Critical Accounting Policies

The Corporation has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of financial statements.

Certain accounting policies involve significant judgments and assumptions by management which, if incorrect, could have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Corporation.

The Corporation believes the allowance for loan losses is a critical accounting policy that requires significant judgments and estimates used in the preparation of consolidated financial statements. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the composition and volume of the loan portfolio, overall portfolio quality, delinquency levels, a review of specific problem loans, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. A portion of the allowance is established by segregating the loans by residential mortgage, commercial and consumer and assigning allocation percentages based on historical loss experience and delinquency trends. The applied allocation percentages are reevaluated at least annually to ensure their relevance in the current economic environment. Accordingly, increases in the size of the loan portfolio and the increased emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increases the allowance. Additionally, a portion of the allowance is established based on the level of classified assets.

Although the Corporation believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review the Corporation's allowance for loan losses. Such agency may require the Corporation to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.

Management's discussion and analysis of financial condition and results of operations and other portions of this Form 10-Q may contain certain "forward-looking statements" concerning the future operations of the Corporation and the Bank. These forward-looking statements are generally identified by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Management intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Corporation of the protections of such safe harbor with respect to all forward-looking statements contained in this report. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could effect actual results include interest rate trends, the general economic climate in the Corporation's and the Bank's market area and the country as a whole, the ability of the Corporation and the Bank to control costs and expenses, competitive products and pricing, loan delinquency rates, the quality and composition of the loan and investment portfolios, changes in accounting principles and guidelines and changes in federal and state regulation. The Corporation provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2007, including in the Risk Factors section of that report, and in its other SEC reports. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

Except as required by applicable law or regulation, the Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward looking statements to reflect events or circumstances after the date of these statements or to reflect the occurrence of anticipated or unanticipated events.

Financial Condition

Assets

Total assets of the Corporation decreased $2,578,000, or 0.63%, to $405,063,000 at June 30, 2008 from $407,641,000 at December 31, 2007. Investments and mortgage-backed securities decreased $22,599,000, or 20.33%, from December 31, 2007 to June 30, 2008, as proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans. Net loans increased $19,973,000, or 7.79%, from December 31, 2007 to June 30, 2008, due primarily to growth in commercial real estate and consumer loans partially offset by reductions in residential mortgage and commercial business loans.

Investment and Mortgage-backed Securities

Held to Maturity-Securities classified as held to maturity consisted of the
following (in thousands):

                          June 30, 2008           December 31, 2007

                       Amortized     Fair      Amortized          Fair
                         Cost        Value       Cost             Value

Municipal Securities  $     2,430   $ 2,409   $     3,126        $ 3,135

                                         June 30, 2008          December 31, 2007
                                      Amortized      Fair     Amortized      Fair
                                        Cost        Value        Cost        Value
Investment Securities:
U.S. Agency Obligations              $         7   $      7   $      507   $     488
Government Sponsored Enterprises          17,999     18,142       40,457      40,665
Municipal Securities                       6,888      7,141        9,296       9,601
Other                                     12,381     11,293       12,458      12,093
Total Investment Securities               37,275     36,583       62,718      62,847
Mortgage-backed Securities:
Fannie Mae                                39,462     39,198       27,511      27,479
Ginnie Mae                                   410        416        1,187       1,200
Freddie Mac                                8,888      9,059       12,860      13,080
Collateralized Mortgage Obligations          911        902        3,492       3,455
Total Mortgage-backed Securities          49,671     49,575       45,050      45,214
Total Available for Sale             $    86,946   $ 86,158   $  107,768   $ 108,061

Loans

Loans increased to $276,460,000 at June 30, 2008 compared to $256,487,000 at
December 31, 2007. The Corporation continues to focus on growth of higher
yielding consumer loans and specific commercial lending products that minimizes
concentration risk to the loan portfolio.

