Loan Bank advances
                                                                                                                            
                                                                                                                            3,000
                                                                                                                            
                                                                                                                            
                                                                                                                            8,100
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            11,100Total
      rate-sensitive liabilities
                                                                                                                            
                                                                                                                            149,474
                                                                                                                            
                                                                                                                            
                                                                                                                            42,817
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            192,291GAP
      (repricing differences)
                                                                                                                            $
                                                                                                                            (80,523
                                                                                                                            )
                                                                                                                            $
                                                                                                                            70,634
                                                                                                                            
                                                                                                                            $
                                                                                                                            24,523
                                                                                                                            
                                                                                                                            $
                                                                                                                            17,120
                                                                                                                            
                                                                                                                            $
                                                                                                                            31,754Cumulative
      GAP
                                                                                                                            $
                                                                                                                            (80,523
                                                                                                                            )
                                                                                                                            $
                                                                                                                            (9,889
                                                                                                                            )
                                                                                                                            $
                                                                                                                            14,634
                                                                                                                            
                                                                                                                            $
                                                                                                                            31,754Cumulative
      GAP/total assets
                                                                                                                            
                                                                                                                            (33.67
                                                                                                                            )%
                                                                                                                            
                                                                                                                            (4.13
                                                                                                                            )%
                                                                                                                            
                                                                                                                            6.12
                                                                                                                            %
                                                                                                                            
                                                                                                                            13.28
                                                                                                                            %





(1)
              In
      preparing the table above, adjustable-rate loans are included in the
      period in which the interest rates are next scheduled to adjust rather
      than in the period in which the loans mature.  Fixed-rate loans
      are scheduled, including repayment, according to their
      maturities.


(2)
              Securities
      are scheduled through the maturity or call
  dates.


(3)
              Money-market,
      NOW, and savings deposits are regarded as readily accessible withdrawable
      accounts.  All other time deposits are scheduled through the
      maturity dates.








12
 Table of Contents







The
following table reflects the contractual principal repayments by period of the
loan portfolio at December 31, 2008 (in thousands):





Commercial
      Real
                                                                        
                                                                        ResidentialYears
      Ending
                                                                        
                                                                        Commercial
                                                                        
                                                                        Estate
                                                                        
                                                                        Mortgage
                                                                        
                                                                        Consumer
                                                                        
                                                                        ConstructionDecember 31,
                                                                        
                                                                        Loans
                                                                        
                                                                        Loans
                                                                        
                                                                        Loans
                                                                        
                                                                        Loans
                                                                        
                                                                        Loans2009
                                                                        
                                                                        $
                                                                        23,873
                                                                        
                                                                        $
                                                                        17,861
                                                                        
                                                                        $
                                                                        109
                                                                        
                                                                        $
                                                                        7,489
                                                                        
                                                                        $
                                                                        1,8912010
                                                                        
                                                                        
                                                                        8,080
                                                                        
                                                                        
                                                                        8,579
                                                                        
                                                                        
                                                                        101
                                                                        
                                                                        
                                                                        4,820
                                                                        
                                                                        
                                                                        3852011
                                                                        
                                                                        
                                                                        5,494
                                                                        
                                                                        
                                                                        5,785
                                                                        
                                                                        
                                                                        8
                                                                        
                                                                        
                                                                        3,179
                                                                        
                                                                        
                                                                        3852012-2013
                                                                        
                                                                        
                                                                        7,081
                                                                        
                                                                        
                                                                        9,631
                                                                        
                                                                        
                                                                        15
                                                                        
                                                                        
                                                                        2,124
                                                                        
                                                                        
                                                                        7702014-2015
                                                                        
                                                                        
                                                                        4,735
                                                                        
                                                                        
                                                                        8,604
                                                                        
                                                                        
                                                                        13
                                                                        
                                                                        
                                                                        627
                                                                        
                                                                        
                                                                        7182016 & beyond
                                                                        
                                                                        
                                                                        14,505
                                                                        
                                                                        
                                                                        44,215
                                                                        
                                                                        
                                                                        78
                                                                        
                                                                        
                                                                        523
                                                                        
                                                                        
                                                                        5,644Total
                                                                        
                                                                        $
                                                                        63,768
                                                                        
                                                                        $
                                                                        94,675
                                                                        
                                                                        $
                                                                        324
                                                                        
                                                                        $
                                                                        18,762
                                                                        
                                                                        $
                                                                        9,793




Of the $136.1 million of loans
due after 2009, 24.11% of such loans have fixed interest rates and 75.89% have
adjustable interest rates.






The
following table sets forth total loans originated and repaid during the period
ended December 31 (in thousands):






Originations:
                                  2008
                                  
                                  2007Commercial
      loans
                                  $
                                  16,224
                                  
                                  $
                                  29,299Commercial
      real estate loans
                                  
                                  11,110
                                  
                                  
                                  38,323Consumer
      loans
                                  
                                  5,467
                                  
                                  
                                  10,197Construction
      loans
                                  
                                  2,899
                                  
                                  
                                  13,637Residential
      loans
                                  
                                  299
                                  
                                  
                                  -Total
      loans originated
                                  
                                  35,999
                                  
                                  
                                  91,456Principal
      reductions and participations sold
                                  
                                  (24,019
                                  )
                                  
                                  (48,624
                                  )Increase
      in total loans
                                  $
                                  11,980
                                  
                                  $
                                  42,832







Deposit
Activities and Other Sources of Funds





Deposits
are the major source of funds for our lending and investment
activities.  In addition, we also generate funds from loan principal
repayments and prepayments, and from the maturities and cash flow of investment
securities.  Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money-market
conditions.  Borrowings from the Federal Home Loan Bank of Atlanta
(the “FHLB”) may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources, or for long-term funding
purposes.  We have “Fed Funds” lines of credit extended by our
correspondent banks to utilize for overnight cash flow
needs.  Longer-term funding is available through a Brokered CD Program
and a Repurchase Agreement, both of which are set-up with our primary
correspondent bank.  Repurchase agreements as a funding source were
not utilized in 2008.





Deposit
instruments include NOW accounts, demand deposit accounts, money-market
accounts, statement savings accounts and certificates of
deposit.  Deposit account terms vary, with the principal differences
being the minimum balance deposit, early withdrawal penalties and interest
rate.  We review our deposit mix and pricing on a frequent
basis.




(continued)


13
 Table of Contents




We
believe that we are competitive in the type of accounts and interest rates we
offer on our deposit products, although deposit pricing continues to be a
challenge.  We determine deposit interest rates based on a number of
conditions, including rates paid by competitors, rates on U.S. Treasury
securities, rates offered on various FHLB advance programs, and the deposit
growth rate we are seeking to achieve.





With the
substantial decline in local real estate and general business activity, we have
seen similar declines in our deposit balances from both new and existing
depositors, as evidenced in the table below.  This decrease in
liquidity has resulted in an increase in wholesale funding sources, which has
placed further pressure on deposit costs and the net-interest
margin.





We may
use premiums to attract new deposit accounts.  Such premiums would be
reflected in an increase in our advertising and promotion expense, as well as
our cost of funds.  We also actively solicit business checking
accounts and individual retirement accounts.





The following
table shows the distribution of, and certain other information relating to
deposit accounts by type (dollars in thousands):





At December 31,2008
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  2006%
      of
                                                                                  
                                                                                  
                                                                                  
                                                                                  %
      of
                                                                                  
                                                                                  
                                                                                  
                                                                                  %
      ofAmount
                                                                                  
                                                                                  Deposits
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Deposits
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  DepositsDemand
      deposits
                                                                                  $
                                                                                  19,492
                                                                                  
                                                                                  9.71
                                                                                  %
                                                                                  $
                                                                                  23,141
                                                                                  
                                                                                  13.40
                                                                                  %
                                                                                  $
                                                                                  20,125
                                                                                  
                                                                                  15.45
                                                                                  %Money-market
      deposits
                                                                                  
                                                                                  30,262
                                                                                  
                                                                                  15.08
                                                                                  
                                                                                  
                                                                                  26,121
                                                                                  
                                                                                  15.13
                                                                                  
                                                                                  
                                                                                  26,541
                                                                                  
                                                                                  20.38NOW
      deposits
                                                                                  
                                                                                  5,039
                                                                                  
                                                                                  2.51
                                                                                  
                                                                                  
                                                                                  3,175
                                                                                  
                                                                                  1.84
                                                                                  
                                                                                  
                                                                                  3,834
                                                                                  
                                                                                  2.94Savings
      deposits
                                                                                  
                                                                                  4,157
                                                                                  
                                                                                  2.07
                                                                                  
                                                                                  
                                                                                  4,061
                                                                                  
                                                                                  2.35
                                                                                  
                                                                                  
                                                                                  5,111
                                                                                  
                                                                                  3.92Subtotal
                                                                                  
                                                                                  58,950
                                                                                  
                                                                                  29.37
                                                                                  
                                                                                  
                                                                                  56,498
                                                                                  
                                                                                  32.72
                                                                                  
                                                                                  
                                                                                  55,611
                                                                                  
                                                                                  42.69Certificate
      of deposits:0
      % - 0.99 %
                                                                                  
                                                                                  23
                                                                                  
                                                                                  .01
                                                                                  
                                                                                  
                                                                                  391
                                                                                  
                                                                                  .23
                                                                                  
                                                                                  
                                                                                  274
                                                                                  
                                                                                  .211.00 %
      - 1.99 %
                                                                                  
                                                                                  140
                                                                                  
                                                                                  .07
                                                                                  
                                                                                  
                                                                                  170
                                                                                  
                                                                                  .10
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  -2.00
      % - 2.99 %
                                                                                  
                                                                                  11,735
                                                                                  
                                                                                  5.85
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  932
                                                                                  
                                                                                  .723.00
      % - 3.99 %
                                                                                  
                                                                                  48,016
                                                                                  
                                                                                  23.93
                                                                                  
                                                                                  
                                                                                  1,497
                                                                                  
                                                                                  .87
                                                                                  
                                                                                  
                                                                                  2,364
                                                                                  
                                                                                  1.824.00
      % - 4.99 %
                                                                                  
                                                                                  59,287
                                                                                  
                                                                                  29.54
                                                                                  
                                                                                  
                                                                                  41,742
                                                                                  
                                                                                  24.17
                                                                                  
                                                                                  
                                                                                  21,272
                                                                                  
                                                                                  16.345.00
      % - 5.99 %
                                                                                  
                                                                                  22,532
                                                                                  
                                                                                  11.23
                                                                                  
                                                                                  
                                                                                  72,379
                                                                                  
                                                                                  41.91
                                                                                  
                                                                                  
                                                                                  49,766
                                                                                  
                                                                                  38.22Total
      certificates of deposit (1)
                                                                                  
                                                                                  141,733
                                                                                  
                                                                                  70.63
                                                                                  
                                                                                  
                                                                                  116,179
                                                                                  
                                                                                  67.28
                                                                                  
                                                                                  
                                                                                  74,608
                                                                                  
                                                                                  57.31Total
      deposits
                                                                                  $
                                                                                  200,683
                                                                                  
                                                                                  100.00
                                                                                  %
                                                                                  $
                                                                                  172,677
                                                                                  
                                                                                  100.00
                                                                                  %
                                                                                  $
                                                                                  130,219
                                                                                  
                                                                                  100.00
                                                                                  %






(1)
              Included
      individual retirement accounts (“IRAs”) totaling $4.3 million, $4.5 and
      $4.0 million at December 31, 2008, 2007, and 2006 all of which are in the
      form of certificates of
deposit.






14
 Table of Contents




The following
table presents by various interest rate categories the amounts of certificates
of deposit at December 31, 2008, which mature during the periods indicated (in
thousands):





Year Ending December
    31,2009
                                                                        
                                                                        2010
                                                                        
                                                                        2011
                                                                        
                                                                        2012
                                                                        
                                                                        2013
                                                                        
                                                                        Total0 % - 0.99 %
                                                                        $
                                                                        23
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        $
                                                                        231.00 % - 1.99 %
                                                                        
                                                                        140
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        1402.00
      % - 2.99 %
                                                                        
                                                                        11,348
                                                                        
                                                                        
                                                                        387
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        11,7353.00
      % - 3.99 %
                                                                        
                                                                        42,066
                                                                        
                                                                        
                                                                        3,353
                                                                        
                                                                        
                                                                        1,238
                                                                        
                                                                        
                                                                        23
                                                                        
                                                                        
                                                                        1,336
                                                                        
                                                                        
                                                                        48,0164.00
      % - 4.99 %
                                                                        
                                                                        44,174
                                                                        
                                                                        
                                                                        13,238
                                                                        
                                                                        
                                                                        316
                                                                        
                                                                        
                                                                        1,284
                                                                        
                                                                        
                                                                        275
                                                                        
                                                                        
                                                                        59,2875.00
      % - 5.99 %
                                                                        
                                                                        9,265
                                                                        
                                                                        
                                                                        5,415
                                                                        
                                                                        
                                                                        3,477
                                                                        
                                                                        
                                                                        4,375
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        22,532Total
      certificates of deposit
                                                                        $
                                                                        107,016
                                                                        
                                                                        $
                                                                        22,393
                                                                        
                                                                        $
                                                                        5,031
                                                                        
                                                                        $
                                                                        5,682
                                                                        
                                                                        $
                                                                        1,611
                                                                        
                                                                        $
                                                                        141,733






Jumbo
certificates ($100,000 and over) mature as follows (in thousands):





December 31,2008
                                          
                                          2007
                                          
                                          2006Due
      three months or less
                                          $
                                          11,778
                                          
                                          $
                                          10,535
                                          
                                          $
                                          6,512Due
      over three months to six months
                                          
                                          4,698
                                          
                                          
                                          14,286
                                          
                                          
                                          5,273Due
      over six months to one year
                                          
                                          22,404
                                          
                                          
                                          16,464
                                          
                                          
                                          19,118Due
      over one year to five years
                                          
                                          16,716
                                          
                                          
                                          27,249
                                          
                                          
                                          8,325$
                                          55,596
                                          
                                          $
                                          68,534
                                          
                                          $
                                          39,228






15
 Table of Contents




Interest
Rate Sensitivity





Our
operating results depend primarily on our net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, consisting primarily of
deposits.  Net interest income is determined by the difference between
yields earned on interest-earning assets and rates paid on interest-bearing
liabilities (“interest-rate spread”) and the relative amounts of
interest-earning assets and interest-bearing liabilities.  Our
interest-rate spread is affected by regulatory, economic, and competitive
factors that influence interest rates, loan demand, and deposit
flows.  In addition, our operations are also affected by the level of
nonperforming loans and foreclosed assets, as well as the level of our
non-interest income, and our non-interest expenses, such as salaries and
employee benefits, occupancy and equipment costs and income taxes.












