FPB BANCORP INC - FORM 10-K - EX-13 - ANNUAL REPORT 2009

FPB BANCORP INC - FORM 10-K - EX-13 - ANNUAL REPORT 2009 - March 19, 2010

Attached files

Attached files

FPB BANCORP INC Reports

file	filename
10-K - 10K FOR DECEMBER 2009 - FPB BANCORP INC	form10k.htm
EX-32.1 - SOX CEO CERT - FPB BANCORP INC	exhibit32_1.htm
EX-31.1 - CEO CERT - FPB BANCORP INC	exhibit31_1.htm
EX-32.2 - SOX CFO CERT - FPB BANCORP INC	exhibit32_2.htm
EX-31.2 - CFO CERT - FPB BANCORP INC	exhibit31_2.htm

2009

ANNUAL

REPORT

LETTER TO SHAREHOLDERS

March 15, 2010

Dear Shareholders:

We want to share with you the Annual Report for FPB Bancorp, Inc. (FPBI) for the year ended December 31, 2009. If 2008 was a significant and historical year because of the massive meltdown in our economy, then 2009 was like the Gulf Coast after hurricane Katrina. Construction and existing home sales came to a grinding halt last year while tourism and other related industries were affected as well. Our area experienced record residential foreclosures, unemployment levels near 20%, numerous business failures and land and property devaluations in some instances of up to 70%. The State of Florida continues to rank among the top five states that lead the country in these categories.

As a result of all of this turmoil, banks began to experience unprecedented defaults in their loan portfolios and many good, hard-working people who never dreamed of not paying their obligations, were laid off from their jobs with little cash to sustain their unexpected unemployment. Business owners dependent on people’s ability to spend found themselves cash-starved and unable to sustain their businesses and in many cases were forced to close their doors. In 2008, we all found out what the phrase “sub-prime mortgage” meant and in 2009, the phrase “Ponzi Scheme” reared its ugly head with the Madoff scandal leading the many stories of financial corruption in our country.

Despite all of these negative issues, our subsidiary First Peoples Bank avoided sub-prime lending, leveraged investments, and for the most part, speculative land-based loans and the high risk acquisition and development lending that caused havoc in our State and in the southeastern portion of the United States. The entire banking industry has experienced deterioration in its loan portfolio and in credit quality. This has resulted in many 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 significantly increase our loan loss reserves for these potential future losses. This was especially true in 2009 and was a large factor in the sizeable losses that we experienced for the year.

We ended 2009 with a consolidated net loss of $9.2 million, compared to 2008 net losses of $3.0 million. This dramatic change is a stark reminder of the impact of the declining local and national economies. The largest cause of our 2009 losses was a required accounting charge to create a deferred tax asset valuation allowance of $4.4 million. The deferred tax asset is the result of cumulative tax benefits from both the 2008 and 2009 losses, and is normally allowable for use against future earnings spread out up to a 20-year period. However, the significant impact of the declining economy has required a reassessment of the bank’s earnings history and trends over the past year, our estimate of future earnings, and the expiration of the net operating loss carryforwards. The result of that analysis was a determination that it is more than likely that the deferred tax asset will not be realized in the near term, and we were required to reserve against the $4.4 million asset at the end of 2009. The end result was that our $4.8 million dollar operating loss was increased to $9.2 million. The good news is that the $4.4 million amount will remain on our books as a contra account and can be restored under the 20 year rule if we attain a history of profitability, and determine that it is more likely than not that we will realize the asset through future earnings. Please be assured that our board and entire management team is committed to attaining profitability as soon as possible.

Our management team recognized the economic downturn early on and elected to slow our loan growth in 2009. Total loans grew by $2.4 million, an increase of only 1.27%, and we ended the year with total loans of $189.7 million. This was in contrast to loan growth in several prior years, which averaged above 20%. We formed a Special Assets Department in June of 2009, which has resulted in significant improvement in the collection of our past due loans and troubled assets. In 2008 and 2009, we reduced our staff by 20% and negotiated with vendors and suppliers to cut expenses. In addition, we have frozen all executive and employee salaries, suspended bonuses, and further reduced director fees, advertising and other overhead expenses. All of these efforts have had a positive effect on our overall financial status and we see progress in many of our key ratios.

The recession has also impacted both loan and deposit rates. The Prime rate of interest of 3¼% has remained constant throughout last year and has had a negative effect 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. In addition, competition for core deposits has increased significantly over the past several years.

Our two newest offices in Palm City, Florida and on Gatlin Boulevard, Port St. Lucie, Florida, were opened in 2008 and their performance has been dramatically affected by the economic downturn, which has significantly reduced their original growth projections. The cost effect of those two offices with their limited growth has had a negative impact on our earnings as well. As the economy rebounds, we expect the growth at those locations to resume. Our primary correspondent bank which was one of the largest bankers’ banks in the country, was closed by its regulators in June, and as stockholders in that institution, we experienced a significant loss from that action resulting in a write-off of $548,000 from that investment.

In spite of these issues, FPBI and First Peoples Bank continue to be adequately capitalized as defined by FDIC regulations. We were among the 660 banks in the country to apply and receive funds under the U.S. Treasury T.A.R.P.-Capital Purchase Program. Those funds allowed us to selectively meet our customer’s borrowing needs and provided supplemental capital for any additional reserves that might be required should economic conditions continue to deteriorate.

FPBI ended 2009 with total consolidated assets of $248.2 million, a 3.78% increase, or $9.0 million, over year-end 2008. Deposits were up 7.82%, or $15.7 million for a total of $216.4 million. All interest bearing accounts at First Peoples Bank are FDIC insured for $250,000 per account ownership category through December 31, 2013, and all non-interest bearing accounts are insured with no limit until June 30, 2010, unless this deadline is extended by the FDIC. We would like to emphasize that no one has ever lost a penny on an account that is covered by FDIC insurance.

As a local community bank, we are working with our customers, some of whom are experiencing severe difficulties during these trying times. This can result in our receiving 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 continue to assist our customers, helping them 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 can assure you that our management and Board of Directors are totally engaged and 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. We will operate as we always have, proud of our heritage and purpose, to serve our customers and community and strive to enhance and achieve 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 FIRST at First Peoples Bank and if you haven’t stopped in for a visit or to open your shareholder account, Advantage Checking or Holiday 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

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 through December 31, 2013, and unlimited for non-interest bearing transaction accounts, through June 30, 2010. 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, 2009, we had total consolidated assets of $248.2 million and total consolidated stockholders' equity of $14.6 million. For the year ended December 31, 2009, we had net losses of $9.2 million, partially due to a $4.4 million accounting charge to record a valuation allowance on our deferred tax asset at December 31, 2009.

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	Page

Financial Highlights	1

Selected Financial Data	2

Management's Discussion and Analysis of Financial Condition and Results of Operations	3-22

Consolidated Financial Statements	23-58

Report of Independent Registered Public Accounting Firm	59

Board of Directors	60

Non-Director Executive Officers	60

First Peoples Bank Board of Directors and Officers	61

General Information	Inside Back Cover

Common Stock Prices and Dividends	Inside Back Cover

Table of Contents

FINANCIAL HIGHLIGHTS

December 31, 2009, 2008 and 2007 or the Years Then Ended

(Dollars in thousands, except per share figures)

At Year End:	2009			2008			2007

Assets	$	248,203		$	239,173		$	196,753
Loans, net	$	184,312		$	184,182		$	172,251
Securities	$	31,752		$	33,239		$	6,793
Deposits	$	216,374		$	200,683		$	172,677
Stockholders' equity	$	14,639		$	24,896		$	21,931
Book value per common share (1)	$	4.50		$	9.53		$	10.66
Common shares outstanding (1)		2,058,047			2,058,047			2,058,047
Equity as a percentage of assets		5.90	%		10.41	%		11.15	%
Nonperforming assets as a percentage of total assets		9.15	%		5.05	%		.89	%

For The Year:

Interest income	$	12,778		$	13,802		$	13,588
Net (loss) earnings	$	(9,208	)	$	(2,978	)	$	177
(Loss) earnings per common share, basic (1)	$	(4.66	)	$	(1.46	)	$	.09
(Loss) earnings per common share, diluted (1)	$	(4.66	)	$	(1.46	)	$	.09
Return on average assets		(3.55	)%		(1.37	)%		.10	%
Return on average equity		(41.74	)%		(13.97	)%		.83	%
Average equity as a percentage of average assets		8.50	%		9.79	%		12.11	%
Non-interest expenses to average assets		4.04	%		3.89	%		4.18	%

Yields and Rates:

Loan portfolio		5.95	%		7.02	%		8.49	%
Securities		4.20	%		4.95	%		4.87	%
Other interest-earning assets		.26	%		2.00	%		4.98	%
All interest-earning assets		5.47	%		6.71	%		8.18	%
Deposits		2.96	%		4.05	%		4.85	%
Borrowings		2.16	%		2.54	%		4.00	%
All interest-bearing liabilities		2.92	%		4.04	%		4.85	%
Interest-rate spread (2)		2.55	%		2.67	%		3.33	%
Net yield on average interest earning assets (3)		2.81	%		3.33	%		4.53	%

______________________________

(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.