Loans receivable consisted of the following (in thousands):

                                         June 30,      December 31,
                                           2008            2007
Mortgage loans:
Fixed rate residential                   $  14,254    $      16,214
Adjustable-rate residential                  8,072            8,775
Commercial real estate                      95,713           76,864
Construction                                 4,149            4,764
Total mortgage loans                       122,188          106,617
Commercial loans:
Commercial non-real estate                  31,829           32,091
Commercial lines of credit                  70,767           72,170
Total commercial loans                     102,596          104,261
Consumer loans:
Home equity                                 16,833           15,185
Consumer and installment                    40,718           36,315
Consumer lines of credit                       339              346
Total consumer loans                        57,890           51,846
Total loans                                282,674          262,724
Less:
Undisbursed portion of interim
construction loans                          (2,043 )         (2,379 )
Unamortized loan discount                     (423 )           (476 )
Allowance for loan losses                   (3,773 )         (3,344 )
Net deferred loan origination costs             25              (38 )
Total, net                               $ 276,460    $     256,487

Weighted-average interest rate of loans       6.34 %           7.56 %

Liabilities

Total liabilities decreased $1,886,000 to $378,442,000 at June 30, 2008 from $380,328,000 at December 31, 2007. Deposits increased $1,786,000, or 0.66%, to $272,185,000 at June 30, 2008 from $270,399,000 at December 31, 2007. The overall growth includes a $5,860,000 increase in transaction accounts as a result of a special product promotion, while certificate accounts decreased $4,074,000. The Corporation continues to target lower-cost demand deposit accounts through media advertising and special product promotions.

                                              June 30, 2008                        December 31, 2007
                                     Rate        Balance         %          Rate        Balance         %
Account Type
NOW accounts:
Commercial non-interest-bearing          --     $  17,773         6.53 %        --     $  16,568         6.13 %
Non-commercial                         2.34 %      64,103        23.55 %      2.14 %      56,282        20.81 %
Money market checking accounts         2.47 %      19,843         7.29 %      4.44 %      23,160         8.57 %
Regular savings                        0.64 %      12,945         4.76 %      0.79 %      12,794         4.73 %
Total demand and savings deposits      1.82 %     114,664        42.13 %      2.47 %     108,804        40.24 %
Time deposits:
Up to 3.00%                                        28,504        10.47 %                   5,768         2.13 %
3.01 %- 4.00%                                      42,783        15.72 %                  26,265         9.71 %
4.01 %- 5.00%                                      42,873        15.75 %                  34,988        12.94 %
5.01 %- 6.00%                                      43,334        15.92 %                  94,548        34.97 %
6.01 %- 7.00%                                          27         0.01 %                      26         0.01 %
Total time deposits                    4.14 %     157,521        57.87 %      4.67 %     161,595        59.76 %
Total deposit accounts                 3.17 %   $ 272,185       100.00 %      3.78 %   $ 270,399       100.00 %

At June 30, 2008 and December 31, 2007, the Bank had $71,161,000 and $69,500,000, respectively, of advances outstanding from the FHLB. The maturity of the advances from the FHLB is as follows (in thousands):

                                                           June 30, 2008                December 31,2007
                                                           Wtd Avg Rate                   Wtd Avg Rate
Contractual Maturity:
Within one year - adjustable rate                     $     6,661        2.70 %   $      5,000            4.88 %
After one but within three years - fixed rate               5,000        4.93 %          5,000            4.93 %
After one but within three years - adjustable rate             --          -- %          7,500            5.30 %
After three but within five years - adjustable rate        22,000        4.58 %         28,000            4.61 %
Greater than five years - adjustable rate                  37,500        3.89 %         24,000            4.10 %
Total advances                                        $    71,161        4.06 %   $     69,500            4.55 %

The Bank pledges as collateral for the advances its investment securities and has entered into a blanket collateral agreement with the FHLB whereby the Bank maintains, free of other encumbrances, qualifying loans with unpaid principal balances equal to, when discounted at 50% to 75% of the unpaid principal balances, 100% of total advances. Borrowings from the Federal Home Loan Bank (the "FHLB") increased $1,661,000, or 2.39%, to $71,161,000 at June 30, 2008 from $69,500,000 at December 31, 2007. Securities sold under agreement to repurchase decreased $4,165,000 to $19,966,000 at June 30, 2008 from $24,131,000 at December 31, 2007. Excess funds from deposit growth, the sale and maturation of securities and , to a lesser extent, borrowings from the Federal Home Loan Bank were used to pay down matured borrowings under these arrangements.