The
following table sets forth, for the years indicated, information regarding: (i)
the total dollar amount of interest and dividend income from interest-earning
assets and the resultant average yield; (ii) the total dollar amount of interest
expense on interest-bearing liabilities and the resultant average costs; (iii)
net interest/dividend income; (iv) interest rate spread; (v) net interest
margin.  Average balances are based on average daily balances (dollars
in thousands).






Year Ended December 31,2008
                                                                                                                          
                                                                                                                          
                                                                                                                          2007
                                                                                                                          
                                                                                                                          
                                                                                                                          2006Interest
                                                                                                                          
                                                                                                                          Average
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          Interest
                                                                                                                          
                                                                                                                          Average
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          Interest
                                                                                                                          
                                                                                                                          AverageAverage
                                                                                                                          and
                                                                                                                          
                                                                                                                          Yield/
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                          and
                                                                                                                          
                                                                                                                          Yield/
                                                                                                                          
                                                                                                                          
                                                                                                                          Average
                                                                                                                          and
                                                                                                                          
                                                                                                                          Yield/Balance
                                                                                                                          Dividends
                                                                                                                          
                                                                                                                          Rate
                                                                                                                          
                                                                                                                          
                                                                                                                          Balance
                                                                                                                          Dividends
                                                                                                                          
                                                                                                                          Rate
                                                                                                                          
                                                                                                                          
                                                                                                                          Balance
                                                                                                                          Dividends
                                                                                                                          
                                                                                                                          RateInterest-earning assets:Loans
                                                                                                                          $
                                                                                                                          185,005
                                                                                                                          
                                                                                                                          12,988
                                                                                                                          
                                                                                                                          7.02
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          151,760
                                                                                                                          
                                                                                                                          12,878
                                                                                                                          
                                                                                                                          8.49
                                                                                                                          %
                                                                                                                          
                                                                                                                          $
                                                                                                                          115,533
                                                                                                                          
                                                                                                                          9,626
                                                                                                                          
                                                                                                                          8.33
                                                                                                                          %Securities
                                                                                                                          
                                                                                                                          13,608
                                                                                                                          
                                                                                                                          673
                                                                                                                          
                                                                                                                          4.95
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7,704
                                                                                                                          
                                                                                                                          375
                                                                                                                          
                                                                                                                          4.87
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10,741
                                                                                                                          
                                                                                                                          426
                                                                                                                          
                                                                                                                          3.97Other
      interest-earning assets (1)
                                                                                                                          
                                                                                                                          7,063
                                                                                                                          
                                                                                                                          141
                                                                                                                          
                                                                                                                          2.00
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          6,732
                                                                                                                          
                                                                                                                          335
                                                                                                                          
                                                                                                                          4.98
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          12,587
                                                                                                                          
                                                                                                                          574
                                                                                                                          
                                                                                                                          4.56Total interest-earning assets
                                                                                                                          
                                                                                                                          205,676
                                                                                                                          
                                                                                                                          13,802
                                                                                                                          
                                                                                                                          6.71
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          166,196
                                                                                                                          
                                                                                                                          13,588
                                                                                                                          
                                                                                                                          8.18
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          138,861
                                                                                                                          
                                                                                                                          10,626
                                                                                                                          
                                                                                                                          7.65Non interest-earning assets
                                                                                                                          
                                                                                                                          12,065
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          10,528
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          8,700Total
      assets
                                                                                                                          $
                                                                                                                          217,741
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          176,724
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          147,561Interest-bearing liabilities:Savings, NOW and money-market deposits
                                                                                                                          
                                                                                                                          38,292
                                                                                                                          
                                                                                                                          976
                                                                                                                          
                                                                                                                          2.55
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          34,200
                                                                                                                          
                                                                                                                          1,156
                                                                                                                          
                                                                                                                          3.38
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          37,710
                                                                                                                          
                                                                                                                          1,121
                                                                                                                          
                                                                                                                          2.97Certificates of deposit
                                                                                                                          
                                                                                                                          133,180
                                                                                                                          
                                                                                                                          5,961
                                                                                                                          
                                                                                                                          4.48
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          90,727
                                                                                                                          
                                                                                                                          4,900
                                                                                                                          
                                                                                                                          5.40
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          64,718
                                                                                                                          
                                                                                                                          2,791
                                                                                                                          
                                                                                                                          4.31Other borrowings
                                                                                                                          
                                                                                                                          552
                                                                                                                          
                                                                                                                          14
                                                                                                                          
                                                                                                                          2.54
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          100
                                                                                                                          
                                                                                                                          4
                                                                                                                          
                                                                                                                          4.00
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,350
                                                                                                                          
                                                                                                                          64
                                                                                                                          
                                                                                                                          4.74Total
      interest-bearing liabilities
                                                                                                                          
                                                                                                                          172,024
                                                                                                                          
                                                                                                                          6,951
                                                                                                                          
                                                                                                                          4.04
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          125,027
                                                                                                                          
                                                                                                                          6,060
                                                                                                                          
                                                                                                                          4.85
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          103,778
                                                                                                                          
                                                                                                                          3,976
                                                                                                                          
                                                                                                                          3.83Demand
      deposits
                                                                                                                          
                                                                                                                          22,765
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          23,004
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          20,978Non-interest
      bearing liabilities
                                                                                                                          
                                                                                                                          1,640
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          7,299
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2,034Stockholders'
      equity
                                                                                                                          
                                                                                                                          21,312
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          21,394
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          20,771Total liabilities and stockholders' equity
                                                                                                                          $
                                                                                                                          217,741
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          176,724
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          147,561Net interest income
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          6,851
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          7,528
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          6,650Interest-rate
      spread (2)
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          2.67
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.33
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.82
                                                                                                                          %Net interest margin (3)
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.33
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.53
                                                                                                                          %
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          4.79
                                                                                                                          %Ratio of average
      interest-earning   assets to average interest-bearing
      liabilities
                                                                                                                          
                                                                                                                          1.20
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.33
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1.34





(1)
              Other
      interest-earning assets included federal funds sold, Federal Home Loan
      Bank stock and time deposits.


(2)
            Interest-rate
      spread represents the difference between the average yield on
      interest-earning assets and the average rate of interest-bearing
      liabilities.


(3)
            Net
      interest margin is net interest income divided by total average
      interest-earning assets.







16
 Table of Contents




Rate/Volume
Analysis





The
following table sets forth certain information regarding changes in interest
income and interest expense for the years indicated.  For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).






Year
Ended December 31, 2008 vs. 2007:





Year Ended December 31, 2008 vs.
      2007
                                                                                                                    
                                                                                                                    
                                                                                                                    Year Ended December 31, 2007 vs.
      2006Increase (Decrease)
                                                                                                                    
                                                                                                                    
                                                                                                                    Increase (Decrease)Rate/
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    Rate/Rate
                                                                                                                    
                                                                                                                    Volume
                                                                                                                    Volume
                                                                                                                    
                                                                                                                    Total
                                                                                                                    
                                                                                                                    
                                                                                                                    Rate
                                                                                                                    
                                                                                                                    Volume
                                                                                                                    
                                                                                                                    Volume
                                                                                                                    
                                                                                                                    Total(In thousands)
                                                                                                                    
                                                                                                                    
                                                                                                                    (In thousands)Interest-earning
      assets:Loans
                                                                                                                    $
                                                                                                                    (2,231
                                                                                                                    )
                                                                                                                    $
                                                                                                                    2,830
                                                                                                                    $
                                                                                                                    (489
                                                                                                                    )
                                                                                                                    $
                                                                                                                    110
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    174
                                                                                                                    
                                                                                                                    $
                                                                                                                    3,019
                                                                                                                    
                                                                                                                    $
                                                                                                                    59
                                                                                                                    
                                                                                                                    $
                                                                                                                    3,252Securities
                                                                                                                    
                                                                                                                    6
                                                                                                                    
                                                                                                                    
                                                                                                                    287
                                                                                                                    
                                                                                                                    5
                                                                                                                    
                                                                                                                    
                                                                                                                    298
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    97
                                                                                                                    
                                                                                                                    
                                                                                                                    (121
                                                                                                                    )
                                                                                                                    
                                                                                                                    (27
                                                                                                                    )
                                                                                                                    
                                                                                                                    (51
                                                                                                                    )Other
      interest-earning assets
                                                                                                                    
                                                                                                                    (201
                                                                                                                    )
                                                                                                                    
                                                                                                                    17
                                                                                                                    
                                                                                                                    (10
                                                                                                                    )
                                                                                                                    
                                                                                                                    (194
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    53
                                                                                                                    
                                                                                                                    
                                                                                                                    (267
                                                                                                                    )
                                                                                                                    
                                                                                                                    (25
                                                                                                                    )
                                                                                                                    
                                                                                                                    (239
                                                                                                                    )Total
                                                                                                                    
                                                                                                                    (2,426
                                                                                                                    )
                                                                                                                    
                                                                                                                    3,134
                                                                                                                    
                                                                                                                    (494
                                                                                                                    )
                                                                                                                    
                                                                                                                    214
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    324
                                                                                                                    
                                                                                                                    
                                                                                                                    2,631
                                                                                                                    
                                                                                                                    
                                                                                                                    7
                                                                                                                    
                                                                                                                    
                                                                                                                    2,962Interest-bearing
      liabilities:Deposits:Savings,
      money-market
                                                                                                                      and
      NOW deposits
                                                                                                                    
                                                                                                                    (284
                                                                                                                    )
                                                                                                                    
                                                                                                                    138
                                                                                                                    
                                                                                                                    (34
                                                                                                                    )
                                                                                                                    
                                                                                                                    (180
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    154
                                                                                                                    
                                                                                                                    
                                                                                                                    (105
                                                                                                                    )
                                                                                                                    
                                                                                                                    (14
                                                                                                                    )
                                                                                                                    
                                                                                                                    35Certificates
      of deposit
                                                                                                                    
                                                                                                                    (835
                                                                                                                    )
                                                                                                                    
                                                                                                                    2,287
                                                                                                                    
                                                                                                                    (391
                                                                                                                    )
                                                                                                                    
                                                                                                                    1,061
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    705
                                                                                                                    
                                                                                                                    
                                                                                                                    1,121
                                                                                                                    
                                                                                                                    
                                                                                                                    283
                                                                                                                    
                                                                                                                    
                                                                                                                    2,109Other
      borrowings
                                                                                                                    
                                                                                                                    (1
                                                                                                                    )
                                                                                                                    
                                                                                                                    18
                                                                                                                    
                                                                                                                    (7
                                                                                                                    )
                                                                                                                    
                                                                                                                    10
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (10
                                                                                                                    )
                                                                                                                    
                                                                                                                    (59
                                                                                                                    )
                                                                                                                    
                                                                                                                    9
                                                                                                                    
                                                                                                                    
                                                                                                                    (60
                                                                                                                    )Total
                                                                                                                    
                                                                                                                    (1,120
                                                                                                                    )
                                                                                                                    
                                                                                                                    2,443
                                                                                                                    
                                                                                                                    (432
                                                                                                                    )
                                                                                                                    
                                                                                                                    891
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    849
                                                                                                                    
                                                                                                                    
                                                                                                                    957
                                                                                                                    
                                                                                                                    
                                                                                                                    278
                                                                                                                    
                                                                                                                    
                                                                                                                    2,084Net
      change in net interestincome
                                                                                                                    $
                                                                                                                    (1,306
                                                                                                                    )
                                                                                                                    $
                                                                                                                    691
                                                                                                                    $
                                                                                                                    (62
                                                                                                                    )
                                                                                                                    $
                                                                                                                    (677
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (525
                                                                                                                    )
                                                                                                                    $
                                                                                                                    1,674
                                                                                                                    
                                                                                                                    $
                                                                                                                    (271
                                                                                                                    )
                                                                                                                    $
                                                                                                                    878





Comparison
of Years Ended December 31, 2008 and 2007





General.  Net
losses for the year ended December 31, 2008, were $3.0 million or ($1.46) per
basic and diluted common share compared to net earnings of $177,000 or $.09 per
basic and diluted common share for the year ended December 31,
2007.  This decrease in net operating results was primarily due to an
increase the provision for loan losses of $3.2 million, an increase in interest
expense and non-interest expense of $2.0 million, and a decrease in non-interest
income of $122,000, partially offset by an increase in interest income of
$214,000 and a decrease in income tax of $1.9 million.  In addition to
the Company’s growth and expansion, the economic downturns both in our State and
the country as a whole have resulted in a decline in the real estate market, new
home construction and development, loss of jobs, foreclosures and business
failures.  As a result of these factors, and in view of the lengthened
expectations for a further weakened economy, we have significantly increased our
provision for loan losses.





Interest
Income.  Interest income increased to $13.8 million for the
year ended December 31, 2008, from $13.6 million for the year ended December 31,
2007.  Interest income on loans increased to $13.0 million from $12.9
million due to an increase in the average loan portfolio balance for the year
ended December 31, 2008, partially offset by a decrease in the weighted-average
yield earned on the portfolio in 2008.  Interest on securities
increased to $673,000 in 2008, from $375,000 in 2007, due to an increase in the
average portfolio balance in 2008, and an increase in the average yield earned.
Interest on other interest-earning assets decreased to $141,000 for the year
ended December 31, 2008, from $335,000 for the year ended December 31, 2007,
primarily due to a decrease in the average yield earned in 2008, partially
offset by an increase in the average balance in 2008.





Interest
Expense.  Interest expense increased to $7.0 million in 2008
from $6.1 million in 2007.  Interest expense increased due to growth
in average interest-bearing liabilities in 2008, partially offset by a decrease
in the weighted-average rate paid on liabilities.






17
 Table of Contents




Provision for
Loan Losses.  The provision for loan losses is charged to
operations to bring the total allowance to a level we deem appropriate and is
based upon historical experience, the volume and the type of lending we
conduct.  In addition, industry standards, the amounts of
nonperforming loans, general economic conditions, particularly as they relate to
our market area, and other factors related to the collectibility of our loan
portfolio were considered.  The provision for loan losses increased to
$4.1 million in 2008 from $885,000 in 2007. The allowance for loan losses
increased to $2.6 million at December 31, 2008 from $2.4 million at December 31,
2007. The increase in the allowance was due to the increase in the loan
portfolio during the year, as well as an increase in non-performing loans in
2008. Management believes that the allowance for loan losses of $2.6 million is
adequate at December 31, 2008.





Non-interest
Income.  Non-interest income decreased to $874,000 in 2008 from
$996,000 in 2007. This was primarily a result of decreased gains from the sales
of loans held for sale and loan brokerage fees in 2008 compared to 2007,
partially offset by an increase in service charges on deposit accounts in
2008.





Non-interest
Expense.  Total non-interest expense increased to $8.5 million
for the year ended December 31, 2008, compared to $7.4 million in
2007.  This was primarily due to increases in professional fees (as a
result of an increase in problem assets), employee compensation and benefits,
occupancy and equipment, data processing and other expenses, partially offset by
a decrease in advertising, all a result of our overall growth and
expansion.