Table of Contents

SELECTED FINANCIAL DATA

December 31, 2009, 2008, 2007, 2006, and 2005 and the

Years Ended December 31, 2009, 2008, 2007, 2006, and 2005

(Dollars in thousands, except per share figures)

At Year End:	2009			2008			2007			2006			2005
Cash and cash equivalents	$	12,932			5,457			6,795			5,422			12,366
Securities		31,752			33,239			6,793			8,953			12,244
Loans, net		184,312			184,182			172,251			130,133			95,666
All other assets		19,207			16,295			10,914			8,931			7,033

Total assets	$	248,203			239,173			196,753			153,439			127,309

Deposit accounts	$	216,374			200,683			172,677			130,219			102,809
Federal Home Loan Bank advances		14,600			11,100			100			100			2,600
All other liabilities		2,590			2,494			2,045			2,057			1,559
Stockholders' equity		14,639			24,896			21,931			21,063			20,341

Total liabilities and stockholders' equity	$	248,203			239,173			196,753			153,439			127,309

For the Period:
Total interest income	$	12,778			13,802			13,588			10,626			7,243
Total interest expense		6,215			6,951			6,060			3,976			1,939
Net interest income		6,563			6,851			7,528			6,650			5,304
Provision for loan losses		4,959			4,059			885			429			352
Net interest income after provision for loan losses		1,604			2,792			6,643			6,221			4,952
Non-interest income		1,189			874			996			824			930
Non-interest expenses		10,482			8,464			7,385			6,082			4,639

(Loss) earnings before income taxes		(7,689	)		(4,798	)		254			963			1,243
Income tax (benefit)		1,519			(1,820	)		77			332			478

Net (loss) earnings	$	(9,208	)		(2,978	)		177			631			765

(Loss) earnings per basic common share (1)	$	(4.66	)		(1.46	)		.09			.32			.50
(Loss) earnings per diluted common share (1)	$	(4.66	)		(1.46	)		.09			.31			.49
Weighted-average number of common shares outstanding for basic (1)		2,058,047			2,058,047			2,017,553			1,998,871			1,539,513
Weighted-average number of common shares outstanding for diluted (1)		2,058,047			2,058,047			2,034,070			2,030,344			1,553,623

Ratios and Other Data:
Return on average assets		(3.55	)%		(1.37	)%		.10	%		.43	%		.64	%
Return on average equity		(41.74	)%		(13.97	)%		.83	%		3.04	%		5.42	%
Average equity as a percentage of average assets		8.50	%		9.79	%		12.11	%		14.08	%		11.85	%
Interest-rate spread during the period		2.55	%		2.67	%		3.33	%		3.82	%		3.79	%
Net yield on average interest-earning assets		2.81	%		3.33	%		4.53	%		4.79	%		4.67	%
Non-interest expenses to average assets		4.04	%		3.89	%		4.18	%		4.12	%		3.89	%
Ratio of average interest-earning assets to average interest-bearing liabilities		1.10			1.20			1.33			1.34			1.51
Nonperforming loans and foreclosed real estate as a percentage of total assets at end of year		9.15	%		5.05	%		.89	%		.22	%		-	%
Allowance for loan losses as a percentage of total loans at end of year		2.49	%		1.36	%		1.36	%		1.36	%		1.42	%
Total number of banking offices		6			6			4			4			3
Total shares outstanding at end of year (1)		2,058,047			2,058,047			2,058,047			2,001,513			1,996,172
Book value per share at end of year (1)	$	4.50		$	9.53		$	10.66		$	10.52		$	10.19

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

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, 2009 and 2008, 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 (through December 31, 2013), and unlimited for non-interest bearing transaction accounts, (through June 30, 2010, unless extended). 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, 2009, we had total consolidated assets of $248.2 million and total consolidated stockholders' equity of $14.6 million. For the year ended December 31, 2009, we had net losses of $9.2 million, partially due to an accounting charge to record a deferred tax valuation allowance of $4.4 million at year-end.

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.

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.

Table of Contents

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.

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.

Table of Contents

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, 2009, we had nonperforming assets of $22.7 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):

	2009					2008					2007					2006					2005
			Loans to Total Loans					Loans to Total Loans					Loans to Total Loans					Loans to Total Loans					Loans to Total Loans

	Amount					Amount					Amount					Amount					Amount

Commercial	$	1,584		33.64	%	$	1,292		34.04	%	$	1,156		34.15	%	$	811		38.13	%	$	576		37.42	%
Commercial real estate		2,749		56.30			916		50.54			857		47.31			631		42.24			478		40.79
Construction		18		.57			113		5.23			145		6.38			65		4.59			53		4.47
Consumer		319		9.07			228		10.02			234		12.13			293		14.80			274		17.11
Residential real estate		60		.42			3		.17			1		.03			1		.24			2		.21

Total allowance for loan losses	$	4,730		100.00	%	$	2,552		100.00	%	$	2,393		100.00	%	$	1,801		100.00	%	$	1,383		100.00	%

Allowance for loan losses as a percent- age of total loans outstanding				2.49	%				1.36	%				1.36	%				1.36	%				1.42	%

Loan Portfolio

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

	2009						2008						2007						2006						2005
				% of Total						% of Total						% of Total						% of Total						% of Total
	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total

Commercial	$	63,815			33.64	%	$	63,768			34.04	%	$	59,878			34.15	%	$	50,521			38.13	%	$	36,510			37.42	%
Commercial real estate		106,803			56.30			94,675			50.54			82,951			47.31			55,967			42.24			39,794			40.79
Construction		1,081			.57			9,793			5.23			11,186			6.38			6,089			4.59			4,365			4.47
Consumer		17,207			9.07			18,762			10.02			21,279			12.13			19,618			14.80			16,688			17.11
Residential real estate		790			.42			324			.17			48			.03			315			.24			206			.21

		189,696			100.00	%		187,322			100.00	%		175,342			100.00	%		132,510			100.00	%		97,563			100.00	%

Less:
Deferred loan costs and fees, net		(654	)					(588	)					(698	)					(576	)					(514	)
Allowance for loan losses		(4,730	)					(2,552	)					(2,393	)					(1,801	)					(1,383	)

Loans, net	$	184,312					$	184,182					$	172,251					$	130,133					$	95,666

Table of Contents

The contractual maturity ranges of our loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range classified by borrower type as of December 31, 2009 (dollars in thousands):

	One Year or Less		After One Through Five Years		After Five Years		Total

Commercial & Industrial	$	13,383	$	19,286	$	31,146	$	63,815
Commercial real estate		8,769		11,430		86,604		106,803
Construction & Development		-		-		1,081		1,081
Consumer		2,413		11,739		3,055		17,207
Residential real estate		195		595		-		790
Total loans	$	24,760	$	43,050	$	121,886	$	189,696

Loans with a fixed interest rate	$	23,623	$	27,334	$	14,087	$	65,044
Loans with a variable interest rate		1,137		15,716		107,799		124,652
Total loans	$	24,760	$	43,050	$	121,886	$	189,696

As of December 31, 2009, our loan portfolio was composed of approximately 34.29% fixed interest rate loans and 65.71% variable interest rate loans. Scheduled contractual principal repayments do not reflect the actual maturities of loan. The average actual maturity of our loans is substantially less than their average contractual term because of prepayments. The average life of mortgage loans tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loans rates are substantially lower than rates on existing mortgages due primarily to refinancing of adjustable rate and fixed rate loans at lower rates.

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.

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	At December 31,
	2009			2008			2007			2006			2005
Non-accrual loans:
Commercial real estate	$	11,438		$	6,627		$	805		$	-		$	-
Commercial		2,990			1,635			297			154			-
Construction and land development		169			1,106			-			-			-
Residential		173			179			272			172			-
Home equity		275			446			-			-			-
Other loans		38			112			27			1 18			-

Total non-accrual loans		15,083			10,105			1,401			344			-

Accruing loans over 90 days delinquent:
Commercial real estate		888			-			243			-			-
Commercial		-			250			106			-			-
Other loans		19			-			-			-			-

Total accrual loans over 90 days delinquent		907			250			349			-			-

Total nonperforming loans		15,990			10,355			1,750			344			-

Foreclosed assets		6,719			1,714			-			-			-

Total non-performing loans and foreclosed assets	$	22,709		$	12,069		$	1,750		$	344		$	-
Total non-performing loans as a percentage of total loans		8.43	%		5.53	%		1.00	%		.26	%		-	%
Total non-performing loans as a percentage of total assets		6.44	%		4.33	%		.89	%		.22	%		-	%
Total non-performing loans and foreclosed assets
as a percentage of total assets		9.15	%		5.05	%		.89	%		.22	%		-	%

Restructured troubled debt	$	5,591		$	12,279		$	-		$	-		$	-

As of December 31, 2009, the $5.6 million in restructured troubled debt are performing loans.

