FORWARD-LOOKING STATEMENTS

Part I of this report contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning our opinions or judgment about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information that could affect the matters discussed in this paragraph, see the "Risk Factors" section of our 2008 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

We follow and apply accounting principles that conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and/or use of estimates based on our best assumptions at the time of the estimation. We have identified two policies as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements - 1) the allowance for loan losses and 2) intangible assets.

Allowance for Loan Losses

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on loans defined as "impaired loans." A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan's effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans. First, loans that we have risk graded as having more than "standard" risk but not considered to be impaired are segregated between those relationships with outstanding balances exceeding $500,000 and those that are less than that amount. For those loan relationships with outstanding balances exceeding $500,000, we review the attributes of each individual loan and assign any necessary loss reserve based on various factors including payment history, borrower strength, collateral value, and guarantor strength. For loan relationships less than $500,000, we assign estimated loss percentages generally accepted in the banking industry. Loans that we have classified as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to

each loan type, based on the historical losses, current economic conditions, and operational conditions specific to each loan type.

The reserve estimated for impaired loans is then added to the reserve estimated for all other loans. This becomes our "allocated allowance." In addition to the allocated allowance derived from the model, we also evaluate other data such as the ratio of the allowance for loan losses to total loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional analysis, we may determine that an additional amount of allowance for loan losses is necessary to reserve for probable losses. This additional amount, if any, is our "unallocated allowance." The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded.

Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners' judgment about information available to them at the time of their examinations.

For further discussion, see "Nonperforming Assets" and "Summary of Loan Loss Experience" below.

Intangible Assets

Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.

When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis.

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill (our community banking operation is our only material reporting unit). At our last evaluation, the fair value of our community banking operation exceeded its carrying value, including goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether

the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset's carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

Fair Value of Acquired Loans

We consider that the determination of the initial fair value of loans acquired in the June 19, 2009, FDIC-assisted transaction and the initial fair value of the related FDIC loss share receivable involve a high degree of judgment and complexity. The carrying value of the acquired loans and the FDIC loss share receivable reflect management's best estimate of the amount to be realized on each of these assets. We determined current fair value accounting estimates of the assumed assets and liabilities in accordance with Statement of Financial Accounting Standards No. 141(R), "Business Combinations." However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. To the extent the actual values realized for the acquired loans are different from the estimate, the FDIC loss share receivable will generally be impacted in an offsetting manner due to the loss-sharing support from the FDIC.

Current Accounting Matters

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

RESULTS OF OPERATIONS

Overview

Net income available to common shareholders for the second quarter of 2009 was $35.0 million compared to $5.3 million reported in the second quarter of 2008. Earnings per diluted common share were $2.10 in the second quarter of 2009 compared to $0.32 in the second quarter of 2008. For the six months ended June 30, 2009, net income available to common shareholders was $38.1 million compared to $10.8 million reported for the comparable period in 2008. Earnings per diluted common share were $2.29 for the six months ended June 30, 2009 compared to $0.70 for the same six months in 2008.

Several significant factors affect the comparability of 2009 and 2008 results, including the following.

· In the second quarter of 2009, we realized a $53.8 million gain related to the acquisition of certain assets and liabilities of Cooperative Bank in Wilmington, North Carolina. This gain resulted from the difference between the purchase price and the acquisition-date fair value of the acquired assets and liabilities. The after-tax impact of this gain was $32.8 million, or $1.97 per diluted common share.

· In the second quarter of 2009, we recorded a $1.6 million expense related to a special assessment levied by the FDIC on all banks in order to replenish the FDIC insurance fund. The after-tax impact of this assessment was $976,000, or $0.06 per diluted common share.

· In the second quarter of 2009, we recorded acquisition related expenses related to Cooperative Bank of $792,000 consisting primarily of professional fees and severance expenses. The after-tax impact of these expenses was $483,000, or $0.03 per diluted common share.

· We have recorded $1.0 million in preferred stock dividends in both the first and second quarters of 2009 related to the January 12, 2009 issuance of preferred stock to the U.S. Treasury. These amounts have reduced our net income available to common shareholders.

Acquisition of Cooperative Bank

On June 19, 2009, the North Carolina Commissioner of Banks issued an order providing for the closing of Cooperative Bank and appointed the FDIC as receiver. We were selected by the FDIC to acquire all deposits (except certain brokered deposits) and borrowings, and substantially all of the assets of Cooperative Bank. Cooperative Bank operated through twenty-one branches in North Carolina and three branches in South Carolina. We assumed all of Cooperative Bank's deposits with no losses to any depositor.