Income
Taxes.The income tax benefit was $1.8 million (an effective
rate of 38%) for 2008 compared   to an income tax provision of
$77,000 (an effective rate of 30%) for 2007.






Comparison
of Years Ended December 31, 2007 and 2006





General.  Net
earnings for the year ended December 31, 2007, were $177,000 or $.09 per basic
and diluted share compared to net earnings of $631,000 or $.32 per basic and
$.31 per diluted share for the year ended December 31, 2006.  This
decrease in net operating results was primarily due to an increase in interest
expense   and non-interest expense, partially offset by an
increase in interest income and non-interest income, all as a result of our
growth and expansion.  In addition, the economic downturns both in our
State and the country as a whole have resulted from a decline in the real estate
market, new home construction and development, loss of jobs, foreclosures and
business failures.  As a result of these factors, and in view of the
lengthened expectations for a further weakened economy, we have begun to
increase our reserves for potential impaired loans.





Interest
Income.  Interest income increased to $13.6 million for the
year ended December 31, 2007, from $10.6 million for the year ended December 31,
2006.  Interest income on loans increased to $12.9 million from $9.6
million due to an increase in the average loan portfolio balance for the year
ended December 31, 2007, and an increase in the weighted-average yield earned on
the portfolio.  Interest on securities decreased to $375,000 in 2007,
from $426,000 in 2006, due to a decrease in the average portfolio balance in
2007, partially offset by an increase in the average yield earned. Interest on
other interest-earning assets decreased to $335,000 for the year ended December
31, 2007, from $574,000 for the year ended December 31, 2006, primarily due to a
decrease in the average balance in 2007.





Interest
Expense.  Interest expense increased to $6.1 million in 2007
from $4.0 million in 2006.  Interest expense increased due to growth
in average interest-bearing deposits in 2007, as well as an increase in the
weighted-average rate paid on deposits.





Provision for
Loan Losses.  The provision for loan losses is charged to
operations to bring the total allowance to a level we deem appropriate and is
based upon historical experience, the volume and the type of lending we
conduct.  In addition, industry standards, the amounts of
nonperforming loans, general economic conditions, particularly as they relate to
our market area, and other factors related to the collectibility of our loan
portfolio were considered.  The provision for loan losses increased to
$885,000 in 2007 from $429,000 in 2006.  The allowance for loan losses
increased to $2.4 million at December 31, 2007 from $1.8 million at December 31,
2006.  The increase in the allowance was due to the increase in the
loan portfolio during the year, as well as an increase in non-performing loans
in 2007. Management believes that the allowance for loan losses of $2.4 million
is adequate at December 31, 2007.




(continued)


18
 Table of Contents




Non-interest
Income.  Non-interest income increased to $996,000 in 2007 from
$824,000 in 2006. This was primarily a result of increased gains from the sales
of loans, service charges on deposit accounts and income from bank-owned life
insurance in 2007 compared to 2006, partially offset by a decrease in loan
brokerage fees.





Non-interest
Expense.  Total non-interest expense increased to $7.4 million
for the year ended December 31, 2007, compared to $6.1 million in
2006.  This was primarily due to increases in employee compensation
and benefits, occupancy and equipment, data processing and other expenses, all a
result of our overall growth and expansion.





Income
Taxes.The income tax provision was $77,000 (an effective rate
of 30%) for 2007 compared   to $332,000 (an effective rate of
34%) for 2006.






Impact
of Inflation and Changing Prices





The
financial statements and related data presented herein have been prepared in
accordance with U.S. generally accepted accounting principles, which requires
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.  Unlike most industrial
companies, substantially all of our assets and liabilities are monetary in
nature.  As a result, interest rates have a more significant impact on
our performance than the effects of general levels of
inflation.  Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest
rates.






Selected
Quarterly Results





Selected
quarterly results of operations for the four quarters ended December 31 are as
follows


(in
thousands, except per share amounts):





2008
                        
                        2007Fourth
                        Third
                        Second
                        First
                        
                        Fourth
                        Third
                        Second
                        FirstQuarter
                        Quarter
                        Quarter
                        Quarter
                        
                        Quarter
                        Quarter
                        Quarter
                        QuarterInterest
      income
                        $
      3,313
                        3,457
                        3,455
                        3,577
                        
                        $
      3,694
                        3,640
                        3,286
                        2,968Interest
      expense
                        1,794
                        1,674
                        1,707
                        1,776
                        
                        1,737
                        1,636
                        1,417
                        1,270Net
      interest income
                        1,519
                        1,783
                        1,748
                        1,801
                        
                        1,957
                        2,004
                        1,869
                        1,698Provision
      for loan  losses
                        2,331
                        896
                        273
                        559
                        
                        317
                        252
                        221
                        95Loss
      before income taxes
                        (2,675)
                        (1,036)
                        (469)
                        (618)
                        
                        26
                        43
                        53
                        132Net
      loss
                        (1,663)
                        (643)
                        (291)
                        (381)
                        
                        22
                        32
                        37
                        86Basic   per
      common share
                        (.81)
                        (.31)
                        (.14)
                        (.20)
                        
                        .01
                        .02
                        .02
                        .04Diluted
      earnings per common share
                        (.81)
                        (.31)
                        (.14)
                        (.20)
                        
                        .01
                        .02
                        .02
                        .04Cash
      dividends declared per common share
                        -
                        -
                        -
                        -
                        
                        -
                        -
                        -
                        -







19
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated Balance Sheets
 (Dollars
in thousands, except per share amounts)
 
 December 31,2008
                                                      
                                                      2007AssetsCash
      and due from banks
                                                      $
                                                      2,826
                                                      
                                                      4,079Federal
      funds sold
                                                      
                                                      2,384
                                                      
                                                      2,466Interest-bearing
      deposits with banks
                                                      
                                                      247
                                                      
                                                      250Total
      cash and cash equivalents
                                                      
                                                      5,457
                                                      
                                                      6,795Securities
      available for sale
                                                      
                                                      33,238
                                                      
                                                      6,789Security
      held to maturity (market value of $1 and $4)
                                                      
                                                      1
                                                      
                                                      4Loans,
      net of allowance for loan losses of $2,552 and $2,393
                                                      
                                                      184,182
                                                      
                                                      172,251Premises
      and equipment, net
                                                      
                                                      5,881
                                                      
                                                      5,466Federal
      Home Loan Bank stock, at cost
                                                      
                                                      853
                                                      
                                                      280Foreclosed
      assets
                                                      
                                                      1,714
                                                      
                                                      -Accrued
      interest receivable
                                                      
                                                      1,355
                                                      
                                                      983Deferred
      income taxes
                                                      
                                                      1,654
                                                      
                                                      628Bank-owned
      life insurance
                                                      
                                                      2,789
                                                      
                                                      2,681Other
      assets
                                                      
                                                      2,049
                                                      
                                                      876Total
      assets
                                                      $
                                                      239,173
                                                      
                                                      196,753Liabilities
      and Stockholders' EquityLiabilities:Non-interest
      bearing demand deposits
                                                      
                                                      19,492
                                                      
                                                      23,141Savings,
      NOW and money-market deposits
                                                      
                                                      39,458
                                                      
                                                      33,357Time
      deposits
                                                      
                                                      141,733
                                                      
                                                      116,179Total
      deposits
                                                      
                                                      200,683
                                                      
                                                      172,677Official
      checks
                                                      
                                                      1,217
                                                      
                                                      1,214Federal
      Home Loan Bank advances
                                                      
                                                      11,100
                                                      
                                                      100Other
      liabilities
                                                      
                                                      1,277
                                                      
                                                      831Total
      liabilities
                                                      
                                                      214,277
                                                      
                                                      174,822Commitments
      (Notes 4 and 7)Stockholders'
      equity:Preferred
      stock, $.01 par value; 1,000,000 shares authorized, 5,800 shares of
      Series A issued and outstanding
                                                      
                                                      -
                                                      
                                                      -Additional
      paid-in capital, preferred
                                                      
                                                      5,800
                                                      
                                                      -Preferred
      stock discount
                                                      
                                                      (521
                                                      )
                                                      -Common
      stock, $.01 par value; 5,000,000 shares authorized, 2,058,047 shares
      issued and outstanding
                                                      
                                                      20
                                                      
                                                      20Additional
      paid-in capital, common
                                                      
                                                      24,393
                                                      
                                                      23,813Accumulated
      deficit
                                                      
                                                      (4,982
                                                      )
                                                      (1,936
                                                      )Accumulated
      other comprehensive income
                                                      
                                                      186
                                                      
                                                      34Total
      stockholders' equity
                                                      
                                                      24,896
                                                      
                                                      21,931Total
      liabilities and stockholders' equity
                                                      $
                                                      239,173
                                                      
                                                      196,753
 
 
 See Accompanying
Notes to Consolidated Financial Statements.
  20
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated
Statements of Operations
 (Dollars
in thousands, except per share amounts)
 
 Year Ended December 31,Interest
      income:
                                                                      2008
                                                                      
                                                                      2007Loans
                                                                      $
                                                                      12,988
                                                                      
                                                                      12,878Securities
                                                                      
                                                                      673
                                                                      
                                                                      375Other
                                                                      
                                                                      141
                                                                      
                                                                      335Total
      interest income
                                                                      
                                                                      13,802
                                                                      
                                                                      13,588Interest
      expense:Deposits
                                                                      
                                                                      6,937
                                                                      
                                                                      6,056Federal
      Home Loan Bank advances
                                                                      
                                                                      7
                                                                      
                                                                      1Other
                                                                      
                                                                      7
                                                                      
                                                                      3Total
      interest expense
                                                                      
                                                                      6,951
                                                                      
                                                                      6,060Net
      interest income
                                                                      
                                                                      6,851
                                                                      
                                                                      7,528Provision
      for loan losses
                                                                      
                                                                      4,059
                                                                      
                                                                      885Net
      interest income after provision for loan losses
                                                                      
                                                                      2,792
                                                                      
                                                                      6,643Non-interest
      income:Service
      charges and fees on deposit accounts
                                                                      
                                                                      532
                                                                      
                                                                      473Loan
      brokerage fees
                                                                      
                                                                      158
                                                                      
                                                                      205Gain
      on sale of loans held for sale
                                                                      
                                                                      15
                                                                      
                                                                      175Gain
      on sale of securities available for sale
                                                                      
                                                                      41
                                                                      
                                                                      -Income
      from bank-owned life insurance
                                                                      
                                                                      108
                                                                      
                                                                      108Other
      fees
                                                                      
                                                                      20
                                                                      
                                                                      35Total
      non-interest income
                                                                      
                                                                      874
                                                                      
                                                                      996Non-interest
      expenses:Salaries
      and employee benefits
                                                                      
                                                                      3,974
                                                                      
                                                                      3,681Occupancy
      and equipment
                                                                      
                                                                      1,528
                                                                      
                                                                      1,246Advertising
                                                                      
                                                                      434
                                                                      
                                                                      566Data
      processing
                                                                      
                                                                      589
                                                                      
                                                                      482Supplies
                                                                      
                                                                      178
                                                                      
                                                                      151Professional
      fees
                                                                      
                                                                      589
                                                                      
                                                                      185Other
                                                                      
                                                                      1,172
                                                                      
                                                                      1,074Total
      non-interest expenses
                                                                      
                                                                      8,464
                                                                      
                                                                      7,385(Loss)
      earnings before income tax (benefit)
                                                                      
                                                                      (4,798
                                                                      )
                                                                      254Income
      tax (benefit)
                                                                      
                                                                      (1,820
                                                                      )
                                                                      77Net
      (loss) earnings
                                                                      $
                                                                      (2,978
                                                                      )
                                                                      177Preferred
      stock dividend requirements and amortization of preferred stock
      discount
                                                                      
                                                                      26
                                                                      
                                                                      -Net
      (loss) earnings available to common shareholders
                                                                      $
                                                                      (3,004
                                                                      )
                                                                      177Net
      (loss) earnings per common share:Basic
                                                                      $
                                                                      (1.46
                                                                      )
                                                                      .09Diluted
                                                                      $
                                                                      (1.46
                                                                      )
                                                                      .09Weighted-average
      number of common shares, basic
                                                                      
                                                                      2,058,047
                                                                      
                                                                      2,017,553Weighted-average
      number of common shares, diluted
                                                                      
                                                                      2,058,047
                                                                      
                                                                      2,034,070
  See Accompanying
Notes to Consolidated Financial Statements.
  21
 Table of Contents


FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated
Statements of Stockholders' Equity
 
 Years
Ended December 31, 2007 and 2008
 (Dollars
in thousands)
   Accumulated­­­­­­­­­­­­­­­­­­­­              Preferred
      Stock
                                                            
                                                            Common
      Stock
                                                            
                                                            OtherAdditional
                                                            
                                                            
                                                            
                                                            
                                                            Additional
                                                            
                                                            Compre-
                                                            TotalPaid-In
                                                            
                                                            
                                                            Paid-In
                                                            Accumulated
                                                            hensive
                                                            Stockholders’Shares
                                                            Amount
                                                            Capital
                                                            Discount
                                                            
                                                            Shares
                                                            Amount
                                                            Capital
                                                            Deficit
                                                            Income (Loss)
                                                            EquityBalance
      at December 31, 2006
                                                            -
                                                            $      -
                                                            -
                                                            -
                                                            
                                                            1,906,203
                                                            $
      19
                                                            21,729
                                                            (634)
                                                            (51)
                                                            21,063Comprehensive
      income:Net
      earnings
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            -
                                                            -
                                                            -
                                                            177
                                                            -
                                                            177Net
      change in unrealized loss on securities available for sale, net of tax of
      $51
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            -
                                                            -
                                                            -
                                                            -
                                                            85
                                                            85Comprehensive
      income
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2625%
      stock dividend, fractional shares paid in cash of $6
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            94,915
                                                            1
                                                            1,472
                                                            (1,479)
                                                            -
                                                            (6)Share-based
      compensation
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            -
                                                            -
                                                            32
                                                            -
                                                            -
                                                            32Proceeds
      from exercise of common stock options
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            56,929
                                                            -
                                                            520
                                                            -
                                                            -
                                                            520Tax
      benefit from the exercise of common stock options
                                                            -
                                                            -
                                                            -
                                                            -
                                                            
                                                            -
                                                            -
                                                            60
                                                            -
                                                            -
                                                            60Balance
      at December 31, 2007
                                                            -
                                                            $     
      -
                                                            -
                                                            -
                                                            
                                                            2,058,047
                                                            $
      20
                                                            23,813
                                                            (1,936)
                                                            34
                                                            21,931
 (continued)
 22
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated
Statements of Stockholders' Equity
 
 Years
Ended December 31, 2007 and 2008, Continued
 (Dollars
in thousands)
  Accumulated­­­­­­­­­­­­­­­­­­­­                       Preferred
      Stock
                                    
                                    Common
      Stock
                                    
                                    OtherAdditional
                                    
                                    
                                    
                                    
                                    Additional
                                    
                                    Compre-
                                    TotalPaid-In
                                    
                                    
                                    Paid-In
                                    Accumulated
                                    hensive
                                    Stockholders’Shares
                                    Amount
                                    Capital
                                    Discount
                                    
                                    Shares
                                    Amount
                                    Capital
                                    Deficit
                                    Income (Loss)
                                    EquityBalance
      at December 31, 2007
                                    -
                                    $  -
                                    -
                                    -
                                    
                                    2,058,047
                                    $
      20
                                    23,813
                                    (1,936)
                                    34
                                    21,931Comprehensive
      loss:Net
      loss
                                    -
                                    -
                                    -
                                    -
                                    
                                    -
                                    -
                                    -
                                    (2,978)
                                    -
                                    (2,978)Net
      change in unrealized gain on securities available for sale, net of tax of
      $92
                                    -
                                    -
                                    -
                                    -
                                    
                                    -
                                    -
                                    -
                                    -
                                    152
                                    152Comprehensive
      Loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (2,826)Proceeds
      from issuance of  5,800 shares of Series A to US
      Treasury
                                    5,800
                                    -
                                    5,800
                                    -
                                    
                                    -
                                    -
                                    -
                                    -
                                    -
                                    5,800Allocation
      of estimated fair value of common stock warrants issued to US Treasury in
      tandem with preferred stock to common equity
                                    -
                                    -
                                    -
                                    (526)
                                    
                                    -
                                    -
                                    526
                                    -
                                    -
                                    -Preferred
      stock dividend requirements and amortization of preferred stock
      discount
                                    -
                                    -
                                    -
                                    5
                                    
                                    -
                                    -
                                    -
                                    (26)
                                    -
                                    (21)Share-based
      compensation
                                    -
                                    -
                                    -
                                    -
                                    
                                    -
                                    -
                                    54
                                    -
                                    -
                                    54Cumulative
      effect adjustment related to deferred compensation plans, net of tax
      benefit of $25 (see note 9)
                                    -
                                    -
                                    -
                                    -
                                    
                                    -
                                    -
                                    -
                                    (42)
                                    -
                                    (42)Balance
      at December 31, 2008
                                    5,800
                                    $
      -
                                    5,800
                                    (521)
                                    
                                    2,058,047
                                    $20
                                    24,393
                                    (4,982)
                                    186
                                    24,896
  See
Accompanying Notes to Consolidated Financial Statements.




23
 Table of Contents


FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated
Statements of Cash Flows
 (In
thousands)
 
 Year Ended December 31,2008
                                      
                                      
                                      2007Cash
      flows from operating activities:Net (loss) earnings available to common shareholders
                                      $
                                      (3,004
                                      )
                                      
                                      177Adjustments
      to reconcile net (loss) earnings available to common shareholders to net
      cash (used in) provided by operating activities:Preferred
      stock dividend requirements and amortization of preferred stock
      discount
                                      
                                      26
                                      
                                      
                                      -Depreciation
      and amortization
                                      
                                      468
                                      
                                      
                                      376Provision
      for loan losses
                                      
                                      4,059
                                      
                                      
                                      885Amortization
      of loan fees, net
                                      
                                      (180
                                      )
                                      
                                      (111
                                      )Deferred
      income taxes
                                      
                                      (1,093
                                      )
                                      
                                      (311
                                      )Net
      amortization of premiums and discounts on securities
                                      
                                      11
                                      
                                      
                                      8Gain
      on sale of loans held for sale
                                      
                                      (15
                                      )
                                      
                                      (175
                                      )Gain
      on sale of securities available for sale
                                      
                                      (41
                                      )
                                      
                                      -Proceeds
      from sale of loans held for sale
                                      
                                      400
                                      
                                      
                                      4,562Originations
      of loans held for sale
                                      
                                      (385
                                      )
                                      
                                      (4,387
                                      )Increase
      in accrued interest receivable
                                      
                                      (372
                                      )
                                      
                                      (155
                                      )Increase
      in other assets
                                      
                                      (1,173
                                      )
                                      
                                      (251
                                      )Increase
      (decrease) in official checks and other liabilities
                                      
                                      361
                                      
                                      
                                      (12
                                      )Income
      from bank-owned life insurance
                                      
                                      (108
                                      )
                                      
                                      (108
                                      )Share-based
      compensation
                                      
                                      54
                                      
                                      
                                      32Net
      cash (used in) provided by operating activities
                                      
                                      (992
                                      )
                                      
                                      530Cash
      flows from investing activities:Maturities and calls of securities available for sale
                                      
                                      -
                                      
                                      
                                      2,500Maturities of securities held to maturity
                                      
                                      -
                                      
                                      
                                      2,500Purchase of securities available for sale
                                      
                                      (34,056
                                      )
                                      
                                      (3,000
                                      )Principal payments on securities available for sale
                                      
                                      650
                                      
                                      
                                      283Proceeds from sale of securities available for sale
                                      
                                      7,231
                                      
                                      
                                      -Principal payments on securities held to maturity
                                      
                                      3
                                      
                                      
                                      5Net increase in loans
                                      
                                      (17,524
                                      )
                                      
                                      (42,892
                                      )Purchase of premises and equipment
                                      
                                      (883
                                      )
                                      
                                      (1,564
                                      )Purchase
      of Federal Home Loan Bank stock
                                      
                                      (573
                                      )
                                      
                                      (21
                                      )Net
      cash used in investing activities
                                      
                                      (45,152
                                      )
                                      
                                      (42,189
                                      )Cash
      flows from financing activities:Net increase in deposits
                                      
                                      28,006
                                      
                                      
                                      42,458Proceeds from Federal Home Loan Bank advances
                                      
                                      11,000
                                      
                                      
                                      -Proceeds from the issuance of 5,800 shares of  Series A
      preferred stock to US Treasury
                                      
                                      5,800
                                      
                                      
                                      -Proceeds from the exercise of common stock options
                                      
                                      -
                                      
                                      
                                      520Tax benefit associated with exercise of common stock
    options
                                      
                                      -
                                      
                                      
                                      60Fractional
      shares of stock dividends paid in cash
                                      
                                      -
                                      
                                      
                                      (6
                                      )Net
      cash provided by financing activities
                                      
                                      44,806
                                      
                                      
                                      43,032Net
      (decrease) increase in cash and cash equivalents
                                      
                                      (1,338
                                      )
                                      
                                      1,373Cash
      and cash equivalents at beginning of year
                                      
                                      6,795
                                      
                                      
                                      5,422Cash
      and cash equivalents at end of year
                                      $
                                      5,457
                                      
                                      
                                      6,795
 
  24
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Consolidated
Statements of Cash Flows, Continued
 (In
thousands)
 
 
 Year Ended December 31,2008
                                            
                                            2007Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest,
      net of interest capitalized of $21 in 2008 and $7 in 2007
                                            $
                                            6,732
                                            
                                            6,026Income
      taxes
                                            $
                                            75
                                            
                                            448Non-cash
      transactions:Accumulated
      other comprehensive income, net change in unrealized gain (loss) on
      securities available for sale, net of tax
                                            $
                                            152
                                            
                                            85Cumulative
      effect adjustment related to deferred compensation plans, net of tax
      benefit of $25
                                            $
                                            42
                                            
                                            -Transfer
      of loans to foreclosed assets
                                            $
                                            1,714
                                            
                                            -Accrual
      of preferred stock dividend
                                            $
                                            21
                                            
                                            -Common
      stock dividend
                                            $
                                            -
                                            
                                            1,473
 
 See
Accompanying Notes to Consolidated Financial Statements.
  25
 Table of Contents
 
  FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements
   December
31, 2008 and 2007 and the Years Then Ended
  (1)  Summary
of Significant Accounting Policies
   Organization.  FPB
      Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common
      stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the
      outstanding common stock of Treasure Coast Holdings, Inc., (collectively
      referred to as the "Company"). The Holding Company operates as a one-bank
      holding company and its only business activity is the operation of the
      Bank.  The Bank is a state (Florida)-chartered commercial bank
      and its deposits are insured up to the maximum amounts by the Federal
      Deposit Insurance Corporation, which are currently $250,000 for all
      qualified deposits, and unlimited for non-interest bearing transaction
      accounts, both through  December 31, 2009. The Bank offers a
      variety of community banking services to individual and corporate
      customers through its six banking offices located in Port St. Lucie,
      Stuart, Fort Pierce, Vero Beach and Palm City, Florida.  The
      newest office opened in May, 2008, on Gatlin Boulevard in Port St. Lucie,
      Florida.  In addition, the Palm City, Florida office opened in
      January of 2008 and an 11,000 square foot Operations Center in Jensen
      Beach, Florida, opened in March of 2007.  The new subsidiary,
      Treasure Coast Holdings, Inc., was incorporated in June 2008 for the sole
      purpose of managing foreclosed
assets.
 
 The
      following is a description of the significant accounting policies and
      practices followed by the Company, which conform with U.S. generally
      accepted accounting principles and prevailing practices within the banking
      industry.
 
 Basis of
      Presentation.The consolidated financial statements
      include the accounts of the Holding Company, the Bank and its subsidiary.
      All significant intercompany accounts and transactions have been
      eliminated in consolidation.
 
 Use of
      Estimates.  In preparing consolidated financial
      statements in conformity with U.S. generally accepted accounting
      principles, management is required to make estimates and assumptions that
      affect the reported amounts of assets and liabilities as of the date of
      the consolidated balance sheet and reported amounts of revenues and
      expenses during the reporting period. 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 deferred tax
      assets.
 
 Cash and
      Cash Equivalents.  For purposes of the consolidated
      statements of cash flows, cash and cash equivalents include cash and
      balances due from banks, interest-bearing deposits with banks and federal
      funds sold, all of which mature within ninety
  days.
 
 The Bank
may be required by law or regulation to maintain cash reserves in the form of
vault cash or in non-interest earning accounts with the Federal Reserve Bank or
other qualified banks. At December 31, 2008 and 2007, there was no required
reserve balance.
 
 (continued)
 26
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements, Continued
 
 
 (1)  Summary
of Significant Accounting Policies, Continued
   Securities.  Securities
      may be classified as either trading, held to maturity or available for
      sale. Trading securities are held principally for resale and recorded at
      their fair values.  Unrealized gains and losses on trading
      securities are included immediately in
      operations.  Held-to-maturity securities are those which the
      Company has the positive intent and ability to hold to maturity and are
      reported at amortized cost.  Available-for-sale securities
      consist of securities not classified as trading securities nor as
      held-to-maturity securities.  Unrealized holding gains and
      losses, net of tax, on available-for-sale securities are reported as a net
      amount in accumulated other comprehensive income. Gains and losses on the
      sale of available-for-sale securities are determined using the
      specific-identification method. Premiums and discounts on securities are
      recognized in interest income using the interest method over the period to
      maturity.
 
 Loans.  Loans
      that management has the intent and ability to hold for the foreseeable
      future or until maturity or pay-off are reported at their outstanding
      principal balance, adjusted for any charge-offs, the allowance for loan
      losses, and any deferred fees or
costs.
 
 Commitment
      fees and loan origination fees are deferred and certain direct origination
      costs are capitalized. Both are recognized as an adjustment of the yield
      of the related loan.
 
 The
      accrual of interest on loans is discontinued at the time the loan is
      ninety days delinquent unless the loan is well collateralized and in
      process of collection.  In all cases, loans are placed on
      non-accrual or charged-off at an earlier date if collection of principal
      or interest is considered doubtful.
 
 All
      interest accrued but not collected for loans that are placed on
      non-accrual or charged-off is reversed against interest
      income.  The interest on these loans is accounted for on the
      cash-basis or cost-recovery method, until qualifying for return to
      accrual.  Loans are returned to accrual status when all the
      principal and interest amounts contractually due are brought current and
      future payments are reasonably
assured.
 
 Loans Held
      for Sale.The Company originates loans guaranteed by the
      U.S. Small Business Administration, the guaranteed portion of which may be
      sold at a premium.  These loans are carried at the lower of cost
      or estimated fair value in the aggregate. There were no loans held for
      sale at December 31, 2008 or 2007.
 
 Allowance
      for Loan Losses.  The allowance for loan losses is
      established as losses are estimated to have occurred through a provision
      for loan losses charged to operations.  Loan losses are charged
      against the allowance when management believes the uncollectibility of a
      loan balance is confirmed.  Subsequent recoveries, if any, are
      credited to the allowance.
   (continued)
 27
 Table of Contents
 
 FPB
BANCORP, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements, Continued
 
 
 (1)  Summary
of Significant Accounting Policies, Continued
  Allowance
      for Loan Losses, Continued. The allowance for loan losses is
      evaluated on a regular basis by management and is based upon management’s
      periodic review of the collectibility of the loans in light of historical
      experience, the nature and volume of the loan portfolio, adverse
      situations that may affect the borrower’s ability to repay, estimated
      value of any underlying collateral and prevailing economic conditions.
      This evaluation is inherently subjective as it requires estimates that are
      susceptible to significant revision as more information becomes
      available.
 
 The
      allowance consists of specific and general components.  The
      specific component relates to loans that are classified as impaired. For
      such loans, an allowance is established when the discounted cash flows (or
      collateral value or observable market price) of the impaired loan is lower
      than the carrying value of that loan.  The general component
      covers all other loans and is based on historical loss experience adjusted
      for qualitative factors.
 
 A
      loan is considered impaired when, based on current information and events,
      it is probable that the Company will be unable to collect the scheduled
      payments of principal or interest when due according to the contractual
      terms of the loan agreement. Factors considered by management in
      determining impairment include payment status, collateral value, and the
      probability of collecting scheduled principal and interest payments when
      due.  Loans that experience insignificant payment delays and
      payment shortfalls generally are not classified as impaired. Management
      determines the significance of payment delays and payment shortfalls on a
      case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay,
      the reasons for the delay, the borrower’s prior payment record, and the
      amount of the shortfall in relation to the principal and interest owed.
      Impairment is measured on all loans by either the present value of
      expected future cash flows discounted at the loan’s effective interest
      rate, the loan’s obtainable market price, or the fair value of the
      collateral if the loan is collateral
dependent.
 
 Foreclosed
      Assets.Assets acquired through, or in lieu of, loan
      foreclosures are to be sold and are initially recorded at the lower of the
      related loan balance or the fair value at the date of foreclosure
      establishing a new cost basis.  After foreclosure, valuations
      are periodically performed by management and the real estate is carried at
      the lower of carrying amount or fair value less costs to
      sell.  Revenue and expenses from operations are included in the
      consolidated statement of
operations.
 
 Premises
      and Equipment.  Land is stated at
      cost.  Building and improvements, leasehold improvements, and
      furniture, fixtures and equipment are stated at cost less accumulated
      depreciation and amortization.  Depreciation and amortization
      expense are computed using the straight-line method over the estimated
      useful life of each type of asset or the length of time the Company
      expects to lease the property, if
shorter.
 
 
  (continued)
 28
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
 
 
 (1)   Summary
of Significant Accounting Policies, Continued
   Transfer of
      Financial Assets.  Transfers of financial assets are
      accounted for as sales, when control over the assets has been
      surrendered.  Control over transferred assets is deemed to be
      surrendered when (1) the assets have been isolated from the Company, (2)
      the transferee obtains the right (free of conditions that constrain it
      from taking advantage of that right) to pledge or exchange the transferred
      assets, and (3) the Company does not maintain effective control over the
      transferred assets through an agreement to repurchase them before their
      maturity.
 
 Income
      Taxes. Deferred income tax assets and liabilities are recorded to
      reflect the tax consequences on future years of temporary differences
      between revenues and expenses reported for financial statement and those
      reported for income tax purposes.  Deferred tax assets and
      liabilities are measured using the enacted tax rates expected to apply to
      taxable income in the years in which those temporary differences are
      expected to be realized or settled. Valuation allowances are provided
      against assets which are not likely to be realized.  The Company
      recognized the deferred tax asset because management believes, based on
      detailed financial projections, that it is more likely than not, the
      Company will have sufficient future earnings to utilize this asset to
      offset future income tax
liabilities.
 
 Share-Based
      Compensation. The Company follows the fair value recognition
      provisions of Statement of Financial Accounting Standards (“SFAS”) No.
      123(R), Share-Based
      Payment(“SFAS 123(R)”), and expenses the fair
      value of any stock options granted after December 31,
      2005.  SFAS 123(R) requires the measurement and recognition of
      compensation for all stock-based awards made to employees and directors
      including stock options based on estimated fair values.  Under
      the fair value recognition provisions of SFAS 123(R), the Company
      recognizes share-based compensation in compensation and benefits for
      officers and employees, and in other expense for directors in the
      consolidated statements of operations.  The expense is
      recognized on a straight-line basis over the vesting
    period.
 
 Off-Balance-Sheet
      Instruments.  In the ordinary course of business the
      Company has entered into off-balance-sheet financial instruments
      consisting of commitments to extend credit, available lines of credit and
      standby letters of credit.  Such financial instruments are
      recorded in the consolidated financial statements when they are
      funded.
 
  (continued)
 29
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
   (1)    Summary
of Significant Accounting Policies, Continued
  (Loss) Earnings Per
      Share. Basic (loss) earnings per share have been computed on
      the basis of the weighted-average number of shares of common stock
      outstanding during the year.  For 2007, diluted earnings per
      share were computed based on the weighted-average number of shares
      outstanding plus the effect of outstanding stock options, computed using
      the treasury stock method. In 2008, outstanding stock options and warrants
      are not considered dilutive due to the loss incurred by the Company. All
      per share amounts reflect the 5% stock dividend paid on June 15, 2007.
      (Loss) earnings per common share have been computed based on the
      following:
  
 Year Ended December 31,2008
                                              
                                              2007Weighted-average
      number of common shares outstanding used to calculate basic (loss)
      earnings per common share
                                              2,058,047
                                              
                                              2,017,553Effect
      of dilutive stock options and warrants
                                              -
                                              
                                              16,517Weighted-average
      number of common shares outstanding used to calculate diluted (loss)
      earnings per common share
                                              2,058,047
                                              
                                              2,034,070
  
 The
following options were excluded from the calculation of earnings per share for
2007, due to the exercise price being above the average market
price:
   NumberOutstanding
                                      
                                      Exercise Price
                                      
                                      ExpiresFor
      the year ended December 31, 2007
                                      115,798
                                      
                                      $
                                      15.42
      - 16.67
                                      
                                      2015
      - 2017
  Fair Value
      Measurements.  Effective January 1, 2008, the Company
      adopted SFAS No. 157, Fair Value Measurements(SFAS 157).  SFAS 157 defines fair value, establishes a
      framework for measuring fair value and enhances disclosures about fair
      value measurements.
   SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be
used to measure fair value:
 
 Level
1:  Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.
 
 Level
2:  Inputs other than quoted prices that are observable for the asset
or liability, either directly or indirectly.  These include quoted
prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are
observable.  Valuations may be obtained from, or corroborated by,
third-party pricing services.
   (continued)
 30
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
  
 (1)    Summary
of Significant Accounting Policies, Continued
  Fair Value Measurements, continued
  Level
3:  Unobservable inputs to measure fair value of assets and
liabilities for which there is little, if any market activity at the measurement
date, using reasonable inputs and assumptions based upon the best information at
the time, to the extent that inputs are available without undue cost and
effort.
 
 In
October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.  This FASB Staff Position clarifies the application of
SFAS 157 in determining the fair value of a financial asset when the market for
that financial asset is not active.  This FASB Staff Position was
effective upon issuance.
 
 In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No.
157.  This FSP delays the effective date of FAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. The impact of adoption had no
effect on the Company.
 
 The
following describes valuation methodologies used for assets and liabilities
measured at fair value:
 
 Securities Available for
Sale.  Where quoted prices are available in an active market,
securities are classified within level 1 of the valuation
hierarchy.  Level 1 securities include highly liquid government bonds,
certain mortgage products and exchange-traded equities.  If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics, or discounted
cash flows.  Examples of such instruments, which would generally be
classified within level 2 of the valuation hierarchy, include certain
collateralized mortgage and debt obligations and certain high-yield debt
securities.  In certain cases where there is limited activity or less
transparency around inputs to the valuation, securities are classified within
level 3 of the valuation hierarchy.  Securities classified within
level 3 include certain residual interests in securitizations and other less
liquid securities.
 
 Impaired
Loans.  All of the Company’s loans are evaluated individually
for impairment.  Estimates of fair value is determined based on a
variety of information, including the use of available appraisals, estimates of
market value by licensed appraisers or local real estate brokers and the
knowledge and experience of the Company’s management related to values of
properties in the Company’s market areas.  Management takes into
consideration the type, location and occupancy of the property as well as
current economic conditions in the area the property is located in assessing
estimates of fair value.  Accordingly, fair value estimates for
impaired loans is classified as Level 3.
 
 (continued)
 31
 Table of Contents
 
 FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
  (1)    Summary
of Significant Accounting Policies, Continued
   Fair Values
      of Financial Instruments.  The following methods and
      assumptions were used by the Company in estimating fair values of
      financial instruments:
 
 Cash and
      Cash Equivalents.  The carrying amounts of cash and cash
      equivalents approximate their fair
value.
 
 Securities.  Fair
      values for securities are based on the framework for measuring fair value
      established by SFAS 157.
 
 Loans.  For
      variable-rate loans that reprice frequently and have no significant change
      in credit risk, fair values are based on carrying values.  Fair
      values for certain fixed-rate residential mortgage, commercial real estate
      and commercial loans are estimated using discounted cash flow analyses,
      using interest rates currently being offered for loans with similar terms
      to borrowers of similar credit
quality.
 
 Federal
      Home Loan Bank Stock.  Fair value of the Company's
      investment in Federal Home Loan Bank stock is based on its redemption
      value, which is its cost of $100 per
share.
 
 Deposit
      Liabilities.  The fair values disclosed for demand, NOW,
      money-market and savings deposits are, by definition, equal to the amount
      payable on demand at the reporting date (that is, their carrying
      amounts).  Fair values for fixed-rate time deposits are
      estimated using a discounted cash flow calculation that applies interest
      rates currently being offered on time deposits to a schedule of aggregated
      expected monthly maturities of time
deposits.
 
 Accrued
      Interest.  The carrying amounts of accrued interest
      approximate their fair values.
 
 Federal
      Home Loan Bank Advances.The fair value of Federal Home
      Loan Bank advances are estimated using a discounted cash flow analysis
      based on the Company's current incremental borrowing rate for similar
      types of borrowings.
 
 Off-Balance-Sheet
      Instruments.  Fair values for off-balance-sheet lending
      commitments are based on fees currently charged to enter into similar
      agreements, taking into account the remaining terms of the agreements and
      the counterparties' credit
standing.
 
 (continued)
 32
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements, Continued
 (1)    Summary
of Significant Accounting Policies, Continued
  
 Comprehensive
      Income (Loss).Accounting principles generally require
      that recognized revenue, expenses, gains and losses be included in
      operations.  Although certain changes in assets and liabilities,
      such as unrealized gains and losses on available-for-sale securities, are
      reported as a separate component of the equity section of the consolidated
      balance sheets, such items, along with net earnings (loss), are components
      of comprehensive income (loss).  The components of other
      comprehensive income (loss) and related tax effects are as follows (in
      thousands):
  
 Before
                                    
                                    Tax
                                    
                                    AfterYear
      Ended December 31, 2008:
                                    Tax
                                    
                                    Effect
                                    
                                    TaxHolding
      gains
                                    $
                                    285
                                    
                                    (107
                                    )
                                    178Gains
      included in net loss
                                    
                                    (41
                                    )
                                    15
                                    
                                    (26
                                    )Net
      unrealized holding gains
                                    $
                                    244
                                    
                                    (92
                                    )
                                    152Year
      Ended December 31, 2007:Holding
      gains
                                    
                                    136
                                    
                                    (51
                                    )
                                    85Gains
      included in net earnings
                                    
                                    -
                                    
                                    -
                                    
                                    -Net
      unrealized holding gains
                                    $
                                    136
                                    
                                    (51
                                    )
                                    85
    Recent
      Accounting Pronouncements.In December 2007, the
      FASBissued
      SFAS No. 141(R), Business Combinations
      ("SFAS 141(R)").  SFAS 141(R) is effective for the Company’s
      financial statements for the year and interim periods within the year
      beginning January 1, 2009.  SFAS 141(R) requires the acquiring
      entity in a business combination to recognize all (and only) the assets
      acquired and liabilities assumed in the transaction; establishes the
      acquisition date fair value as the measurement objective for all assets
      acquired and liabilities assumed; and requires the acquirer to disclose to
      investors and other users all of the information they need to evaluate and
      understand the nature and financial effect of the business
      combination.  Acquisition related costs including finder's fees,
      advisory, legal, accounting valuation and other professional and
      consulting fees are required to be expensed as incurred.  The
      adoption of SFAS 141(R) had no current effect on the Company’s financial
      condition or results of operations.
 
 In December
2007, the FASB issued SFAS No.160, Non-controlling Interests in
Consolidated Financial Statements ("SFAS 160").  SFAS 160
requires the Company to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160is effective for the
Company’s financial statements for the year and interim periods within the year
beginning January 1, 2009. The adoption of SFAS 160 had no effect on the
Company.
 
 (continued)
 33
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
   (1)    Summary
of Significant Accounting Policies, Continued
  Recent
      Accounting Pronouncements,
continued
   In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS 161"). This standard requires
enhanced disclosures regarding derivative instruments and hedging activities so
as to enable investors to better understand their effects on an entity's
financial position, financial performance, and cash flows. SFAS 161 is effective
for the Company's
financial statements for the year and interim periods within the year beginning
January 1, 2009.  The Companydoes not engage in
trading or hedging activities, nor does it invest in interest rate derivatives
or enter into interest rate swaps. Accordingly, the adoption of SFAS 161 had no
effect on its financial statements
 
 In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS 162"). This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of non-governmental entities
that are presented in conformity with generally accepted accounting principles
("GAAP") in the United States. This Statement was effective in December
2008.  The adoption of SFAS 162 had no effect on the
Company.
 
 In September,
2008, the FASB issued FSP No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB
Statement No. 161 ("FSP 133-1"). FSP 133-1 requires expanded
disclosures about credit derivatives and guarantees. The expanded disclosure
requirements for FSP 133-1 were effective for the Company's financial statements
for the year ending December 31, 2008. The adoption of FSP 133-1 had no
effect on the Company.
 
 In June,
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
("FSP 03-6-1"). FSP 03-6-1 defines unvested share-based payment awards that
contain non-forfeitable rights to dividends as participating securities that
should be included in computing earnings per share (EPS) using the two-class
method under SFAS No. 128, Earnings per
Share.  FSP 03-6-1 is effective for the Company's financial
statements for the year and interim periods within the year beginning January 1,
2009. Additionally, all prior-period EPS data shall be adjusted retrospectively.
The adoption of FSP 03-6-1 had no effect on the Company.
 
 In February,
2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions ("FSP
140-3").  FSP 140-3 requires that an initial transfer of a financial
asset and a repurchase financing that was entered into contemporaneously with,
or in contemplation of, the initial transfer be evaluated together as a linked
transaction under SFAS 140, unless certain criteria are met. FSP 140-3 is
effective for the Company's financial statements for the year and interim
periods within the year beginning January 1, 2009. The adoption of FSP 140-3 had
no effect on the Company.
 