Asset Quality

In mid-2008, we formulated a plan to reduce our exposure to weaker lending relationships. Management’s practice has been to do business with borrowers in our area who we know. The Bank did not fund any sub-prime loans and had very limited exposure to non-owner occupied commercial real estate and residential real estate. We have moved further away from this class of assets by establishing a moratorium on residential construction and development lending in the current economic environment. As of December 31, 2009, we have reduced our exposure in total construction and development loans by more than $8.7 million, or 89% from December 31, 2008. The majority of the Bank’s loans are owner occupied commercial loans to local borrowers or consumer loans to their employees. Our market area as a whole has felt the impact of the residential real estate market’s deterioration and our customers appear to be working hard to adjust their business plans to this new reality.

The increase in nonperforming assets in 2009 was due primarily to the continued decline in the economy, resulting in continued deterioration in the real estate and commercial secured sectors of our loan portfolio.

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We have endeavored to deal aggressively with problem assets in our loan portfolio. Since the Bank’s inception in 1999, we have engaged a third-party audit firm to conduct independent asset quality reviews that are specialized and targeted loan reviews by type. We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile and maintaining a high quality loan portfolio on an ongoing basis. Additionally, in the future we intend to develop a more balanced real estate portfolio by reducing our concentration of higher risk non-owner occupied commercial real estate and construction and development loans.

Furthermore, since December 31, 2008, we have enhanced our credit risk management processes by:

q	forming a real estate holding company to manage and liquidate foreclosed assets;

q	developing processes for supervising criticized and classified loans;

q	adopting a specific action plan for managing and disposing OREO;

q	performing a quarterly assessment of the Bank’s monitoring systems for timely identification of problem loans;

q	forming a Special Assets Committee of the Board that meets monthly to review management’s progress on all classified assets; and

q	creating a Special Assets Department to reduce the Bank’s underperforming credits.

We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile.

In 2009, we have taken several properties into our subsidiary incorporated for the purpose of divesting our foreclosed assets, and we are actively working to market these properties. For example, in 2009 we have (i) sold three commercial properties carried at $2.4 million for $2.6 million; (ii) sold five vacant lots carried at $173,000 for $172,000; and (iii) sold six residential properties carried at $796,000 for $792,000.

The following table illustrates the payment status of certain classes of loans in our portfolio (dollars in thousands):

	Accruing and Past Due 30-89 Days		Non-Accrual and Past Due 90 days and Over		Total
	Amount		Amount		Amount
As of December 31, 2009
Commercial Real Estate	$	548	$	12,326	$	12,874
Commercial & Industrial		560		2,990		3,550
Construction and Land development		-		169		169
Residential		10		173		183
Home Equity Lines		-		275		275
Other		162		57		219
Total	$	1,280	$	15,990	$	17,270

As of December 31, 2008
Commercial Real Estate	$	3,781	$	6,627	$	10,408
Commercial & Industrial		2,010		1,885		3,895
Construction and Land development		-		1,106		1,106
Residential		211		179		390
Home Equity Lines		199		446		645
Other		157		112		269
Total	$	6,358	$	10,355	$	16,713

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, 2009, increased to 8.43% of total loans, compared to 5.53% at December 31, 2008. During 2009, our allowance increased by $2.2 million or 85.3%, and totaled $4.7 million at December 31, 2009. Additional allowance was made to cover the loan growth of 1% in 2009, as well as the increase in non-performing loans. We believe that the allowance for loan losses was adequate at December 31, 2009.

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

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	Year Ended December 31,
	2009			2008			2007			2006			2005
Allowance at beginning of year	$	2,552		$	2,393		$	1,801		$	1,383		$	1,097

Charge-offs:
Real estate loans		925			2,898			123			-			-
Consumer loans		306			394			49			19			17
Construction		841			-			-			-			-
Commercial real estate		140			-			-			-			-
Commercial		786			631			128			14			55

Total charge-offs		2,998			3,923			300			33			72

Recoveries:
Real estate loans		15			10			-			-			-
Consumer loans		29			6			6			10			1
Construction		135			-			-			-			-
Commercial and all other loans		38			7			1			12			5

Total recoveries		217			23			7			22			6

Provision for loan losses charged to operations		4,959			4,059			885			429			352

Allowance at end of year	$	4,730		$	2,552		$	2,393		$	1,801		$	1,383

Ratio of net charge-offs during the year to average loans outstanding during the year		1.47	%		2.11	%		.19	%		.01	%		.08	%

Allowance for loan losses as a percentage of total loans at end of year		2.49	%		1.36	%		1.36	%		1.36	%		1.42	%

Allowance for loan losses as a percentage of non-performing loans		29.58	%		24.65	%		136.74	%		523.55	%		-	%

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, advances from the FHLB and a secured line of credit extended by the Federal Reserve Bank 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, 2009, 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.

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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, 2009, we exceeded the minimum applicable capital adequacy requirements. See "Regulation and Supervision - Capital Requirements."

As of December 31, 2009, our actual and required minimum capital ratios were as follows (dollars in thousands):

	Actual				Minimum For Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2009:	Amount		%		Amount		%		Amount		%

Total Capital to Risk-Weighted Assets	$	17,324	8.96	%	$	15,461	8.00	%	$	19,326	10.00	%
Tier 1 Capital to Risk-Weighted Assets		14,880	7.70			7,730	4.00			11,596	6.00
Tier 1 Capital to Total Assets		14,880	5.65			10,538	4.00			13,172	5.00

Our primary source of cash during the year ended December 31, 2009, was from the proceeds from net deposit inflows of $15.7 million, proceeds from Federal Home Loan Bank advances of $3.5 million, net proceeds from the sale, maturity, call and repayment of securities totaling $53.0 million, and proceeds from the sale of foreclosed assets of $3.2 million. Cash was used primarily to purchase securities, premises and equipment and originate loans. At December 31, 2009, we had outstanding commitments to originate loans totaling $3.3 million, available lines of credit of $14.4 million, and standby letters of credit of $86,000.

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, 2009, our securities portfolio equaled $31.8 million, or 12.8% of total assets. Our investment portfolio is comprised of agency securities, mortgage-backed securities, asset-backed securities and CMO 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.

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Securities

The following table sets forth the carrying value of our securities portfolio at December 31, 2009 (in thousands):

	2009		2008		2007
Securities available for sale:
U.S. Government agency securities	$	14,332	$	16,375	$	6,061
Mortgage-backed securities		5,087		16,863		728
Asset-backed securities		6,097		-		-
CMO securities		6,236		-		-
		31,752		33,238		6,789
Securities held to maturity:
U.S. Government agency securities		-		-		-
Mortgage-backed securities		-		1		4
		-		1		4

Total	$	31,752	$	33,239	$	6,793

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 Than
	One Year or Less					to Five Years					to Ten Years					Ten Years					Total
	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Yield
December 31, 2009:
U.S. Government agency securities	$	-		-	%	$	-		-	%	$	5,766		3.97	%	$	8,566		4.51	%	$	14,332		4.21	%
Mortgage-backed securities		-		-			-		-			-		-			-		-			5,087		4.07	%
Asset-backed securities		-		-			-		-			-		-			-		-			6,097		4.35	%
CMO securities		-		-			-		-			-		-			-		-			6,236		4.05	%

Total																					$	31,752		4.18	%

December 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		5.49

Total																					$	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		4.03

Total																					$	6,793		5.11	%

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Regulatory Matters

Board Resolutions. The Federal Reserve Bank of Atlanta (“Federal Reserve”) has requested our Board of Directors to adopt resolutions limiting us from reducing our capital position. Pursuant to these resolutions, we have committed to: (i) not incurring debt at the holding company level without prior Federal Reserve approval; (ii) not paying dividends on our securities (including our Series A Preferred Stock) without prior Federal Reserve approval; (iii) not purchasing or redeeming stock without Federal Reserve approval; (iv) not making any other payment which would represent a reduction in capital, other than normal and routine operating expenses; and (v) providing to the Federal Reserve on a quarterly basis, a parent-only balance sheet and confirmation of compliance with the resolutions. Our Board of Directors adopted these resolutions at its October 21, 2009. These resolutions also prohibit us from paying dividends on, or redeeming, the Series A Preferred Stock without Federal Reserve approval.

Memorandum of Understanding. The Bank has agreed with the bank regulatory agencies, in a memorandum of understanding, that by December 31, 2009 and thereafter, the Bank will maintain a Tier 1 leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. The Bank has also committed to reducing its ratio of classified assets to the sum of its capital and allowance for loan and lease losses on a graduated basis over the next year, culminating in a ratio of 60% by September 2010. At December 31, 2009, the Bank had a Tier 1 leverage capital ratio of 5.65% and a total risk-based capital ratio of 8.96%, with FPB retaining $379,000 in cash at the holding company level which could be down-streamed to the Bank as capital.