The following is a summary of the assets acquired and liabilities assumed:

· $958 million in total assets at book value, which decreased to $928 million after applying purchase accounting fair market value adjustments

· $829 million in loans at book value, which decreased to $531 million after applying purchase accounting fair market value adjustments

· $706 million in deposits at book value, which increased to $712 million after applying purchase accounting fair market value adjustments

· $153 million in borrowings at book value, which increased to $159 million after applying purchase accounting fair market value adjustments

The loans and foreclosed real estate that we purchased are covered by two loss share agreements with the FDIC, which affords us significant loss protection. Under the loss share agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $303 million and 95% of losses that exceed that amount. We

have recorded an estimated receivable from the FDIC in the amount of $241.4 million, which represents the fair value of the FDIC's portion of the losses that are expected to be incurred.

We received a $123 million discount on the assets acquired and paid no deposit premium, which, after applying purchase accounting fair market value adjustments to the acquired assets and assumed deposits, resulted in a gain of $53.8 million. Also in connection with this transaction, a core deposit intangible of $3.8 million was recorded. The fair value estimates and resulting gain should be considered preliminary and are subject to change for a period of one year as information relative to closing date fair values becomes available.

Our operating results for the period ended June 30, 2009 include the results of the acquired assets and assumed liabilities for the 11 days subsequent to the acquisition date of June 19, 2009. The acquired loan and deposit balances have not varied materially since June 19, 2009.

Balance Sheet Growth

Excluding the Cooperative acquisition, we experienced a slight decline in loans during 2009. Internally generated loan balances declined $13 million, or 0.6%, in the second quarter of 2009 and have declined $37 million, or 1.7%, year to date. Internally generated deposit growth amounted to $24 million, or 1.1%, in the second quarter of 2009, and $88 million, or 4.3%, for the first six months of 2009.

Total assets at June 30, 2009, including the impact of Cooperative, amounted to $3.5 billion, 34.2% higher than a year earlier. Total loans at June 30, 2009 amounted to $2.7 billion, a 24.7% increase from a year earlier, and total deposits amounted to $2.9 billion at June 30, 2009, a 42.6% increase from a year earlier.

Net Interest Income and Net Interest Margin

Net interest income for the second quarter of 2009 amounted to $23.4 million, a 9.0% increase over the second quarter of 2008. Net interest income for six months ended June 30, 2009 amounted to $45.6 million, a 10.4% increase over the second quarter of 2008. The higher net interest income was a result of higher average balances of loans and deposits as our net interest margin for those periods did not vary significantly among those periods.

Our net interest margin (tax-equivalent net interest income divided by average earnings assets) in the second quarter of 2009 was 3.74%, a three basis point increase from the 3.71% margin realized in the second quarter of 2008 and a six basis point increase from the 3.68% margin realized in the first quarter of 2009. In the second quarter of 2009, for the second consecutive quarter, there were no changes in the interest rates set by the Federal Reserve, and we were able to reprice maturing time deposits at lower levels, which resulted in a higher net interest margin. During the second quarter of 2009, our average yield on loans increased slightly, amounting to 6.00%, a one basis point increase from the first quarter of 2009, while our average rate paid on interest-bearing liabilities was 2.25%, a 17 basis point decrease from the first quarter of 2009.

Provision for Loan Losses and Asset Quality

The current economic environment has resulted in an increase in our loan losses and nonperforming assets, which has led to significantly higher provisions for loan losses. Our provision for loan losses amounted to $3,926,000 in the second quarter of 2009 compared to $2,059,000 in the second quarter of 2008. The provision for loan losses for the six months ended June 30, 2009 was $8,411,000 compared to $3,592,000 recorded in the first half of 2008.

Noninterest Income

Total noninterest income was $58.7 million in the second quarter of 2009 and $63.5 million for the six months ended June 30, 2009. Total noninterest income for 2009 is not comparable to 2008 because of the previously discussed $53.8 million gain from an acquisition. Excluding that item, total noninterest income for the second

quarter of 2009 was $4.9 million compared to $5.2 million in the second quarter of 2008, and $9.6 million for the six months ended June 30, 2009 compared to $10.3 million for the comparable period of 2008. The decreases in 2009 are attributable primarily to lower levels of nonsufficient fund charges as a result of a lower occurrence of overdrawn accounts and higher levels of securities losses and other miscellaneous losses experienced in 2009.

Noninterest Expenses

Noninterest expenses amounted to $19.2 million in the second quarter of 2009, an 18.9% increase over 2008. Noninterest expenses for the six months ended June 30, 2009 amounted to $35.1 million, a 14.3% increase from the $30.7 million recorded in the first six months of 2008. The increases are primarily due to higher FDIC insurance expense, higher employee insurance costs, higher pension plan costs, and acquisition-related expenses, which were partially offset by lower salaries expense.