 
 34
 Table of Contents
 
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
 
 (2)  Securities
    Securities
      have been classified according to management's intention.  The
      carrying amount of securities and their fair values are as follows (in
      thousands):
   Amortized
                    Cost
                  
                  GrossUnrealized
                    Gains
                  
                  GrossUnrealized
                    Losses
                  
                  Fair
                    ValueAt
      December 31, 2008:
                    Securities available for
      sale:U.S.
      Government agency securities
                  $
                  16,247
                  
                  128
                  
                  -
                  
                  16,375Mortgage-backed
      securities
                  
                  16,693
                  
                  170
                  
                  -
                  
                  16,863Total
      securities available for sale
                  $
                  32,940
                  
                  298
                  
                  -
                  
                  33,238Security
      held to maturity -Mortgage-backed
      security
                  $
                  1
                  
                  -
                  
                  -
                  
                  1At
      December 31, 2007:
                    Securities available for
      sale:U.S.
      Government agency securities
                  
                  6,000
                  
                  62
                  
                  (1
                  )
                  6,061Mortgage-backed
      securities
                  
                  735
                  
                  -
                  
                  (7
                  )
                  728Total
      securities available for sale
                  $
                  6,735
                  
                  62
                  
                  (8
                  )
                  6,789Security
      held to maturity -Mortgage-backed
      security
                  $
                  4
                  
                  -
                  
                  -
                  
                  4
    Available-for-sale
securities at December 31, 2008, measured at fair value on a recurring basis,
are summarized below (in thousands):
 
 Fair
      Value Measurements at December 31, 2008UsingQuoted
      PricesFair
                  In
      Active
                  SignificantValue
                  Markets
      for
                  Other
                  SignificantAs
      of
                  Identical
                  Observable
                  UnobservableDecember
      31,
                  Assets
                  Inputs
                  Inputs2008
                  (Level 1)
                  (Level 2)
                  (Level 3)Available-for-salesecurities
                  $33,238
                  -
                  33,238
                  -
    
 There were no sales
      of available-for-sale securities in 2007.  Securities
      available-for-sale sold during the year ended December 31, 2008 are
      summarized as follows
                (in
      thousands):
   Principal
      received from sales
                            $
                            7,231Gross
      gains
                            $
                            41
   35
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 
 Notes
to Consolidated Financial Statements, Continued
 
 (2)Securities,
      Continued
   The scheduled maturities of securities at December 31, 2008 are as follows (in
thousands):
 
 Available for Sale
                                        
                                        Held to MaturityAmortizedCost
                                        
                                        FairValue
                                        
                                        AmortizedCost
                                        
                                        FairValueDue
      in one year or less
                                        $
                                        995
                                        
                                        1,000
                                        
                                        -
                                        
                                        -Due
      from one to five years
                                        
                                        1,000
                                        
                                        1,002
                                        
                                        -
                                        
                                        -Due
      from five to ten years
                                        
                                        3,499
                                        
                                        3,577
                                        
                                        -
                                        
                                        -Due
      in more than ten years
                                        
                                        10,753
                                        
                                        10,796
                                        
                                        -
                                        
                                        -Mortgage-backed
      securities
                                        
                                        16,693
                                        
                                        16,863
                                        
                                        1
                                        
                                        1$
                                        32,940
                                        
                                        33,238
                                        
                                        1
                                        
                                        1
   
 At
      December 31, 2008 and 2007 securities with a carrying value of $24,135,000
      and $6,724,000, respectively, were pledged for Federal Home Loan Bank
      advances, to the Federal Reserve Bank for Treasury Tax and Loan (TT&L)
      transactions, and the State of Florida as collateral for public
      funds.
 
 Management
      evaluates securities for other-than-temporary impairment at least on a
      quarterly basis, and more frequently when economic or market concerns
      warrant such evaluation.  Consideration is given to (1) the
      length of time and the extent to which the fair value has been less than
      cost, (2) the financial condition and near-term prospects of the issuer,
      and (3) the intent and ability of the Company to retain its investment in
      the issuer for a period of time sufficient to allow for any anticipated
      recovery in fair value.
 
 (3)  Loans
  The
components of loans are as follows (in thousands):
 
 At December 31,2008
                                
                                2007Commercial
                                $
                                63,768
                                
                                59,878Commercial
      real estate
                                
                                94,675
                                
                                82,951Construction
                                
                                9,793
                                
                                11,186Consumer
                                
                                18,762
                                
                                21,279Residential
      real estate
                                
                                324
                                
                                48Total
      loans
                                
                                187,322
                                
                                175,342Deduct:Deferred
      loan costs and fees, net
                                
                                (588
                                )
                                (698
                                )Allowance
      for loan losses
                                
                                (2,552
                                )
                                (2,393
                                )Loans,
      net
                                $
                                184,182
                                
                                172,251
  (continued)
 36
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements, Continued
 
 (3)  Loans,
Continued
  An
analysis of the change in the allowance for loan losses follows (in
thousands):
 
 Year ended December 31,2008
                              
                              2007Beginning
      balance
                              $
                              2,393
                              
                              1,801Provision
      for loan losses
                              
                              4,059
                              
                              885Charge-offs,
      net of recoveries
                              
                              (3,900
                              )
                              (293
                              )Ending
      balance
                              $
                              2,552
                              
                              2,393
 
 
 Information
      about impaired loans, all of which are collateral dependent, is as follows
      (in thousands):
   At December 31,2008
                                            
                                            2007Loans
      identified as impaired:Gross
      loans with no related allowance for losses
                                            $
                                            17,977
                                            
                                            1,410Gross
      loans with related allowance for loan losses recorded
                                            
                                            4,707
                                            
                                            1,280Less:
      Allowance on these loans
                                            
                                            486
                                            
                                            355Net
      investment in impaired loans
                                            $
                                            22,198
                                            
                                            2,335Year Ended December 31,2008
                                            
                                            2007Average
      investment in impaired loans
                                            $
                                            7,498
                                            
                                            1,331Interest
      income recognized on impaired loans
                                            $
                                            117
                                            
                                            31Interest
      income received on impaired loans
                                            $
                                            103
                                            
                                            31
   Impaired
      collateral-dependent loans are carried at the lower of cost or fair
      value.  At December 31, 2008, those impaired
      collateral-dependent loans which are measured at fair value or a
      non-recurring basis are as follows (in
  thousands):
   Losses
      Recorded inFair
                                            
                                            
                                            
                                            Total
                                            EarningsValue(1)
                                            Level 1
                                            Level 2
                                            Level 3
                                            Losses
                                            During 2008Impaired
      Loans
                                            $7,811
                                            -
                                            -
                                            $7,811
                                            $(2,970)
                                            $(2,814)
  (1)In addition, loans with a carrying value of $14.4 million were
      measured for impairment using Level 3 inputs and had a fair value in
      excess of carrying value.
 
   (continued)
 37
 Table of Contents
  FPB
BANCORP, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements, Continued
 
 (3)  Loans,
Continued
  
 Non-accrual
      loans and loans past due ninety days or more but still accruing were as
      follows (in thousands):




At December 31,2008
                                  
                                  2007Non-accrual
      loans
                                  $
                                  10,105
                                  
                                  1,401Past
      due ninety days or more but still accruing
                                  
                                  250
                                  
                                  349$
                                  10,355
                                  
                                  1,750




(4)  Premises
and Equipment






A
      summary of premises and equipment follows (in
  thousands):






At December 31,2008
                              
                              2007Building
      and improvements
                              $
                              3,936
                              
                              2,779Land
                              
                              552
                              
                              552Furniture,
      fixtures and equipment
                              
                              2,058
                              
                              1,651Leasehold
      improvements
                              
                              964
                              
                              811Construction
      in process
                              
                              -
                              
                              834Total,
      at cost
                              
                              7,510
                              
                              6,627Less
      accumulated depreciation and amortization
                              
                              (1,629
                              )
                              (1,161
                              )Premises
      and equipment, net
                              $
                              5,881
                              
                              5,466






Interest
      capitalized and included in construction in process during 2008 and 2007
      was approximately $21,000 and $7,000,
  respectively.







The
      Company leases its Stuart, Florida branch office facility under a
      non-cancelable lease. The initial lease term is five years with two
      five-year renewal options.  In November 2005, the Company signed
      a ten year lease with four five-year renewals, on a branch building in
      Vero Beach, Florida which opened in March, 2006.  In February of
      2006, the Company signed a fifty year lease, with four ten-year renewal
      options on a ground lease for the Gatlin Boulevard, Port St. Lucie,
      Florida  branch site, which opened in May of 2008.  In
      April of 2006, the Company signed a seven year lease, with two five-year
      renewal options, on the Operations Center in Jensen Beach, Florida which
      opened in March of 2007. In May of 2007, the Company signed a 10 year
      lease with two five-year renewal options for a branch office in Palm City,
      Florida, which opened in January, 2008. The Company is required to pay an
      allowable share of common area maintenance, insurance and real estate
      taxes on these leases. Rent expense under the operating leases during the
      years ended December 31, 2008 and 2007 was approximately $593,000 and
      $488,000, respectively. In addition, the Company leases space in its Fort
      Pierce branch office facility to third parties. The leases have initial
      terms of five years and lease income was approximately $125,000 and
      $87,000 in 2008 and 2007,
respectively.




(continued)


38
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued







(4)  Premises
and Equipment, Continued






At
      December 31, 2008, future minimum rental commitments, including certain
      renewal options, under these non-cancelable leases were approximately as
      follows (in thousands):






Year EndingDecember 31,
                
                OperatingLease
                  Expense
                
                OperatingLeaseIncome2009
                
                $
                498
                
                732010
                
                
                509
                
                -2011
                
                
                521
                
                -2012
                
                
                539
                
                -2013
                
                
                548
                
                -Thereafter
                
                
                15,768
                
                -Total
                
                $
                18,383
                
                73





(5)  Deposits




The
      aggregate amount of time deposits with a minimum denomination of $100,000
      was approximately $55,596,000 and $68,534,000 at December 31, 2008 and
      2007, respectively.







A schedule of maturities of time deposits at December 31, 2008 follows (in
thousands):




Year
      EndingDecember 31,
                        
                        Amount2009
                        
                        $
                        107,0162010
                        
                        
                        22,3932011
                        
                        
                        5,0312012
                        
                        
                        5,6822013
                        
                        
                        1,611$
                        141,733







(6)  Federal
Home Loan Bank Advances






Maturity
      and interest rate of the advances from the Federal Home Loan Bank of
      Atlanta ("FHLB") consisted of the following ($ in
    thousands):






Maturity
                                      
                                      Fixed
      orYear
      Ending
                                      
                                      Variable
                                      
                                      
                                      
                                      At December 31,December 31,
                                      
                                      Rate
                                      
                                      Interest Rate
                                      
                                      2008
                                      
                                      20072009
                                      
                                      Fixed
                                      
                                      1.32
                                      %
                                      $
                                      3,000
                                      
                                      -2010
                                      
                                      Fixed
                                      
                                      1.81
                                      %
                                      
                                      3,000
                                      
                                      -2011
                                      
                                      Fixed
                                      
                                      2.31
                                      %
                                      
                                      1,000
                                      
                                      -2012
                                      
                                      Fixed
                                      
                                      3.05
                                      %
                                      
                                      2,500
                                      
                                      -2013
                                      
                                      Fixed
                                      
                                      3.20
                                      %
                                      
                                      1,500
                                      
                                      -Thereafter
                                      
                                      Fixed
      (1)
                                      
                                      .50
                                      %
                                      
                                      100
                                      
                                      100$
                                      11,100
                                      
                                      100




(1)
      Low interest rate due to being related to FHLB low-housing project
      lending.






The
      advances are collateralized by securities available for sale with a
      carrying value of approximately $13,193,000 and $250,000 at December 31,
      2008 and 2007, respectively.






39
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements, Continued


(7)  Financial
Instruments




The
      estimated fair values of the Company's financial instruments were as
      follows (in thousands):






At December 31, 2008
                
                At December 31, 2007Carrying
                  Amount
                
                Fair
                  Value
                
                Carrying
                  Amount
                
                Fair
                  ValueFinancial
      assets:Cash
      and cash equivalents
                $
                5,457
                
                5,457
                
                
                6,795
                
                6,795Securities
      available for sale
                
                33,238
                
                33,238
                
                
                6,789
                
                6,789Securities
      held to maturity
                
                1
                
                1
                
                
                4
                
                4Loans,
      net
                
                184,182
                
                189,649
                
                
                172,251
                
                173,071Federal
      Home Loan Bank stock
                
                853
                
                853
                
                
                280
                
                280Accrued
      interest receivable
                
                1,355
                
                1,355
                
                
                983
                
                983Financial
      liabilities:Deposit
      liabilities
                
                200,683
                
                202,475
                
                
                172,677
                
                173,078Federal
      Home Loan Bank advances
                
                11,100
                
                11,377
                
                
                100
                
                100Off-balance-sheet
      financial instruments
                
                -
                
                -
                
                
                -
                
                -





(continued)


40
 Table of Contents


FPB
BANCORP, INC. AND SUBSIDIARY
  Notes
to Consolidated Financial Statements, Continued




(7)
Financial Instruments, Continued




The
      Company is a party to financial instruments with off-balance-sheet risk in
      the normal course of business to meet the financing needs of its
      customers.  These financial instruments are commitments to
      extend credit, available lines of credit and standby letters of credit and
      may involve, to varying degrees, elements of credit and interest-rate risk
      in excess of the amount recognized in the consolidated balance sheet. The
      contract amounts of these instruments reflect the extent of involvement
      the Company has in these financial
instruments.





The
      Company's exposure to credit loss in the event of non-performance by the
      other party to the financial instrument for commitments to extend credit
      is represented by the contractual amount of those instruments. The Company
      uses the same credit policies in making commitments as it does for
      on-balance-sheet instruments.





Commitments to extend credit are
      agreements to lend to a customer as long as there is no violation of any
      condition established in the contract.  Commitments generally
      have fixed-expiration dates or other termination clauses and may require
      payment of a fee.  Because some of the commitments are expected
      to expire without being drawn upon, the total commitment amounts do not
      necessarily represent future cash requirements.  The Company
      evaluates each customer's creditworthiness on a case-by-case
      basis.  The amount of collateral obtained, if deemed necessary
      by the Company, upon extension of credit, is based on management's credit
      evaluation of the
counterparty.





Standby
      letters of credit are conditional commitments issued by the Company to
      guarantee the performance of a customer to a third party.  The
      credit risk involved in issuing letters of credit is essentially the same
      as that included in extending loans to customers. The Company generally
      holds collateral supporting these commitments and management does not
      anticipate any potential losses if these letters of credit are
      funded.





Standby
      letters of credit, available lines of credit and commitments to extend
      credit typically result in loans with a market interest rate when
      funded.  A summary of Company's financial instruments with off
      balance sheet risk at December 31, 2008 follows (in
      thousands):





Standby
      letters of credit
                                      $
                                      148Commitments
      to extend credit
                                      $
                                      700Available
      lines of credit
                                      $
                                      16,182





41
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FPB
BANCORP, INC. AND SUBSIDIARY





Notes
to Consolidated Financial Statements, Continued




(8)  Credit
Risk




The
      Company grants the majority of its loans to borrowers throughout the Port
      St. Lucie, Stuart, Palm City, Fort Pierce and Vero Beach, Florida area.
      Although the Company has a diversified loan portfolio, a significant
      portion of its borrowers' ability to honor their contracts is dependent
      upon the economy in St. Lucie County, Martin County and Indian River
      County, Florida. The Company does not have significant concentrations to
      any one industry or customer. The Company did have eighteen loans
      aggregating $14.1 million and $16.9 million at December 31, 2008 and 2007
      respectively, with original maturities of five years or less,
      respectively, where the primary source of repayment is the sale of the
      related collateral or the conversion of the existing debt into debt at
      another financial institution. The majority of these loans are located in
      Martin, St. Lucie and Indian Counties,
Florida.





With
      the uncertain real estate market in Martin, St. Lucie and Indian River
      Counties, Florida, in the short-term, obtaining refinancing or sale of the
      collateral, with terms acceptable to the borrower may be difficult or
      impossible. While some of these loans have been extended, it is possible
      others will be extended and/or modified or the loans which have been
      extended may be extended again. Management is closely monitoring these
      loans and believes the loan loss allowance at December 31, 2008 is
      adequate.