Shareholders' equity decreased $692,000, or 2.53%, to $26,621,000 at June 30, 2008 from $27,313,000 at December 31, 2007 due primarily to the repurchase of 16,920 shares at a cost of $316,000, dividend payments of $0.23 per share at a cost of $411,000, and a $704,000 increase in unrealized losses on securities available for sale, offset by net income of $736,000.

Liquidity

Liquidity is the ability to meet demand for loan disbursements, deposit withdrawals, repayment of debt, payment of interest on deposits and other operating expenses. The primary sources of liquidity are deposits, loan repayments, borrowings, maturity and sale of securities and interest payments.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The primary investing activities of the Corporation are the origination of commercial and consumer loans, and the purchase of investment and mortgage-backed securities. These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, securities sold under agreements to repurchase and FHLB advances.

At June 30, 2008, the Corporation's investment in marketable securities totaled $88,588,000, nearly all of which is available for sale. Approximately $67,997,000 and $74,410,000 of debt securities at June 30, 2008 and December 31, 2007, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements.

Outstanding loan commitments (including commitments to fund credit lines) totaled $142,800,000 at June 30, 2008. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments.

The Corporation closely monitors its liquidity position on a daily basis. Time deposits that are scheduled to mature in one year or less from June 30, 2008, totaled $139,388,000. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer special products to its customers to increase retention and to attract new deposits. Based upon the Corporation's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances, securities sold under agreements to repurchase and lines of credit. At June 30, 2008, the Corporation had outstanding $71,161,000 of FHLB borrowings and $19,966,000 of securities sold under agreements to repurchase. At June 30, 2008, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $30,000,000 and the ability to borrow an additional $20,000,000 from the FHLB and secured borrowing lines. Lines of credit are available on a one-to-ten day basis for general purposes of the Corporation. All of the lenders have reserved the right to withdraw these lines at their option.

Capital Management

The Bank and the Corporation are subject to various regulatory capital requirements administered by banking regulators. 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 Corporation's

Quantitative measures established by regulations to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of June 30, 2008, that the Bank and the Corporation met the capital adequacy requirements to which they are subject.
As of June 30, 2008, the Bank was "well capitalized" under the regulatory framework for prompt corrective action based on its capital ratio calculations. In order to be "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
Under present regulations of the Office of the Comptroller of the Currency, the Bank must have core capital (leverage requirement) equal to 4.0% of assets, of which 1.5% must be tangible capital, excluding intangible assets. The Bank must also maintain risk-based regulatory capital as a percent of risk weighted assets at least equal to 8.0%. In measuring compliance with capital standards, certain adjustments must be made to capital and total assets.

The following tables present the total risk-based, Tier 1 risk-based and Tier 1 leverage requirements for the Corporation and the Bank (dollars in thousands).

                                                    June 30, 2008

                                          Actual                Regulatory Minimum              "Well Capitalized"

                                    Amount       Ratio          Amount           Ratio          Amount          Ratio
                                      $             %              $                %             $                %
Leverage ratio
Corporation                          33,216        8.21 %            16,180        4.00 %              n/a         n/a
Bank                                 35,397        8.76 %            16,351        4.00 %           20,439        5.00 %

Tier 1 capital ratio
Corporation                          33,216       10.70 %            12,403        4.00 %              n/a         n/a
Bank                                 35,397       11.42 %            12,403        4.00 %           18,605        6.00 %

Total risk-based capital ratio
Corporation                          39,853       12.84 %            24,807        8.00 %              n/a         n/a
Bank                                 39,170       12.63 %            24,807        8.00 %           31,009       10.00 %

During fiscal 2003, the Corporation implemented a share repurchase program under which the Board of Directors of the Corporation authorized the repurchase of up to 5% of the outstanding shares or 98,000 shares. The program was expanded by an additional 5%, or 98,000 shares, in fiscal 2004, by an additional 5%, or 95,000 shares in fiscal 2005 and by an additional 5%, or 92,000 shares in fiscal 2006. The shares are to be repurchased, either through open market purchases or privately negotiated transactions, depending on market conditions and other factors.