Our effective tax rate was approximately 37%-39% for each of the three and six month periods ended June 30, 2009 and 2008.

Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended June 30, 2009 amounted to $23,443,000, an increase of $1,942,000, or 9.0%, from the $21,501,000 recorded in the second quarter of 2008. Net interest income on a tax-equivalent basis for the three months ended June 30, 2009 amounted to $23,630,000, an increase of $1,966,000, or 9.1%, from the $21,664,000 recorded in the second quarter of 2008. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during those periods.

                                          Three Months Ended June 30,
($ in thousands)                           2009                 2008
Net interest income, as reported      $       23,443               21,501
Tax-equivalent adjustment                        187                  163
Net interest income, tax-equivalent   $       23,630               21,664

Net interest income for the six months ended June 30, 2009 amounted to $45,553,000, an increase of $4,288,000, or 10.4%, from the $41,265,000 recorded in the first six months of 2008. Net interest income on a taxable equivalent basis for the six months ended June 30, 2009 amounted to $45,903,000, an increase of $4,311,000, or 10.4%, from the $41,592,000 recorded in the first six months of 2008.

                                        Six Months Ended June,
($ in thousands)                          2009             2008
Net interest income, as reported      $     45,553         41,265
Tax-equivalent adjustment                      350            327
Net interest income, tax-equivalent   $     45,903         41,592

There are two primary factors that cause changes in the amount of net interest income we record - 1) growth in loans and deposits, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three and six months ended June 30, 2009, the increases in net interest income over the comparable periods in 2008 were due primarily to growth in loans and deposits, as our net interest margins in 2009 have not varied significantly from the comparable periods in 2008. Our net interest margin was 3.74% in the second

quarter of 2009 compared to 3.71% in the second quarter of 2008. For the six months ended June 30, 2009 our net interest margin was 3.71% compared to 3.75% for the six months ended June 30, 2008.

The following tables present net interest income analysis on a tax-equivalent basis for the three and six month periods ended June 30, 2009 and 2008.

                                                    For the Three Months Ended June 30,
                                            2009                                          2008
                                                          Interest                                      Interest
                            Average        Average         Earned         Average        Average         Earned
($ in thousands)            Volume           Rate         or Paid         Volume           Rate         or Paid
Assets
Loans (1)                 $ 2,249,130           6.00 %   $   33,640     $ 2,144,694           6.53 %   $   34,814
Taxable securities            165,555           4.08 %        1,682         148,429           5.10 %        1,882
Non-taxable securities
(2)                            20,407           7.45 %          379          16,274           8.01 %          324
Short-term investments        101,931           0.26 %           66          40,737           2.72 %          276
Total interest-earning
assets                      2,537,023           5.65 %       35,767       2,350,134           6.38 %       37,296

Cash and due from banks        36,701                                        41,628
Premises and equipment         52,200                                        50,198
Other assets                   99,290                                        68,531
  Total assets            $ 2,725,214                                   $ 2,510,491

Liabilities
NOW accounts              $   228,436           0.29 %   $      167     $   203,140           0.20 %   $      103
Money market accounts         397,052           1.48 %        1,467         313,829           2.23 %        1,742
Savings accounts              128,828           1.10 %          352         133,925           1.74 %          579
Time deposits >$100,000       655,567           2.92 %        4,769         538,131           4.13 %        5,523
Other time deposits           598,780           2.99 %        4,469         602,045           3.92 %        5,863
   Total
interest-bearing
deposits                    2,008,663           2.24 %       11,224       1,791,070           3.10 %       13,810
Securities sold under
agreements to
repurchase                     55,046           1.49 %          205          40,470           1.74 %          175
Borrowings                     97,962           2.90 %          708         199,957           3.31 %        1,647
Total interest-bearing
liabilities                 2,161,671           2.25 %       12,137       2,031,497           3.09 %       15,632

Non-interest-bearing
deposits                      246,711                                       241,831
Other liabilities              22,939                                        19,459
Shareholders' equity          293,893                                       217,704
  Total liabilities
and shareholders'
equity                    $ 2,725,214                                   $ 2,510,491

Net yield on
interest-earning assets
and net interest income                         3.74 %   $   23,630                           3.71 %   $   21,664
Interest rate spread                            3.40 %                                        3.29 %

Average prime rate                              3.25 %                                        5.08 %

(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2) Includes tax-equivalent adjustments of $187,000 and $163,000 in 2009 and 2008, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense.