Forward Looking Statements

This report contains certain forward-looking statements that represent the Company's expectations or beliefs concerning future events. Such forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. These forward-looking statements are based on assumptions with respect to future business strategies and decisions that are subject to change based on changes in the economic and competitive environment in which we operate. Forward-looking statements speak only as of the date they are made and the Company is under no duty to update these forward-looking statements or to reflect the occurrence of unanticipated events. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. Factors that could cause such a difference include, but are not limited to, the timing and amount of revenues that may be recognized by the Company, changes in local or national economic trends, increased competition among depository and financial institutions, continuation of current revenue and expense trends (including trends affecting chargeoffs and provisions for loan losses), changes in interest rates, changes in the shape of the yield curve, and adverse legal, regulatory or accounting changes. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on these statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

Overview

Management's Discussion and Analysis is provided to assist in understanding and
evaluating the Company's results of operations and financial condition. The
following discussion is designed to provide a general overview of the Company's
performance for the three- and nine-month periods ended September 30, 2008 and
2007. Readers seeking a more in-depth analysis should read the detailed
discussions below, as well as the condensed consolidated financial statements
and related notes. Financial highlights are presented in the table below.

                                    Three Months      Three Months                     Nine Months       Nine Months
                                       Ended             Ended                            Ended             Ended
                                   September 30,     September 30,                    September 30,     September 30,
                                       2008              2007           % Change          2008              2007           % Change
Earnings:
Net interest income               $         5,382   $         5,103           5.47 % $        15,081   $        15,222        (0.93) %
Provision for loan losses                    (720 )            (300 )       140.00            (1,815 )            (960 )       89.06
Noninterest income                          1,492             1,534          (2.74 )           4,765             5,051         (5.66 )
Noninterest expense                        (5,145 )          (4,554 )        12.98           (14,730 )         (13,456 )        9.47
Income tax expense                           (187 )            (434 )       (56.91 )            (647 )          (1,519 )      (57.41 )
Net Income                        $           822   $         1,349         (39.07 ) $         2,654   $         4,338        (38.82 )

Per Share Data:
Avg. common shares outstanding,
basic                                   7,358,086         7,627,620         (3.53) %       7,380,236         7,748,605        (4.75) %
Basic net income                  $          0.11   $          0.18         (38.89 ) $          0.36   $          0.56        (35.71 )

Avg. common shares outstanding,
diluted                                 7,386,513         7,691,722         (3.97) %       7,414,274         7,817,438        (5.16) %
Diluted net income                $          0.11   $          0.18         (38.89 ) $          0.36   $          0.55        (34.55 )

Cash dividends paid               $         0.085   $          0.08           6.25 % $         0.255   $          0.24          6.25 %
Period-end book value                       11.02             10.86           1.47             11.02             10.86          1.47

Financial Ratios (annualized):
Return on average stockholders'
equity                                       3.97 %            6.37 %      (37.68) %            4.25 %            6.83 %     (37.77) %
Return on average assets                     0.40              0.70         (42.86 )            0.45              0.78        (42.31 )
Efficiency ratio                            74.85             68.61           9.09             74.22             66.37         11.83
Net interest margin                          3.02              3.13          (3.51 )            2.96              3.19         (7.21 )
Average equity to average
assets                                      10.09             11.09          (9.02 )           10.54             11.37         (7.30 )

Asset Quality Data:
Allowance for loan losses         $         7,027   $         6,292          11.68 % $         7,027   $         6,292         11.68 %
Nonperforming loans                         3,335             2,528          31.92             3,335             2,528         31.92
Nonperforming assets                        4,549             3,164          43.77             4,549             3,164         43.77
Net charge-offs                               450               136         230.88               932               433        115.24
Allowance for loan losses to
total loans                                  1.12 %            1.15 %        (2.61 )            1.12 %            1.15 %       (2.61 )
Nonperforming loans to total
loans                                        0.53              0.46          15.22              0.53              0.46         15.22
Nonperforming assets to total
assets                                       0.55              0.42          30.95              0.55              0.42         30.95

Average Balances:
Total assets                      $       817,613   $       759,132           7.70 % $       794,066   $       746,974          6.30 %
Loans, net of unearned income             615,755           541,396          13.73           590,554           528,800         11.68
Interest-earning assets                   724,949           668,671           8.42           700,225           653,662          7.12
Deposits                                  581,162           579,141           0.35           579,810           573,373          1.12
Interest-bearing liabilities              685,823           625,128           9.71           659,411           612,301          7.69
Stockholders' equity                       82,478            83,984          (1.79 )          83,685            84,912         (1.45 )