(9)  Benefit
Agreements




The
      Company has Deferred Compensation Agreements (the "Agreements") with
      certain officers and directors which require the Company to provide salary
      continuation benefits to them upon retirement.  The Agreements
      require the Company to pay annual benefits for five to fifteen years
      following their normal retirement ages. The Company has purchased life
      insurance policies on these officers and directors which although not
      formerly linked, have estimated future cash values that exceed the
      estimated future benefits that will be due under these Agreements. The
      Company recognized income on the life insurance policies, net of benefit
      expense accrued on the Agreements, of $84,000 in 2008 and $86,000 in
      2007.





During
      2007, the FASB issued EITF No. 06-4, “Accounting for Deferred
      Compensation and Postretirement Benefit Aspects of Endorsed Split-Dollar
      Life Insurance Arrangements” (“EITF 06-4”), which requires an
      employer to recognize a liability for postretirement death benefits
      provided under endorsement split-dollar agreements. An endorsement
      split-dollar agreement is an arrangement whereby an employer owns a life
      insurance policy that covers the life of an employee and, pursuant to a
      separate agreement, endorses a portion of the policy’s death benefits to
      the insured employee’s beneficiary. EITF 06-4 was effective on January 1,
      2008. The Company has entered into Supplemental Death Benefit Agreements
      with certain of its directors and executive officers pursuant to which the
      Company has agreed to pay a portion of the death benefit payable under
      certain life insurance policies owned by the Company to the directors’ or
      executives’ beneficiaries upon their death. As a result of the adoption of
      EITF 06-4, the Company recognized a cumulative effect adjustment
      (increase) to accumulated deficit of ($42,000) representing
      additional liability of $67,000 required to be provided under EITF 06-4 on
      January 1, 2008 relating to the agreements, net of deferred income taxes
      of $25,000.








42
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FPB
BANCORP, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued






(10)
      Income Taxes (Benefit)






Income
taxes (benefit) consisted of the following (in thousands):






Year Ended December 31,2008
                                    
                                    2007Current:Federal
                                    $
                                    (727
                                    )
                                    332State
                                    
                                    -
                                    
                                    56Total
      current
                                    
                                    (727
                                    )
                                    388Deferred:Federal
                                    
                                    (829
                                    )
                                    (265
                                    )State
                                    
                                    (264
                                    )
                                    (46
                                    )Total
      deferred
                                    
                                    (1,093
                                    )
                                    (311
                                    )Income
      taxes (benefit)
                                    $
                                    (1,820
                                    )
                                    77


The
      reasons for the differences between the statutory Federal income tax rate
      and the effective tax rate are summarized as follows (dollars in
      thousands):


Year Ended December
    31,2008
                
                2007Amount
                
                %
      of
                  Pretax
                  Loss
                
                Amount
                
                %
      of
                  Pretax
                  EarningsIncome
      taxes (benefit) at statutory rate
                $
                (1,631
                )
                (34
                )%
                $
                86
                
                34
                %Increase
      (decrease) resulting from:State
      taxes, net of Federal tax benefit
                
                (175
                )
                (3
                )
                
                7
                
                3Income
      from bank-owned life insurance
                
                (43
                )
                (1
                )
                
                (40
                )
                (16
                )Nondeductible
      expenses
                
                12
                
                -
                
                
                13
                
                5Share-based
      compensation
                
                17
                
                -
                
                
                11
                
                4Income
      taxes (benefit)
                $
                (1,820
                )
                (38
                )%
                $
                77
                
                30
                %





(continued)


43
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued







(10)
      Income Taxes (Benefit), Continued


The
      tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities are
      presented below (in thousands).


At December 31,2008
                
                2007Deferred
      tax assets:Allowance for loan losses
                $
                519
                
                830Net operating loss carryforward
                
                1,166
                
                -Deferred compensation
                  Impaired loan interest
                
                127
      68
                
                64
      8Other
                
                110
                
                11Deferred
      tax assets
                
                1,990
                
                913Deferred
      tax liabilities:Accrual
      to cash adjustment
                
                (30
                
                (60
                )Accumulated
      depreciation
                
                (81
                
                (87
                )Deferred
      loan costs
                
                (113
                
                (118
                )Unrealized
      gain on securities available for sale
                
                (112
                
                (20
                )Deferred
      tax liabilities
                
                (336
                
                (285
                )Net
      deferred tax asset
                $
                1,654
                
                628






At
      December 31, 2008, the Company had net operating loss carryforwards of
      approximately $2.9 million for Federal and $5.0 million for Florida
      available to offset future taxable income. The carryforwards will expire
      in 2028.







(11)  Related
      Party Transactions


In
      the ordinary course of business, the Company may make loans at terms and
      rates prevailing at the time to officers and directors of the Company or
      their affiliates. The Company also accepts deposits from these same
      related parties.  These are summarized as follows (in
      thousands):






2008
                                      
                                      2007Loans:Balance
      at beginning of year
                                      $
                                      4,346
                                      
                                      2,824Borrowings
                                      
                                      708
                                      
                                      1,892Repayments
                                      
                                      (1,176
                                      )
                                      (370Balance
      at end of year
                                      $
                                      3,878
                                      
                                      4,346Deposits
                                      $
                                      3,954
                                      
                                      2,867






44
 Table of Contents





FPB
BANCORP, INC. AND SUBSIDIARY





Notes
to Consolidated Financial Statements, Continued







(12)  Stock
      Options and Warrants


The
      Company established a Stock Option Plan in 1998 (“1998 Plan”) for
      directors, officers and employees of the Company. The 1998 Plan as amended
      provides for 131,553 shares (adjusted) of common stock to be available for
      grant.  The exercise price of the stock options is the fair
      market value of the common stock on the date of grant.  The
      options expire ten years from the date of grant. At December 31, 2008, no
      shares remain available for grant, as the Plan Agreement terminated on
      December 8, 2008. All per share amounts reflect the 5% stock dividend paid
      on June 15, 2007. A summary of stock option information follows ($ in
      thousands, except per share
amounts):







Number
      of
                  Options
                
                Weighted
      -Average
                  ExercisePrice
                
                Weighted
      -Average
                  RemainingContractual
                  Term
                
                AggregateIntrinsic
                  ValueOutstanding
      at December 31, 2006
                
                94,932
                
                $
                10.19Options
      exercised
                
                (56,929
                )
                
                (9.12
                )Options
      forfeited
                
                (1,050
                )
                
                (15.42
                )Outstanding
      at December 31, 2007
                
                36,953
                
                
                11.68Options
      granted
                
                579
                
                
                8.50Options
      forfeited
                
                (771
                )
                
                (9.52
                )Outstanding
      at December 31, 2008
                
                36,761
                
                $
                11.68
                
                2.41 years
                
                $
                -Exercisable
      at  December 31, 2008
                
                36,182
                
                $
                11.73
                
                2.30 years
                
                $
                -





(continued)


45
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY





Notes
to Consolidated Financial Statements, Continued







(12)  Stock
      Options and Warrants, Continued


In
      2005, the Company established a new option plan (“2005 Plan”) for
      directors, officers and employees of the Company.  The 2005 Plan
      provides for 158,743 shares (adjusted) of common stock to be available for
      grant.  The exercise price of the stock options is the fair
      market value of the common stock on the date of grant. The 2005 Plan
      allows for various vesting periods and the options expire ten years from
      the date of grant. At December 31, 2008, 35,694 shares (adjusted) remain
      available for grant.  All per share amounts reflect the 5% stock
      dividend paid on June 15, 2007. A summary of stock option information
      follows:







Number
      of
                  Options
                
                Weighted
      -Average
                  ExercisePrice
                
                Weighted
      -Average
                  RemainingContractual
                  Term
                
                AggregateIntrinsic
                  ValueOptions
      outstanding at December 31, 2006
                
                87,573
                
                $
                15.42Options
      forfeited
                
                (2,756
                )
                
                (15.42
                )Options
      granted
                
                16,966
                
                
                16.67Options
      outstanding at December 31, 2007
                
                101,783
                
                
                15.63Options
      forfeited
                
                (6,442
                )
                
                (14.47
                )Options
      granted
                
                27,708
                
                
                9.34Options
      outstanding at December 31, 2008
                
                123,049
                
                $
                14.27
                
                7.74 years
                
                $
                -Options
      exercisable at December 31, 2008
                
                85,030
                
                $
                15.49
                
                7.30 years
                
                $
                -






The
      fair value of each option granted was estimated on the date of grant using
      the Black-Scholes option-pricing model with the following weighted-average
      assumptions:






Years Ended December 31,2008
                          
                          2007Dividend
      yield
                          
                          -
                          %
                          
                          -
                          %Expected
      life
                          
                          6 - 6.5 years
                          
                          
                          6 yearsExpected
      volatility
                          
                          23.44%
      - 28.74
                          %
                          
                          18.62
                          %Risk-free
      interest rate
                          
                          4.07%
      - 4.98
                          %
                          
                          3.88
                          %Weighted-average
      grant-date fair value of options issued during the year
                          $
                          2.27
      - $3.40
                          
                          $
                          4.96





(continued)


46
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY





Notes
to Consolidated Financial Statements, Continued





(12)  Stock
      Options and Warrants, Continued


The
      Company has examined its historical pattern of option exercises by its
      directors and employees in an effort to determine if there was any pattern
      based on these populations.  From this analysis, the Company
      could not identify any patterns in the exercise of options.  As
      such, the Company used the guidance in Staff Accounting Bulletin No. 107
      issued by the Securities and Exchange Commission to determine the
      estimated life of options.  Expected volatility is based on
      historical volatility of the Company's common stock.  The
      risk-free rate for periods within the contractual life of the option is
      based on the U.S. treasury yield curve in effect at the time of
      grant.  The dividend yield assumptions are based on the
      Company’s history and expectation of dividend
  payments.


The
      total intrinsic value of options exercised in 2007 was $186,000 and the
      related tax benefit recognized was $60,000. The total fair value of shares
      vested and recognized as compensation expense was $54,000 and $32,000 for
      2008 and 2007 respectively, and the related tax benefit recognized was
      $2,000 in 2008 and none in 2007. As of December 31, 2008, the Company had
      38,598 (adjusted) stock options not fully vested and there was $89,000 of
      total unrecognized compensation cost related to these non-vested options.
      This cost is expected to be recognized monthly over a weighted-average
      period of 1.5 years on a straight-line
basis.





Also
      in January 2004, 22,050 (adjusted) stock options were granted to a third
      party as compensation for services provided to the Company.  The
      options, which expire at the end of ten years, were issued at $11.00 per
      share and are fully vested.  As of December 31, 2008, none of
      these options had been exercised.





In
      addition, as discussed in more detail in Note 14, the Company sold on
      December 5, 2008 to the U.S. Treasury a ten year warrant to purchase at
      any time up to 183,158 shares of the Company’s common stock for $4.75 per
      share.





(13)  Profit
      Sharing Plan


The
      Company sponsors a section 401(k) profit sharing plan (the "Plan") which
      is available to all employees electing to participate.  During
      2008 and 2007, the Company approved a 1% and 2% match, respectively, to
      the Plan in an approximate amount of $24,000 and $43,000
      respectively.





(14)  Stockholders’
      Equity


On
      December 5, 2008, the Company issued and sold to the United States
      Department of the Treasury (the “Treasury”) 5,800 shares of Fixed Rate
      Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”),
      along with a ten year warrant (the “Warrant”) to purchase at any time up
      to 183,158 shares of the Company’s common stock for $4.75 per share, for a
      total cash investment of $5.8 million from the Treasury (the
      “Transaction”). The Transaction was completed pursuant to, and is governed
      by, the U.S. Treasury’s Capital Purchase Program (the “CPP”), which is
      designed to attract broad participation by healthy institutions, to
      stabilize the financial system, and to increase lending for the benefit of
      the U.S. economy.




(continued)


47
 Table of Contents




FPB BANCORP, INC. AND
SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued






(14)  Stockholders’
      Equity, Continued


The
      Transaction proceeds of $5.8 million were allocated between the Preferred
      Shares and Warrant based on the ratio of the estimated fair value of the
      Warrant to the aggregate estimated fair value of both the Preferred Shares
      and the Warrant. The value of the Warrant was computed to be $394,000
      using the Black Scholes model with the following inputs: expected stock
      volatility of 61.89%, risk-free interest rate of 4.11%, expected life of 5
      years and no dividend yield. The value of the Preferred Shares was
      computed to be $3.9 million based on the net present value of the expected
      cash flows over five years using a discount rate of 14%, which represents
      what the Company believes to be its incremental borrowing rate for a
      similar transaction in the private sector. The allocation of proceeds to
      the Warrant was recorded as a “preferred stock discount” against the
      Preferred Shares, with a corresponding and equal entry to additional paid
      in common equity in the amount of $526,000. This discount is being
      amortized over five years on a straight-line basis and increases the loss
      available to common shareholders.





The
      Preferred Shares carry a 5% per year cumulative preferred dividend rate,
      payable quarterly. The dividend rate increases to 9% after five years.
      Dividends compound if they accrue and are not paid. The Preferred Shares
      have a liquidation preference of $1,000 per share, plus accrued unpaid
      dividends. During the first three years after the Transaction, the Company
      may not redeem the Preferred Shares except in conjunction with a qualified
      equity offering meeting certain requirements. After three years, the
      Company may redeem the Preferred Shares, plus accrued unpaid dividends, in
      whole or in part, subject to the approval of the Company’s primary federal
      banking regulator.





While
      the Preferred Shares are outstanding, certain restrictions apply to the
      Company, including, among others, those that are discussed
      below.





The
      Preferred Shares have a senior rank and the Company cannot issue other
      preferred stock senior to the Preferred Shares. Until the third
      anniversary of the sale of the Preferred Shares, unless the Preferred
      Shares have been redeemed in whole or the Treasury has transferred all of
      the shares to a non-affiliated third party, the Company may not increase
      its common stock cash dividend or repurchase common stock or other equity
      shares (subject to certain limited exceptions) without the Treasury’s
      approval. If the Company were to pay a cash dividend in the future, any
      such dividend would have to be discontinued if a Preferred Share dividend
      were missed. Thereafter, dividends on common stock could be resumed only
      if all Preferred Share dividends in arrears were paid. Similar
      restrictions apply to the Company’s ability to repurchase common stock if
      Preferred Share dividends are missed. Failure to pay the Preferred Share
      dividend is not an event of default. However, a failure to pay a total of
      six   Preferred Share dividends, whether or not
      consecutive, gives the holders of the Preferred Shares the right to elect
      two directors to the Company’s board of directors.  That right
      would continue until the Company pays all dividends in
      arrears.