Consent Order. The FDIC on December 18, 2009, requested that the Bank agree to the entry of a Consent Order. The proposed terms of the Consent Order are substantially similar to the terms of the Bank’s current memorandum of understanding, and in certain cases, are less stringent. The Bank and the FDIC have reached agreement relative to certain terms and deadlines, and anticipate the entry of a Consent Order in March or April of 2010.

As proposed, the Consent Order would require the Bank to achieve within 90 days of the effective date and thereafter maintain an 8% Tier 1 Leverage Capital Ratio and a 11% Total Risk Based Capital Ratio. The memorandum of understanding currently requires the Bank to maintain ratios of 8% and 11%, respectively.

With respect to reducing the level of assets classified as “Substandard,” the proposed Consent Order is less stringent than the memorandum of understanding. As proposed, the Consent Order would require the ratio of such assets to Tier 1 Capital plus the Allowance for Loan and Lease Losses (“ALLL”) to be reduced to no greater than: (i) 140% within 90 days of the effective date; (ii) 120% within 120 days; (iii) 100% within 270 days; (iv) 80% within 360 days; and (v) 60% within 540 days. The memorandum of understanding currently requires the Bank to reach the 60% target by September 2010.

The proposed Consent Order also imposes a new asset growth restriction of 10% per year. In light of the current economic conditions, the Bank’s management has not intended to budget asset growth in excess of 10% for 2010. Other new obligations are a requirement of the Bank to perform a risk segmentation analysis with respect to its concentrations of credit and the elimination of a quantitative target with respect to the Bank’s net non-core funding dependence ratio. The Bank will also be prohibited from making dividend payments to FPB during the term of the Consent Order.

The Consent Order, as proposed, also contains requirements similar to those the Bank is already obligated to adhere to with respect to: (i) Board involvement with overseeing compliance; (ii) maintaining an adequate ALLL; (iii) not extending credit to borrowers with classified assets at the Bank, except under limited circumstances; and (iv) developing and adopting a strategic plan, a liquidity plan, a profit plan and a budget. When the Consent Order becomes effective, it will replace and supersede the MOU.

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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.

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The following table sets forth certain information relating to interest-earning assets and interest-bearing liabilities at December 31, 2009, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):

				More			More
				than One			than Five
				Year and			Years and			Over
	One Year			Less than			Less than			Fifteen
	or Less			Five Years			Fifteen years			Years			Total
Mortgage and commercial loans (1):
Commercial	$	28,041		$	30,131		$	5,643		$	-		$	63,815
Commercial real estate		16,443			72,932			16,501			927			106,803
Construction		-			-			497			584			1,081
Consumer		2,275			11,372			3,420			140			17,207
Residential mortgage		136			654			-			-			790

Total loans		46,895			115,089			26,061			1,651			189,696

Interest-bearing deposits with banks		10,043			-			-			-			10,043
Federal funds sold		-			-			-			-			-
Federal Home Loan Bank stock		-			-			-			1,087			1,087
Securities (2)		19,402			1,683			919			9,748			31,752

Total rate-sensitive assets		76,340			116,772			26,980			12,486			232,578

Deposit accounts (3):
Money market deposits		40,424			-			-			-			40,424
NOW deposits		14,270			-			-			-			14,270
Savings deposits		5,997			-			-			-			5,997
Certificates of deposit		88,675			48,083			-			-			136,758

Total deposit accounts		149,366			48,083			-			-			197,449

Federal Home Loan Bank advances		5,500			9,100			-			-			14,600

Total rate-sensitive liabilities		154,866			57,183			-			-			212,049

GAP (repricing differences)	$	(78,526	)	$	59,589		$	26,980		$	12,486		$	20,529

Cumulative GAP	$	(78,526	)	$	(18,937	)	$	8,043		$	20,529

Cumulative GAP/total assets		(31.64	)%		(7.63	)%		3.24	%		8.27	%

(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.

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The following table reflects the contractual principal repayments by period of the loan portfolio at December 31, 2009 (in thousands):

			Commercial
			Real		Residential
Years Ending	Commercial		Estate		Mortgage		Consumer		Construction
December 31,	Loans		Loans		Loans		Loans		Loans

2010	$	23,006	$	19,102	$	439	$	7,550	$	61
2011		8,316		7,561		218		4,342		61
2012		5,158		6,290		133		2,297		61
2013-2014		7,404		11,539		-		1,743		122
2015-2016		4,391		9,798		-		720		122
2017 & beyond		15,540		52,513		-		555		654

Total	$	63,815	$	106,803	$	790	$	17,207	$	1,081

Of the $139.6 million of loans due after 2010, 20.26% of such loans have fixed interest rates and 79.74% have adjustable interest rates.

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

Originations:	2009			2008

Commercial loans	$	16,764		$	16,224
Commercial real estate loans		14,202			11,110
Consumer loans		4,411			5,467
Construction loans		-			2,899
Residential loans		790			299

Total loans originated		36,167			35,999

Principal reductions and participations sold		(33,793	)		(24,019	)

Increase in total loans	$	2,374		$	11,980

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 also have lines of credit extended by the Federal Reserve Bank 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 2009.

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.

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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,
			2009					2008					2007
					% of					% of					% of
			Amount		Deposits			Amount		Deposits			Amount		Deposits
Demand deposits			$	18,925		8.75	%	$	19,492		9.71	%	$	23,141		13.40	%
Money-market deposits				40,424		18.68			30,262		15.08			26,121		15.13
NOW deposits				14,270		6.60			5,039		2.51			3,175		1.84
Savings deposits				5,997		2.77			4,157		2.07			4,061		2.35

Subtotal				79,616		36.80			58,950		29.37			56,498		32.72

Certificate of deposits:
	0%- 0.99	%		748		.34			23		.01			391		.23
	1.00% - 1.99	%		38,056		17.59			140		.07			170		.10
	2.00% - 2.99	%		56,831		26.26			11,735		5.85			-		-
	3.00% - 3.99	%		12,659		5.85			48,016		23.93			1,497		.87
	4.00% - 4.99	%		15,140		7.00			59,287		29.54			41,742		24.17
	5.00% - 5.99	%		13,324		6.16			22,532		11.23			72,379		41.91

Total certificates of deposit (1)				136,758		63.20			141,733		70.63			116,179		67.28

Total deposits			$	216,374		100.00	%	$	200,683		100.00	%	$	172,677		100.00	%

(1)	Included individual retirement accounts (“IRAs”) totaling $5.0 million, $4.3 and $4.5 million at December 31, 2009, 2008, and 2007 all of which are in the form of certificates of deposit.

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The following table presents by various interest rate categories the amounts of certificates of deposit at December 31, 2009, which mature during the periods indicated (in thousands):

			Year Ending December 31,
			2010		2011		2012		2013		2014		Total

	0% - 0.99	%	$	443	$	105	$	200	$	-	$	-	$	748
	1.00% - 1.99	%		33,247		4,809		-		-		-		38,056
	2.00% - 2.99	%		31,370		19,823		4,974		236		428		56,831
	3.00% - 3.99	%		4,973		1,245		4,459		1,328		654		12,659
	4.00% - 4.99	%		13,224		322		1,306		288		-		15,140
	5.00% - 5.99	%		5,418		3,489		4,417		-		-		13,324
Total certificates of deposit			$	88,675	$	29,793	$	15,356	$	1,852	$	1,082	$	136,758

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

	December 31,
	2009		2008		2007

Due three months or less	$	6,922	$	11,778	$	10,535
Due over three months to six months		4,493		4,698		14,286
Due over six months to one year		16,044		22,404		16,464
Due over one year to five years		17,243		16,716		27,249

	$	44,702	$	55,596	$	68,534

Other Borrowings

The following table illustrates the types, available amounts and outstanding balances of our sources of other borrowings (dollars in thousands) as of December 31, 2009. All borrowings require adequate collateral, such as unpledged investment securities or loans.

Type of Borrowing	Outstanding		Line Amount		Available

Fed Funds Purchased	$	-	$	-	$	-
Repurchase Agreements		-		-		-
FHLB Advances		14,600		14,600		-
FRB Discount Window		-		64,975		64,975
	$	14,600	$	79,575	$	64,975

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.