Off-Balance Sheet Risk

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customer's requests for funding and take the form of legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Outstanding loan commitments (including commitments to fund credit lines) totaled $142,800,000 at June 30, 2008. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on the credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The credit risk on these commitments is managed by subjecting each customer to normal underwriting and risk management processes. For the period ended June 30, 2008, the Corporation did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operation and cash flows.

Results of operations for the three months ended June 30, 2008 and 2007

General

Net income decreased $285,000, or 47.42%, to $316,000 for the three months ended June 30, 2008 as compared to $601,000 for the same period in 2007. The decrease in net income for the period was due primarily to a compression of the net interest margin caused by declining interest rates along with an increase in the provision for loan losses due to loan growth and the increase in nonperforming loans, offset by a decrease in non-interest expense.

Average Yields and Rates
(dollars in thousands)

                                                                            Three Months Ended June 30,
                                                              2008                                           2007
                                              Average                        Average         Average                        Average
                                              Balance       Interest       Yield/Cost        Balance       Interest       Yield/Cost
Interest-earning assets:
Loans (1)                                    $ 276,355     $    4,378              6.34 %   $ 237,514     $    4,803              8.09 %
Mortgage-backed securities                      52,041            687              5.28 %      26,102            306              4.69 %
Investment securities                           40,655            562              5.53 %      91,077          1,234              5.42 %
Other interest-earning assets                    5,658             73              5.18 %       8,294            117              5.62 %
Total interest-earning assets                  374,709          5,700              6.08 %     362,987          6,460              7.12 %
Non-interest-earning assets                     32,608                                         31,698
Total assets                                 $ 407,317                                      $ 394,685
Interest-bearing liabilities:
Deposits                                       273,403          2,218              3.25 %     259,778          2,397              3.69 %
Floating rate junior subordinated
deferrable interest debentures                  12,372            175              5.65 %      12,372            223              7.20 %
FHLB advances and other borrowings              91,084            843              3.70 %      92,846          1,093              4.71 %
Total interest-bearing liabilities             376,859          3,236              3.43 %     364,996          3,713              4.07 %
Non-interest-bearing liabilities                 3,838                                          2,780
Total liabilities                              380,697                                        367,776
Shareholders' equity                            26,620                                         26,909
Total liabilities and shareholders' equity   $ 407,317                                      $ 394,685
Net interest income/spread                                 $    2,464              2.65 %                 $    2,747              3.05 %
Net yield on earning assets                                                        2.63 %                                         3.03 %

(1) Average balances of loans include non-accrual loans.

Interest Income

Interest income decreased $760,000, or 11.76%, to $5,700,000 for the three months ended June 30, 2008 as compared to the same period in 2007. Interest income on loans decreased by 8.85%, or $425,000, to $4,378,000 for the three months ended June 30, 2008 from $4,803,000 for the three months ended June 30, 2007, due to declining market interest rates, offset by higher average balance of loans. Interest on deposits and federal funds sold, combined with interest and dividends on investment and mortgage-backed securities decreased $335,000 for the three months ended June 30, 2008 to $1,322,000 from $1,657,000 during the same period in 2007 due to lower average balances, offset by higher investment yields as a result of a higher concentration of mortgage-backed securities.

Interest expense decreased $477,000, or 12.85%, to $3,236,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Interest expense on deposit accounts decreased $179,000, or 7.47%, to $2,218,000 for the three months ended June 30, 2008 from $2,397,000 during the same period in 2007 due primarily to lower market interest rates and a shift in the . . .