(continued)


48
 Table of Contents




FPB BANCORP, INC. AND
SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued








(14)  Stockholders’
      Equity, Continued


Senior
      Executive Officers of the Company and its subsidiary agreed to limit
      certain compensation, bonus, incentive and other benefit plans,
      arrangements, and policies with respect to the Senior Executive Officers
      during the period that the Treasury owns any debt or equity securities
      acquired in connection with the Transaction. The Preferred Shares
      generally are non-voting, other than in connection with proposals to issue
      preferred stock senior to the Preferred Shares, certain merger
      transactions, amendments to the rights of the holder of the Preferred
      Shares, and other than in connection with the board representation rights
      mentioned above, as required by Delaware State law. The Warrant is
      exercisable immediately and expires in ten years. The Warrant has
      anti-dilution protections and certain other protections for the holder, as
      well as potential registration rights upon written request from the
      Treasury. If requested by the Treasury, the Warrant (and the underlying
      common stock) may need to be listed on a national securities exchange. The
      Treasury has agreed not to exercise voting rights with respect to common
      shares it may acquire upon exercise of the Warrant. The number of common
      shares covered by the Warrant may be reduced by up to one-half if the
      Company completes an equity offering meeting certain requirements by
      December 31, 2009. If the Preferred Shares are redeemed in whole, the
      Company has the right to purchase any common shares held by the Treasury
      at their fair market value at that
time.





(15)  Restrictions
      on Dividends


The
      Company’s ability to pay cash dividends on its common stock is limited to
      the amount of dividends it could receive from the Bank plus its own cash
      and cash equivalents, which amounted to $4.4 million at December 31, 2008.
      It is also restricted as discussed in Note 14. The amount of dividends the
      Bank is permitted to pay to the Company is restricted to 100% of its
      calendar year-to-date net earnings plus retained earnings for the
      preceding two years.  In addition, no bank may pay a dividend at
      any time that net earnings in the current year when combined with retained
      earnings from the preceding two years produce a loss. Under Florida law, a
      Florida chartered commercial bank may not pay cash dividends that would
      cause the Bank’s capital to fall below the minimum amount required by
      Federal or Florida law.





(16)
      Regulatory Matters


The
      Bank is subject to various regulatory capital requirements administered by
      the regulatory banking agencies. Failure to meet minimum capital
      requirements can initiate certain mandatory and possibly additional
      discretionary actions by regulators that, if undertaken, could have a
      direct material effect on the Bank's and the Company's consolidated
      financial statements.  Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Bank must meet
      specific capital guidelines that involve quantitative measures of their
      assets, liabilities, and certain off-balance-sheet items as calculated
      under regulatory accounting practices.  The capital amounts and
      classification are also subject to qualitative judgments by the regulators
      about components, risk weightings, and other
  factors.






(continued)


49
 Table of Contents




FPB BANCORP, INC. AND
SUBSIDIARY


Notes
to Consolidated Financial Statements, Continued





(16)
      Regulatory Matters, Continued


Quantitative
      measures established by regulation to ensure capital adequacy require the
      Bank to maintain minimum amounts and percentages (set forth in the
      following table) of total and Tier 1 capital (as defined in the
      regulations) to risk-weighted assets (as defined) and of Tier 1 capital
      (as defined) to average assets (as defined).  Management
      believes, as of December 31, 2008, the Bank met all capital adequacy
      requirements to which they are
subject.






As
      of December 31, 2008, the most recent notification from the regulatory
      authorities categorized the Bank as well capitalized under the regulatory
      framework for prompt corrective action.  To be categorized as
      well capitalized, an institution must maintain minimum total risk-based,
      Tier 1 risk-based, and Tier 1 leverage percentages as set forth in the
      following tables. There are no conditions or events since that
      notification that management believes have changed the Bank's
      category.  The Bank's actual capital amounts and percentages are
      also presented in the table ($ in
thousands).









Actual
                
                Minimum
      for
                  Capital
      Adequacy
                  Purposes
                
                Minimum
                  To
      Be Well
                  Capitalized
      Under
                  Prompt
      Corrective
                  Action ProvisionsAmount
                
                %
                
                Amount
                
                %
                
                Amount
                
                %As
      of December 31, 2008:Total
      Capital to Risk -Weighted
      Assets
                $
                21,280
                
                10.88
                %
                $
                15,647
                
                8.00
                %
                $
                19,559
                
                10.00
                %Tier
      1 Capital to Risk -Weighted
      Assets
                
                18,834
                
                9.63
                
                
                7,824
                
                4.00
                
                
                11,736
                
                6.00Tier
      1 Capital To
      Total Assets
                
                18,834
                
                8.27
                
                
                9,111
                
                4.00
                
                
                11,389
                
                5.00As
      of December 31, 2007:Total
      Capital to Risk -Weighted
      Assets
                $
                20,202
                
                11.09
                
                $
                14,579
                
                8.00
                
                $
                18,224
                
                10.00Tier
      1 Capital to Risk -Weighted
      Assets
                
                17,923
                
                9.83
                
                
                7,290
                
                4.00
                
                
                10,934
                
                6.00Tier
      1 CapitalTo
      Total Assets
                
                17,923
                
                9.09
                
                
                7,884
                
                4.00
                
                
                9,855
                
                5.00








50
 Table of Contents




FPB
BANCORP, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued








(17)
      Holding Company Financial
Information




The
Holding Company's unconsolidated financial information is as follows (in
thousands):






Condensed
Balance Sheets





At December 31,2008
                                  
                                  2007AssetsCash
      and cash equivalents
                                  $
                                  4,402
                                  
                                  3,687Investment
      in subsidiary
                                  
                                  20,248
                                  
                                  17,957Other
      assets
                                  
                                  342
                                  
                                  287Total
      assets
                                  $
                                  24,992
                                  
                                  21,931LiabilitiesTotal
      liabilities
                                  $
                                  96
                                  
                                  -Stockholders’
      EquityStockholders’
      Equity
                                  
                                  24,896
                                  
                                  21,931Total
      Liabilities and Stockholders’ Equity
                                  $
                                  24,992
                                  
                                  21,931








Condensed Statements of
Operations





Year
      EndedDecember 31,2008
                            
                            2007Revenues
                            $
                            -
                            
                            -Expenses
                            
                            (159
                            )
                            (96
                            )Loss
      before (loss) earnings of subsidiary
                            
                            (159
                            )
                            (96
                            )(Loss)
      earnings of subsidiary
                            
                            (2,819
                            )
                            273Net
      (loss) earnings
                            $
                            (2,978
                            )
                            177





(continued)


51
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FPB
BANCORP, INC. AND SUBSIDIARY




Notes
to Consolidated Financial Statements, Continued








(17)
      Holding Company Financial Information,
Continued




Condensed
Statements of Cash Flows


Year
      EndedDecember 31,2008
                                                
                                                2007Cash
      flows from operating activities:Net
      (loss) earnings available to common shareholders
                                                $
                                                (3,004
                                                )
                                                177Adjustments to reconcile net (loss) earnings to net cash used
      in operating activities:
                                                  Preferred stock dividend requirements and amortization of preferred
      stock discount
                                                
                                                26
                                                
                                                -Share-based compensation
                                                
                                                54
                                                
                                                32Undistributed (losses) earnings of subsidiary
                                                
                                                2,819
                                                
                                                (273
                                                )Increase in other assets
                                                
                                                (55
                                                )
                                                (108
                                                )Increase in other liabilities
                                                
                                                75
                                                
                                                -Net
      cash used in operating activities
                                                
                                                (85
                                                )
                                                (172
                                                )Cash
      flows from investing activity -Investment
      in subsidiary
                                                
                                                (5,000
                                                )
                                                (5,000
                                                )Cash
      flows from financing activities:Proceeds from the
      issuance of 5,800 shares of Series A preferred stock to the US
      Treasury
                                                
                                                5,800
                                                
                                                -Proceeds from the exercise of
      common stock options
                                                
                                                -
                                                
                                                520Tax benefit
      associated with exercise of common stock options
                                                
                                                -
                                                
                                                60Fractional
      shares of stock dividends, paid in cash
                                                
                                                -
                                                
                                                (6
                                                )Net
      cash provided by financing activities
                                                
                                                5,800
                                                
                                                574Net
      increase (decrease) in cash and cash equivalents
                                                
                                                715
                                                
                                                (4,598
                                                )Cash
      and cash equivalents at beginning of year
                                                
                                                3,687
                                                
                                                8,285Cash
      and cash equivalents at end of year
                                                $
                                                4,402
                                                
                                                3,687Non-cash
      transactions:Accumulated
      other comprehensive income of subsidiary,
                                                  net
      change in unrealized gain (loss) on securities availablefor
      sale, net of tax
                                                $
                                                152
                                                
                                                85Accrual of preferred stock dividend
                                                $
                                                21
                                                
                                                -Cumulative
      effect adjustment related to deferred compensation plans, net of tax
      benefit of $25
                                                $
                                                42
                                                
                                                -Common
      stock dividend
                                                $
                                                -
                                                
                                                1,473








52
 Table of Contents





Report of Independent Registered Public Accounting
Firm











FPB
Bancorp, Inc.


Port St.
Lucie, Florida:





We have
audited the accompanying consolidated balance sheets of FPB Bancorp, Inc. and
Subsidiary (the "Company") as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
2008 and 2007, and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.

















HACKER,
JOHNSON & SMITH PA


Fort
Lauderdale, Florida


March 3,
2009





53
 Table of Contents











BOARD OF DIRECTORS





Gary
A. Berger, Chairman




Donald
J. Cuozzo




Ann
L. Decker, Secretary




Timothy
K. Grimes




John
S. Leighton, III




Paul
J. Miret




Robert
L. Schweiger




Robert
L. Seeley




David
W. Skiles, President & Chief Executive Officer




Paul
A. Zinter, Vice Chairman







NON-DIRECTOR EXECUTIVE OFFICERS





Marge
Riley, Executive Vice President and Chief Operating Officer




Nancy
E. Aumack, Senior Vice President and Chief Financial Officer







54
 Table of Contents








FIRST PEOPLES BANK








BOARD OF DIRECTORS





Gary
A. Berger, Chairman




Donald
J. Cuozzo




Ann
L. Decker, Secretary




Timothy
K. Grimes




John
S. Leighton, III




Paul
J. Miret




Robert
L. Schweiger




Robert
L. Seeley




David
W. Skiles, President & Chief Executive Officer




Paul
A. Zinter, Vice Chairman







OFFICERS





Marge
Riley, Executive Vice President and Chief Operating Officer




Nancy
E. Aumack, Senior Vice President and Chief Financial Officer




William
V. West, Senior Vice President and Senior Lender




Stephen
J. Krumfolz, Senior Vice President, SBA Commercial Lender




Philip
Lee Brown, Senior Vice President and Area Executive – St. Lucie
County




Melissa
M. Favorite, Senior Vice President, BSA/Compliance Officer




Randy
J. Riley, Senior Vice President and Area Executive – Indian River
County




Craig
C.  Dietz, Senior Vice President, Credit Administration




David
P. Hoffman, Vice President, Senior Consumer Lender




Brenda
K. Parmelee, Vice President, Branch Manager (Fort Pierce)




Amy
M. Sowerby, Vice President, Deposit Operations




Jill
E. Knapp, Vice President, Commercial Lender




Jillian
A. Lopez, Assistant Vice President, Human Resource Officer




Christina
M. Saltos, Assistant Vice President, Branch Manager (Port St.
Lucie)




Sarah
C. Baker, Assistant Vice President, Branch Manager (Stuart)




Peter
G. Ferlatte, Assistant Vice President, Network Administration
Officer




Rebekah
A. Witt, Assistant Vice President, Loan Operations




Kim
Prado, Assistant Vice President, Branch Manager (Vero Beach)






55
 Table of Contents




FIRST
PEOPLES BANK





COMMUNITY LIAISON BOARDS








Fort
Pierce





Barbara
S. Allen, Associated Coastal Ear/Nose/Throat


Judy
Culpepper, Retired


Dr.
Kenneth Langley, St. Lucie Eye Associates


Stefan
K. Matthes, Sr., Culpepper & Terpening, Inc.


Erik
Melville, Raymond James


Michelle
R. Miller-Morris, Miller Insurance Agency


John
A. Schwerer, DMD


Babu
Thomas, IRCC Regional Crime Lab








Port St.
Lucie





Meredith
C. Breault, Management Recruiters


Shirley
Cherveny, Palm Realty


Gardner
S. Foote, Retired


Al
Soricelli, AXA Advisors


Jack
Wilson, Florida Tire Recycling


Ernesto
Velasco, Velcon Group


Greg
Wyatt, Port St. Lucie Broadcasters








Stuart





Linda
B. Braswell, Braswell Bail Bonds and Braswell Surety Services


Mark
E. Brechbill, Mark Brechbill CPA


Lee
Carroll, Deakins Carroll Insurance


Vicki
Davis, Supervisor of Elections for Martin County, FL


Philip
T. Faherty, Stuart Business Systems


Howard
Shields, Organizing Board Chairman & Director Emeritus


Gene
R. Zweben, Schwartz Zweben, LLC - Attorney








Vero
Beach





Joe
Coakley, Market Rite, Inc.


Lynn
Hall, Northwestern Mutual


Steve
Henderson, Collins, Brown & Caldwell (of counsel)


James
Kretsch, James Kretsch & Associates, LLC - Attorney


Catherine
McKenzie, BellSouth


John
Michael Matthews, John Michael Matthews Fine Jewelry


Mahendra
Patel, Patel & Associates





56
 Table of Contents





GENERAL INFORMATION








Annual
      Meeting
                        The
      Annual Meeting of the Stockholders will be held at The Hilton Garden Inn –
      PGA Village, 8540 NW Commerce Centre Drive, Port St. Lucie, Florida 34986
      at 5:30 P.M., Wednesday, April 29th,
      2009.  A social hour will begin at 4:30 p.m.Transfer
      Agent and
                        Registrar
      and Transfer Co.Registrar
                        10
      Commerce DriveCranford,
      NJ  07016(800)
      368-5948Corporate
      Counsel
                        Igler
      & Dougherty, P.A.2457
      Care DriveTallahassee,  Florida  32308Independent
                        Hacker,
      Johnson & Smith PAAuditors
                        Independent
      Registered Public Accountants500
      West Cypress Creek Road, Suite 450Fort
      Lauderdale, Florida  33309Form
      10-K
                        A
      copy of the Form 10-K as filed with the Securities and Exchange Commission
      may be obtained by stockholders without charge upon written request to
      Nancy E. Aumack, Senior Vice President and Chief Financial Officer, 1792
      NE Jensen Beach Blvd., Jensen Beach,
    Florida  34957.








COMMON STOCK PRICES AND DIVIDENDS








The
common stock of FPB Bancorp, Inc. is listed on the Nasdaq Capital Market, under
the symbol "FPBI".  The Company did not declare a dividend for the
year ended December 31, 2008.  Future dividends, if any, will be
determined by the Board of Directors.  As of December 31, 2008, FPB
Bancorp, Inc. had approximately 1,400 holders of record of common
stock.








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