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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,
	2009							2008							2007
			Interest		Average					Interest		Average					Interest		Average
	Average		and		Yield/			Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Rate			Balance		Dividends		Rate			Balance		Dividends		Rate
Interest-earning assets:
Loans	$	189,672		11,287		5.95	%	$	185,005		12,988		7.02	%	$	151,760		12,878		8.49	%
Securities		34,961		1,468		4.20			13,608		673		4.95			7,704		375		4.87
Other interest-earning assets (1)		8,894		23		.26			7,063		141		2.00			6,732		335		4.98
Total interest-earning assets		233,527		12,778		5.47			205,676		13,802		6.71			166,196		13,588		8.18
Non interest-earning assets		26,034							12,065							10,528

Total assets	$	259,561						$	217,741						$	176,724

Interest-bearing liabilities:
Savings, NOW and money-market deposits		58,070		986		1.70			38,292		976		2.55			34,200		1,156		3.38
Certificates of deposit		143,781		4,986		3.47			133,180		5,961		4.48			90,727		4,900		5.40
Other borrowings		11,250		243		2.16			552		14		2.54			100		4		4.00

Total interest-bearing liabilities		213,101		6,215		2.92			172,024		6,951		4.04			125,027		6,060		4.85

Demand deposits		21,640							22,765							23,004
Non-interest bearing liabilities		2,758							1,640							7,299
Stockholders' equity		22,062							21,312							21,394

Total liabilities and stockholders' equity	$	259,561						$	217,741						$	176,724

Net interest income			$	6,563						$	6,851						$	7,528

Interest-rate spread (2)						2.55	%						2.67	%						3.33	%

Net interest margin (3)						2.81	%						3.33	%						4.53	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.10							1.20							1.33

______________________________________________________

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

(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.

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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, 2009 vs. 2008:

	Year Ended December 31, 2009 vs. 2008											Year Ended December 31, 2008 vs. 2007
	Increase (Decrease)											Increase (Decrease)
						Rate/											Rate/
	Rate			Volume		Volume			Total			Rate			Volume		Volume			Total
	(In thousands)											(In thousands)
Interest-earning assets:
Loans	$	(1,979	)	$	328	$	(50	)	$	(1,701	)	$	(2,231	)	$	2,830	$	(489	)	$	110
Securities		(102	)		1,057		(160	)		795			6			287		5			298
Other interest-earning assets		(123	)		37		(32	)		(118	)		(201	)		17		(10	)		(194	)

Total		(2,204	)		1,422		(242	)		(1,024	)		(2,426	)		3,134		(494	)		214

Interest-bearing liabilities:
Deposits:
Savings, money-market and NOW deposits		(326	)		504		(168	)		10			(284	)		138		(34	)		(180	)
Certificates of deposit		(1,343	)		475		(107	)		(975	)		(835	)		2,287		(391	)		1,061
Other borrowings		(2	)		272		(41	)		229			(1	)		18		(7	)		10

Total		(1,671	)		1,251		(316	)		(736	)		(1,120	)		2,443		(432	)		891

Net change in net interest income	$	(533	)	$	171	$	74		$	(288	)	$	(1,306	)	$	691	$	(62	)	$	(677	)

Comparison of Years Ended December 31, 2009 and 2008

General. Net losses for the year ended December 31, 2009, were $9.2 million or ($4.66) per basic and diluted common share compared to net loss of $3.0 million or ($1.46) per basic and diluted common share for the year ended December 31, 2008. This increase in the net loss was primarily due to a $4.4 million accounting charge to record a deferred tax asset valuation allowance, which resulted in income tax expense of $1.5 million in 2009, compared to a tax benefit of $1.8 million in 2008, an increase in the provision for loan losses of $900,000, a decrease in interest income of $1.0 million, and an increase in non-interest expense of $2.0 million, partially offset by and an increase in non-interest income of $315,000, and a decrease in interest expense of $736,000. In addition to the Company’s growth, the economic downturns both in our State and the country as a whole have resulted in a continued decline in the real estate market, 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 decreased to $12.8 million for the year ended December 31, 2009, from $13.8 million for the year ended December 31, 2008. Interest income on loans decreased to $11.3 million from $13.0 million due to a decrease in the weighted-average yield earned on the portfolio for 2009, partially offset by an increase in the average loan portfolio balance for the year ended December 31, 2009. Interest on securities increased to $1.5 million in 2009, from $673,000 in 2008, due to an increase in the average portfolio balance in 2009, partially offset by a decrease in the average yield earned. Interest on other interest-earning assets decreased to $23,000 for the year ended December 31, 2009, from $141,000 for the year ended December 31, 2008, primarily due to a decrease in the average yield earned in 2009, partially offset by an increase in the average balance in 2009.

Interest Expense. Interest expense decreased to $6.2 million in 2009 from $7.0 million in 2008. Interest expense decreased due to a decrease in the weighted-average rate paid on liabilities, partially offset by an increase in average interest-bearing liabilities in 2009.

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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 $5.0 million in 2009 from $4.1 million in 2008. The allowance for loan losses increased to $4.7 million at December 31, 2009 from $2.6 million at December 31, 2008. 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 2009. Management believes that the allowance for loan losses of $4.7 million is adequate at December 31, 2009.

Non-interest Income. Non-interest income increased to $1.2 million in 2009 from $874,000 in 2008. This was primarily a result of increases in service charges on deposit accounts, and gains on the sale of loans held for sale and securities available for sale, partially offset by the $548,000 corporate stock write down representing the Company’s investment in 200 shares of common stock of Silverton Bank, N.A. in 2009. This common stock was recorded as an other asset and not considered part of the Company’s investment portfolio.

Non-interest Expense. Total non-interest expense increased to $10.5 million for the year ended December 31, 2009, compared to $8.5 million in 2008. This was primarily due to increases in professional fees (as a result of an increase in problem assets), FDIC insurance, and expenses and losses related to foreclosed assets, partially offset by decreases in employee compensation and benefits, supplies and advertising.

Income Taxes. As a result of a $4.4 million charge related to the recording of a deferred tax asset valuation allowance, the adjusted income tax was $1.5 million for 2009, compared to an income tax benefit of $1.8 million for 2008.

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 in 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 significant declines in real estate values, new home construction and development, high unemployment, 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 a 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 deposits in 2008, partially offset by a decrease in the weighted-average rate paid on deposits.

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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 a tax provision of $77,000 (an effective rate of 30%) for 2007.

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):

	2009												2008
	Fourth			Third			Second			First			Fourth			Third			Second			First
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Interest income	$	3,178			3,207			3,174			3,219		$	3,313			3,457			3,455			3,577
Interest expense		1,311			1,580			1,660			1,664			1,794			1,674			1,707			1,776
Net interest income		1,867			1,627			1,514			1,555			1,519			1,783			1,748			1,801
Provision for loan losses		1,046			1,981			863			1,069			2,331			896			273			559
Loss before income taxes		(1,771	)		(2,714	)		(1,970	)		(1,234	)		(2,675	)		(1,036	)		(469	)		(618	)
Net loss		(5,773	)		(1,580	)		(1,093	)		(762	)		(1,663	)		(643	)		(291	)		(381	)
Basic loss per common share		(2.85	)		(.81	)		(.58	)		(.42	)		(.81	)		(.31	)		(.14	)		(.20	)
Diluted loss per common share		(2.85	)		(.81	)		(.58	)		(.42	)		(.81	)		(.31	)		(.14	)		(.20	)
Cash dividends declared per common share		-			-			-			-			-			-			-			-

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

	December 31,
			2008
Assets
Cash and due from banks	$	2,889	2,826
Federal funds sold		-	2,384
Interest-bearing deposits with banks		10,043	247

Total cash and cash equivalents		12,932	5,457

Securities available for sale		31,752	33,238
Security held to maturity (market value of $1)		-	1
Loans, net of allowance for loan losses of $4,730 and $2,552		184,312	184,182
Premises and equipment, net		5,432	5,881
Federal Home Loan Bank stock, at cost		1,087	853
Foreclosed assets		6,719	1,714
Accrued interest receivable		1,201	1,355
Deferred income taxes, net		-	1,654
Bank-owned life insurance		3,017	2,789
Other assets		1,751	2,049

Total assets	$	248,203	239,173

Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing demand deposits		18,925	19,492
Savings, NOW and money-market deposits		60,691	39,458
Time deposits		136,758	141,733

Total deposits		216,374	200,683

Official checks		960	1,217
Federal Home Loan Bank advances		14,600	11,100
Other liabilities		1,630	1,277

Total liabilities		233,564	214,277

Commitments (Notes 4, 7 and 17)

Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized, 5,800 shares of Series A issued and outstanding		-	-
Additional paid-in capital, preferred		5,800	5,800
Preferred stock discount		(429	(521	)
Common stock, $.01 par value; 25,000,000 shares authorized, 2,058,047 shares issued and outstanding		20	20
Additional paid-in capital, common		24,444	24,393
Accumulated deficit		(14,572	(4,982	)
Accumulated other comprehensive (loss) income		(624	186

Total stockholders' equity		14,639	24,896

Total liabilities and stockholders' equity	$	248,203	239,173

See Accompanying Notes to Consolidated Financial Statements.

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

	Year Ended December 31,
Interest income:	2009			2008
Loans	$	11,287			12,988
Securities		1,468			673
Other		23			141

Total interest income		12,778			13,802

Interest expense:
Deposits		5,972			6,937
Other borrowings		243			14

Total interest expense		6,215			6,951

Net interest income		6,563			6,851
Provision for loan losses		4,959			4,059
Net interest income after provision for loan losses		1,604			2,792

Non-interest income:
Service charges and fees on deposit accounts		725			532
Loan brokerage fees		117			158
Gain on sale of loans held for sale		233			15
Gain on sale of securities available for sale		520			41
Write-down of other assets		(548	)		-
Income from bank-owned life insurance		120			108
Other fees		22			20

Total non-interest income		1,189			874

Non-interest expenses:
Salaries and employee benefits		3,820			3,974
Occupancy and equipment		1,564			1,528
Advertising		245			434
Data processing		589			589
Supplies		118			178
Professional fees		757			589
Loss on sale of foreclosed assets		142			-
Write-down of foreclosed assets		880			-
Expenses on foreclosed assets		899			55
FDIC insurance		610			185
Other		858			932

Total non-interest expenses		10,482			8,464

Loss before income taxes (benefit)		(7,689	)		(4,798	)
Income tax expense (benefit)		1,519			(1,820	)

Net loss		(9,208	)		(2,978	)
Preferred stock dividend requirements and amortization of preferred stock discount		382			26
Net loss available to common shareholders	$	(9,590	)		(3,004	)

Net Loss per common share (basic)	$	(4.66	)		(1.46	)
Net Loss per common share (diluted)	$	(4.66	)		(1.46	)

Weighted-average number of common shares, basic		2,058,047			2,058,047
Weighted-average number of common shares, diluted		2,058,047			2,058,047

See Accompanying Notes to Consolidated Financial Statements.

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2008 and 2009

(Dollars in thousands)

									Accumulated
	Preferred Stock				Common Stock					Other
			Additional				Additional		Compre-		Total
			Paid-In				Paid-In	Accumulated	hensive		Stockholders’
	Shares	Amount	Capital	Discount	Shares	Amount	Capital	Deficit	Income (Loss)		Equity
Balance at December 31, 2007	-	$ -	-	-	2,058,047	$20	23,813	(1,936)	34		21,931

Comprehensive income:
Net loss	-	-	-	-	-	-	-	(2,978)	-		(2,978)

Net change in unrealized gain on securities available for sale, net of tax of $92	-	-	-	-	-	-	-	-	152		152

Comprehensive loss											(2,826)

Proceeds from issuance of $5,800 shares of Series A to US Treasury	5,800	-	5,800	-	-	-	-	-	-		5,800

Allocation 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 mortization of preferred stock discount	-	-	-	5	-	-	-	(26)	-		(21)

Share-based compensation	-	-	-	-	-	-	54	-	-		54

Cumulative 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.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2008 and 2009, Continued

(Dollars in thousands)

									Accumulated
	Preferred Stock				Common Stock					Other
			Additional				Additional		Compre-		Total
			Paid-In				Paid-In	Accumulated	hensive		Stockholders’
	Shares	Amount	Capital	Discount	Shares	Amount	Capital	Deficit	Income (Loss)		Equity
Balance at December 31, 2008	5,800	$ -	5,800	(521)	2,058,047	$20	24,393	(4,982)	186		24,896

Comprehensive loss:
Net loss	-	-	-	-	-	-	-	(9,208)	-		(9,208)

Net change in unrealized gain on securities available for sale	-	-	-	-	-	-	-	-	(810)		(810)

Comprehensive Loss											(10,018)

Preferred stock dividend requirements and amortization of preferred stock discount	-	-	-	92	-	-	-	(382)	-		(290)

Share-based compensation	-	-	-	-	-	-	51	-	-		51

Balance at December 31, 2009	5,800	$ -	5,800	(429)	2,058,047	$20	24,444	(14,572)	(624)		14,639

See Accompanying Notes to Consolidated Financial Statements.

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In thousands)

	Year Ended December 31,
	2009			2008
Cash flows from operating activities:
Net loss	$	(9,208	)		(2,978	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		467			468
Provision for loan losses		4,959			4,059
Amortization of loan fees, net		(105	)		(180	)
Deferred income taxes		1,766			(1,093	)
Net amortization of premiums and discounts on securities		154			11
Gain on sale of loans held for sale		(233	)		(15	)
Gain on sale of securities available for sale		(520	)		(41	)
Proceeds from sale of loans held for sale		5,876			400
Originations of loans held for sale		(5,643	)		(385	)
Write-down of foreclosed assets		880			-
Loss on sale of foreclosed assets		142			-
Decrease (increase) in accrued interest receivable		154			(372	)
Decrease (increase) in other assets		298			(1,173	)
Increase in official checks and other liabilities		81			361
Income from bank-owned life insurance		(120	)		(108	)
Share-based compensation		51			54

Net cash used in operating activities		(1,001	)		(992	)

Cash flows from investing activities:
Maturities and calls of securities available for sale		16,400			-
Purchase of securities available for sale		(52,041	)		(34,056	)
Principal payments on securities available for sale		2,919			650
Proceeds from sale of securities available for sale		33,652			7,231
Principal payments on securities held to maturity		1			3
Net increase in loans		(14,224	)		(17,524	)
Purchase of premises and equipment		(18	)		(883	)
Purchase of Federal Home Loan Bank stock		(234	)		(573	)
Purchase of bank-owned life insurance		(108	)		-
Proceeds from the sale of foreclosed assets		3,213			-

Net cash used in investing activities		(10,440	)		(45,152	)

Cash flows from financing activities:
Net increase in deposits		15,691			28,006
Cash paid to preferred stockholder		(275	)		-
Proceeds from Federal Home Loan Bank advances		3,500			11,000
Proceeds from the issuance of 5,800 shares of Series A preferred stock to US Treasury		-			5,800

Net cash provided by financing activities		18,916			44,806

Net increase (decrease) in cash and cash equivalents		7,475			(1,338	)

Cash and cash equivalents at beginning of year		5,457			6,795

Cash and cash equivalents at end of year	$	12,932			5,457

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FPB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows, Continued

(In thousands)

	Year Ended December 31,
	2009			2008
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest, net of interest capitalized of $21 in 2008	$	6,347			6,732

Income taxes	$	(1,011	)		75

Non-cash transactions:
Accumulated other comprehensive income (loss), net change in unrealized gain on securities available for sale, net of tax	$	(810	)		152

Cumulative effect adjustment related to deferred compensation plans, net of tax benefit of $25	$	-			(42	)

Transfer of loans to foreclosed assets	$	9,240			1,714

Amortization of preferred stock discount	$	92			5

Accrual of preferred stock dividend at end of period	$	37			21

See Accompanying Notes to Consolidated Financial Statements.

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2009 and 2008 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 through December 31, 2013, and unlimited for non-interest bearing transaction accounts, through June 30, 2010. 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.

Subsequent Events. Management has evaluated events occurring subsequent to the balance sheet date through March 15, 2010, determining no events require additional disclosure in these consolidated financial statements.

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, foreclosed assets 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, 2009 and 2008, there was no required reserve balance.

(continued)

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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, 2009 or 2008.

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)

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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)

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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. The Company follows accounting guidance relating to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2009, the Company recorded a $4.4 million valuation allowance against the deferred tax asset of $4.4 million.

The Company recognizes interest and penalties on income taxes as a component of income tax (benefit) expense.

Share-Based Compensation. The Company has adopted the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718, Stock Compensation ("ASC 718"), and expenses the fair value of any stock options as they vest. Under the fair value recognition provisions of ASC 718, the Company recognizes stock-based compensation in the accompanying consolidated statement of operations.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

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.

Loss Per Common Share. Loss per common share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the year. In 2009 and 2008, outstanding stock options and warrants are not considered dilutive due to the losses incurred by the Company.

Fair Value Measurements. Fair value is 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. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy 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.

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.

The following describes valuation methodologies 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

(continued)

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

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. Estimates of fair value are 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 are classified as Level 3.

Foreclosed Assets. The Company's foreclosed assets are recorded at lower of cost or fair market value less estimated costs to sell. Estimates of fair values are 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 senior lending officers related to values of properties in the Company's market areas. These officers take 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, the fair values estimates for foreclosed assets are classified as Level 3.

Fair Values of Financial Instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument or may not necessarily represent the underlying fair value of the Company. 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. The fair value for securities are based on the framework for measuring fair value.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

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 fixed-rate mortgage (e.g. one-to-four family residential), 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. Fair values for impaired loans are based on the framework for measuring fair value.

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.

Comprehensive 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 loss, are components of comprehensive loss. The components of other comprehensive loss and related tax effects are as follows (in thousands):

(continued)

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Comprehensive Loss, Continued

	Before			Tax			After
Year Ended December 31, 2009:	Tax			Effect			Tax
Holding losses	$	(290	)		-			(290	)
Gains included in net loss	$	(520	)		-			(520	)
Net unrealized holding losses	$	(810	)		-			(810	)

Year Ended December 31, 2008:
Holding gains	$	285			(107	)		178
Gains included in net loss		(41	)		15			(26	)
Net unrealized holding gains	$	244			(92	)		152

Recent Accounting Pronouncements. In 2009, the FASB Accounting Standards Codification ("ASC") became the single source of authoritative generally accepted accounting principles in the United States of America ("GAAP") recognized by the FASB to be applied be nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") are also sources of authoritative GAAP for SEC registrants. The ASC superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC is non-authoritative. The Company's policies were not affected by the conversion to ASC.

In 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140, ("SFAS No. 166") (This SFAS was incorporated into the ASC on January 1, 2010) amending the accounting for the transfers of financial assets. This new standard enhances reporting about transfers of financial assets, including loan participations and securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a "qualifying special-purpose entity" and changes the requirements for derecognizing financial assets. It also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The standard was effective January 1, 2010 and did not have a material impact on the Company's consolidated financial statements.

In 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), ("SFAS No. 167") (This SFAS was incorporated into the ASC on January 1, 2010) on how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The standard requires additional disclosures about the reporting entity's involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity's financial statements. The standard was effective January 1, 2010 and did not have a material impact on the Company's consolidated financial statements.

(continued)

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		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At December 31, 2009: Securities available for sale:
U.S. Government agency securities	$	14,620		2		(290	)		14,332
Mortgage-backed securities		5,182		4		(99	)		5,087
Asset-backed securities		6,282		-		(185	)		6,097
CMO securities		6,292		-		(56	)		6,236
Total securities available for sale	$	32,376		6		(630	)		31,752

At December 31, 2008: Securities available for sale:
U.S. Government agency securities	$	16,247		128		-			16,375
Mortgage-backed securities		16,693		170		-			16,863

Total securities available for sale	$	32,940		298		-			33,238

Security held to maturity -
Mortgage-backed security	$	1		-		-			1

Sales of securities available-for-sale are summarized as follows (in thousands):

Information pertaining to securities with gross unrealized losses at December 31, 2009, aggregated by investment category and length of time that individual securities available for sale have been in a continuous loss position, follows (in thousands):

At December 31, 2009:	Gross Unrealized Losses			ApproximateFair Value
U.S. Government agency securities	$	(290	)	$	10,842
Mortgage-backed securities		(99	)		4,900
Asset-backed securities		(185	)		6,097
CMO securities		(56	)		6,236

Total	$	(630	)	$	28,075

(continued)

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, 2009 are as follows (in thousands):

	Available for Sale
	Amortized Cost		Fair Value

Due from five to ten years		5,864		5,766
Due in more than ten years		8,756		8,566
Asset-backed securities		6,282		6,097
CMO securities		6,292		6,236
Mortgage-backed securities		5,182		5,087

	$	32,376	$	31,752

At December 31, 2009 and 2008, securities with a carrying value of $31,332,000 and $24,135,000, 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.

The unrealized losses on fifteen investment securities available for sale were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

(continued)

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans

The components of loans are as follows (in thousands):

	At December 31,
	2009			2008

Commercial	$	63,815			63,768
Commercial real estate		106,803			94,675
Construction		1,081			9,793
Consumer		17,207			18,762
Residential real estate		790			324

Total loans		189,696			187,322

Deduct:
Deferred loan costs and fees, net		(654	)		(588	)
Allowance for loan losses		(4,730	)		(2,552	)

Loans, net	$	184,312			184,182

An analysis of the change in the allowance for loan losses follows (in thousands):

	Year ended December 31,
	2009			2008

Beginning balance	$	2,552			2,393
Provision for loan losses		4,959			4,059
Charge-offs, net of recoveries		(2,781	)		(3,900	)

Ending balance	$	4,730			2,552

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans, Continued

Information related to impaired loans is as follows (in thousands):

	At December 31,
	2009			2008
Collateral dependent loans identified as impaired:
Gross loans with no related allowance for losses (1)	$	7,197			6,960

Gross loans with related allowance for losses recorded		8,443			3,445
Less allowances on these loans		(2,007	)		(448	)

Net loans with related allowance		6,436			2,997

Net investment in collateral dependent impaired loans		13,633			9,957

Noncollateral dependent loans identified as impaired:
Gross loans with no related allowance for losses		1,945			11,017

Gross loans with related allowance for losses recorded		3,645			1,262
Less allowance on these loans		(79	)		(38	)

Net loans with related allowance		3,566			1,224

Net investment in noncollateral dependent impaired loans		5,511			12,241

Net investment in impaired loans	$	19,144			22,198

(1)	At December 31, 2009, includes loans with partial charge-offs of $734,000 relating to loans with a net carrying value of $915,000.

	Year Ended December 31,
	2009		2008
Average investment in impaired loans	$	21,202		7,498

Interest income recognized on impaired loans	$	404		117

Interest income received on impaired loans	$	426		103

(continued)

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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,
	2009		2008

Non-accrual loans	$	15,083		10,105
Past due ninety days or more but still accruing		907		250
	$	15,990		10,355

	At December 31,
	2009		2008

Non-accrual loans	$	15,083		10,105
Past due ninety days or more but still accruing		907		250
	$	15,990		10,355

(4) Premises and Equipment

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

	At December 31,
	2009			2008
Building and improvements	$	3,936			3,936
Land		552			552
Furniture, fixtures and equipment		2,072			2,058
Leasehold improvements		965			964

Total, at cost		7,525			7,510

Less accumulated depreciation and amortization		(2,093	)		(1,629	)

Premises and equipment, net	$	5,432			5,881

Interest capitalized and included in construction in process during 2008 was approximately $21,000. No interest was capitalized during 2009.

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, 2009 and 2008 was approximately $655,000 and $593,000, respectively. In addition, the Company leases space in its Fort Pierce branch office facility to third parties, one of whom is now on a month-by-month basis. The second lease was renewed in 2009 for a term of five years, with one five-year renewal term. Total lease income was approximately $141,000 and $125,000 in 2009 and 2008, respectively.

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(4) Premises and Equipment, Continued

At December 31, 2009, future minimum rental commitments, including certain renewal options, under these non-cancelable leases were approximately as follows (in thousands):

Year Ending December 31,	OperatingLease Expense		OperatingLease Income
2010		509		17
2011		521		17
2012		539		17
2013		548		17
2014		559		11
Thereafter		15,209		-

Total	$	17,885		79

(5) Deposits

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $44,702,000 and $55,596,000 at December 31, 2009 and 2008, respectively.

A schedule of maturities of time deposits at December 31, 2009 follows (in thousands):

Year Ending December 31,	Amount
2010	$	88,675
2011		29,793
2012		15,356
2013		1,852
2014		1,082

	$	136,758

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(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 Year Ending	Fixed or Variable				At December 31,
December 31,	Rate	Interest Rate			2009		2008

2009	Fixed		1.32	%		-	3,000
2010	Fixed		1.81	%		3,000	3,000
2010	Variable		.36	%		2,500	-
2011	Fixed		2.31	%		1,000	1,000
2011	Fixed		1.41	%		4,000	-
2012	Fixed		3.05	%		2,500	2,500
2013	Fixed		3.20	%		1,500	1,500
2015	Fixed (1)		.50	%		100	100

					$	14,600	11,100

(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 $10,039,000 and $13,193,000 at December 31, 2009 and 2008, respectively. In addition, at December 31, 2009, advances were also collateralized by $1,921,000 in cash and $8,107,000 in residential real estate, home equity lines of credit and multi-family loans.

(7) Financial Instruments

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

	At December 31, 2009				At December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and cash equivalents	$	12,932		12,932		5,457		5,457
Securities available for sale		31,752		31,752		33,238		33,238
Securities held to maturity		-		-		1		1
Loans, net		184,312		184,701		184,182		189,649
Federal Home Loan Bank stock		1,087		1,087		853		853
Accrued interest receivable		1,201		1,201		1,355		1,355

Financial liabilities:
Deposit liabilities		216,374		218,124		200,683		202,475
Federal Home Loan Bank advances		14,600		14,618		11,100		11,377
Off-balance-sheet financial instruments		-		-		-		-

(continued)

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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, 2009 follows (in thousands):

Standby letters of credit	$	86

Commitments to extend credit	$	3,278

Available lines of credit	$	14,408

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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 fifteen loans aggregating $11.6 million and eighteen loans aggregating $14.1 million at December 31, 2009 and 2008 respectively, with original maturities of five years or less, 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, 2009 is adequate.

(9) Fair Value Measurements

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

			Fair Value Measurements at December 31, 2009 Using
	Fair Value As of December 31,2009		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available-for-sale securities	$	31,752		-		31,752		-

The following table summarizes financial assets measured at fair value on a nonrecurring basis as of December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	At December 31, 2009											Losses Recorded in
	Fair								Total			Operations
	Value (1)		Level 1		Level 2		Level 3		Losses			During 2009

Impaired loans	$	7,351		-		-		7,351		(3,173	)		(2,425	)
Foreclosed assets		5,358		-		-		5,358		(336	)		(336	)

Total	$	12,709		-		-		12,709		(3,509	)		(2,761	)

(1)	In addition, impaired loans and foreclosed real estate with a carrying value of $6.3 million and $1.4 million, respectively, were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(10) 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 $96,000 in 2009 and $84,000 in 2008.

The Company is required 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. 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, the Company recognized a cumulative effect adjustment (increase) to accumulated deficit of ($42,000) representing additional liability of $67,000 on January 1, 2008 relating to the agreements, net of deferred income taxes of $25,000.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(11) Income Taxes (Benefit)

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

	Year Ended December 31,
	2009			2008
Current:
Federal	$	(247	)		(727	)
State		-			-
Total current	$	(247	)		(727	)

Deferred:
Federal		(2,241	)		(829	)
State		(426	)		(264	)
Valuation allowance		4,433			-
Total deferred		1,766			(1,093	)

Income taxes (benefit)	$	1,519			(1,820	)

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,
	2009						2008
	Amount			% of Pretax Loss			Amount			% of Pretax Loss

Income taxes (benefit) at statutory rate	$	(2,614	)		(34	)%	$	(1,631	)		(34	)%
Increase (decrease) resulting from:
State taxes, net of Federal tax benefit		(281	)		(4	)		(175	)		(3	)
Valuation allowance		4,433			58			-			-
Income from bank-owned life insurance		(46	)		(1	)		(43	)		(1	)
Nondeductible expenses		12			-			12			-
Share-based compensation		15			1			17			-
Income taxes (benefit)	$	1,519			20	%	$	(1,820	)		(38	)%

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(11) 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,
	2009			2008
Deferred tax assets:
Allowance for loan losses	$	1,208			519
Net operating loss carryforward		2,772			1,166
Foreclosed property expenses		354			-
Deferred compensation		181			127
Impaired loan interest		-			68
Other		192			110

Gross deferred tax assets		4,707			1,990
Less: Valuation allowance		4,433			-
Net deferred tax asset		274			1,990

Deferred tax liabilities:
Accrual to cash adjustment		-			(30	)
Premises and equipment		(147	)		(81	)
Deferred loan costs		(127	)		(113	)
Unrealized gain on securities available for sale		-			(112	)

Deferred tax liabilities		(274	)		(336	)

Net deferred tax asset	$	-			1,654

During the year ended December 31, 2009, the Company assessed its earnings history and trend over the past year, its estimate of future earnings, and the expiration of the net operating loss carryforwards and determined that it is more likely than not that the deferred tax assets will not be realized in the near term. Accordingly, a full valuation allowance was recorded against the net deferred tax asset.

At December 31, 2009, the Company had net operating loss carryforwards of approximately $7.1 million for Federal and $9.9 million for Florida available to offset future taxable income. The carryforwards will begin to expire in 2028.

The Company files income tax returns in the U.S. Federal jurisdiction and the State of Florida. The Company is no longer subject to U.S. Federal, State and local income tax examinations by tax authorities for years before 2006.

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(12) 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):

	2009			2008
Loans:
Balance at beginning of year	$	3,878			4,346
Borrowings		1,140			708
Repayments		(495	)		(1,176	)

Balance at end of year	$	4,523			3,878

Deposits	$	3,507			3,954

(13) 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 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, 2009, no shares remain available for grant, as the Plan Agreement terminated on December 8, 2008. A summary of stock option information follows ($ in thousands, except per share amounts):

	Number of Options			Weighted-Average Exercise Price			Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at December 31, 2007		36,953		$	11.68
Options granted		579			8.50
Options forfeited		(771	)		(9.52	)

Outstanding at December 31, 2008		36,761			11.68
Options forfeited		(2,755	)		11.88
Options expired		(3,306	)		9.07

Outstanding at December 31, 2009		30,700		$	11.94			1.30 years	$	-

Exercisable at December 31, 2009		30,237		$	11.99			1.19 years	$	-

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(13) 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 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, 2009, 41,627 shares remain available for grant. A summary of stock option information follows:

	Number of Options			Weighted-Average Exercise Price			Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value

Options outstanding at December 31, 2007		101,783		$	15.63
Options forfeited		(6,442	)		(14.47	)
Options granted		27,708			9.34

Options outstanding at December 31, 2008		123,049			14.27
Options forfeited		(6,433	)		(15.91	)
Options granted		500			8.85

Options outstanding at December 31, 2009		117,116		$	14.16			6.76 years	$	-

Options exercisable at December 31, 2009		92,461		$	15.05			6.44 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,
	2009			2008
Dividend yield		-	%	-	%
Expected life	6 years			6-6.5 years
Expected volatility		86.14	%	23.44%-28.74	%
Risk-free interest rate		3.76	%	4.07%-4.98	%
Weighted-average grant-date fair value of options issued during the year	$	1.18		$2.27-$3.40

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(13) 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 fair value of shares vested and recognized as compensation expense was $51,000 and $54,000 for 2009 and 2008 respectively, and the related tax benefit recognized was $2,000 in 2008. As of December 31, 2009, the Company had 25,118 stock options not fully vested and there was $38,000 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 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, 2009, 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.

(14) 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, the Company approved 1% match, to the Plan in an approximate amount of $24,000. The Company did not approve a match during 2009.

(15) 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)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(15) 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)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(15) 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.

(16) 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. It is also restricted as discussed in Note 15 and Note 17. 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.

(17) 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)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) 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, 2009, the Bank met all capital adequacy requirements to which they are subject.

To be categorized as adequately 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 Provisions
	Amount		%			Amount		%			Amount		%
As of December 31, 2009:
Total Capital to Risk- Weighted Assets	$	17,324		8.96	%	$	15,461		8.00	%	$	19,326		10.00	%
Tier 1 Capital to Risk- Weighted Assets		14,880		7.70			7,730		4.00			11,596		6.00
Tier 1 Capital To Average Assets		14,880		5.65			10,538		4.00			13,172		5.00

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		6.00
Tier 1 Capital To Total Assets		18,834		8.27			9,111		4.00			11,389		5.00

(continued)

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) Regulatory Matters, Continued

(continued)

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) Regulatory Matters, Continued

(continued)

Table of Contents

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(18) Holding Company Financial Information

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

Condensed Balance Sheets

	At December 31,
	2009		2008
Assets

Cash and cash equivalents	$	379		4,402
Investment in subsidiary		14,255		20,248
Other assets		192		342

Total assets	$	14,826		24,992

Liabilities

Total liabilities	$	187		96

Stockholders’ Equity

Stockholders’ Equity		14,639		24,896

Total Liabilities and Stockholders’ Equity	$	14,826		24,992

Condensed Statements of Operations

	Year Ended December 31,
	2009			2008

Revenues	$	-			-
Expenses		(225	)		(159	)

Loss before loss of subsidiary		(225	)		(159	)
Loss of subsidiary		(8,983	)		(2,819	)

Net loss	$	(9,208	)		(2,978	)

(continued)

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FPB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(18) Holding Company Financial Information, Continued

Condensed Statements of Cash Flows

	Year Ended
	December 31,
	2009			2008
Cash flows from operating activities:
Net loss	$	(9,208	)		(2,978	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation		51			54
Undistributed losses of subsidiary		8,983			2,819
Decrease (increase) in other assets		150			(55	)
Increase in other liabilities		76			75

Net cash provided by (used in) operating activities		52			(85	)

Cash flows from investing activity -
Investment in subsidiary		(3,800	)		(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
Cash dividends paid to preferred shareholder		(275	)		-

Net cash (used in) provided by financing activities		(275	)		5,800

Net (decrease) increase in cash and cash equivalents		(4,023	)		715

Cash and cash equivalents at beginning of year		4,402			3,687

Cash and cash equivalents at end of year	$	379			4,402

Non-cash transactions:

Accumulated other comprehensive (loss) income of subsidiary, net change in unrealized gain on securities available for sale, net of tax	$	(810	)		152

Accrual of preferred stock dividend	$	290			21

Cumulative effect adjustment related to deferred compensation plans, net of tax benefit of $25	$	-			42

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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, 2009 and 2008, 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, 2009 and 2008, 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 15, 2010

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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. Seeley

David W. Skiles, President and 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

William V. West, Senior Vice President and Senior Lender

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. Seeley

David W. Skiles, President and Chief Executive Officer

Paul A. Zinter, Vice Chairman

OFFICERS

David W. Skiles, President and Chief Executive Officer

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

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

Randy J. Riley, Senior Vice President and Special Assets Manager

Craig C. Dietz, Senior Vice President, Credit Administration

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

Amy M. Sowerby, Vice President, Deposit Operations

Marianne Keehan, Vice President, SBA Commercial Lender

Larry T. Hall, Vice President, Commercial Lender

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

Christina M. Saltos, Assistant Vice President, Branch Manager (Gatlin)

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)

Kathryn Hayden, Assistant Vice President, Branch Manager (Port St. Lucie)

Ashley Calcagno, Branch Manager (Palm City)

Year Ended December 31,

Principal received from sales

Gross gains