At Period End:
Total assets                      $       823,030   $       760,987           8.15 % $       823,030   $       760,987          8.15 %
Loans, net of unearned income             621,469           548,026          13.40           621,469           548,026         13.40
Interest-earning assets                   732,683           666,874           8.25           732,683           676,874          8.25
Deposits                                  584,928           572,114           2.24           584,928           572,114          2.24
Interest-bearing liabilities              691,600           628,084          10.11           691,600           628,084         10.11
Stockholders' equity                       82,827            84,378          (1.84 )          82,827            84,378         (1.84 )

Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiaries are based on accounting principles generally accepted in the United States and conform to general practices in the banking industry. We consider a critical accounting policy to be one that is both very important to the portrayal of the Company's financial condition and results of operations and requires a difficult, subjective or complex judgment by management. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Changes in underlying factors, assumptions or estimates could have a material impact on our future financial condition and results of operations. Based on the size of the item or significance of the estimate, our critical accounting and reporting policies include our accounting for the allowance for loan losses and evaluation of other-than-temporary impairment of investments.

Allowance for Loan Losses. The allowance for loan losses is calculated with the objective of maintaining an allowance sufficient to absorb estimated probable loan losses. Management's determination of the adequacy of the allowance is based on quarterly evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss for each type of loan and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of the collateral.

Management has established a systematic method for periodically evaluating the credit quality of the loan portfolio in order to establish an allowance for loan losses. The methodology is set forth in a formal policy and includes a review of all loans in the portfolio on which full collectibility may or may not be reasonably assured. The loan review considers among other matters, the estimated fair value of the collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Specific allowances are established for certain individual loans that management considers impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The remainder of the portfolio is segmented into groups of loans with similar risk characteristics for evaluation and analysis. In originating loans, we recognize that 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, the term of the loan, general economic conditions, and in the case of a secured loan, the quality of the collateral. We increase our allowance for loan losses by charging provisions for loan losses against our current period income. Management's periodic evaluation of the adequacy of the allowance is consistently applied and is based on our past loan loss experience, particular risks inherent in the different kinds of lending that we engage in, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions, and other relevant internal and external factors that affect loan collectibility. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

Other-Than-Temporary Impairment of Securities. Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance provided by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In November 2006, the FASB issued Staff Position ("FSP") FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The FSP addressed the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amended SFAS No. 115"Accounting for Certain Investments in Debt and Equity Securities", No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations", and APB Opinion 18, "The Equity Method of Accounting for Investments in Common Stock".

Effective September 30, 2008, management evaluated the Company's investment portfolio and determined that the $468,000 impairment on a $1.0 million trust preferred collateralized debt obligation was other-than-temporary. This investment is collateralized by trust preferred securities that were issued by a pool of 40 banks operating throughout the country. Management determined that the impairment was other-than-temporary because 1) two of the original 40 banks had defaulted on their payments; 2) the security, which had an original credit rating of "A-", was on negative watch and subject to downgrade by one or more of the credit rating agencies; and 3) the interest rate of LIBOR plus 105 basis points on this security was well below the current pricing for bank capital which approximated LIBOR plus 400 basis points at September 30, 2008. Management determined that it was unlikely that the pricing for bank capital would return to a level consistent with the pricing on the Company's security in the foreseeable future. Due to the lack of liquidity for this type of security in the current environment, the security was valued using Level 3. The fair value was prepared by an independent third party using a discounted cash flow model using various default assumptions ranging from 10% to 40%. The fair value of $532,000 was determined based on a weighted average of the various default assumptions, with the 20% default rate as the most likely scenario over the life of the security. The current default rate on this security is 5.25%.

All other unrealized losses were determined by management to be the result of temporary changes in interest rates, pricing spreads, and market conditions that could be recovered in the foreseeable future. The Company has the ability to hold these investments to maturity if necessary in order to recover any temporary losses that may presently exist. As a result, management did not consider any additional unrealized losses as other-than-temporary as of September 30, 2008.

Comparison of Financial Condition

Assets. Total assets of the Company increased by $43.9 million, or 5.6%, from $779.1 million at December 31, 2007, to $823.0 million at September 30, 2008. This increase was primarily due to a $68.5 million, or 12.2%, increase in loans receivable to $628.5 million at September 30, 2008. The growth in loans was primarily comprised of a $27.7 million, or 33.7%, increase in consumer loans to $109.7 million, a $34.6 million, or 12.6%, increase in commercial real estate loans to $308.3 million, a $1.0 million, or 3.0%, increase in commercial business loans to $34.2 million, and a $7.0 million, or 9.0%, increase in residential loans to $85.0 million. These increases in loans were partly offset by a $2.8 million, or 3.2%, decrease in residential and commercial construction loans to $86.5 million. Loan production remained strong during the first nine months of 2008, totaling $216.1 million, compared to $234.7 million during the first nine months of 2007. The economy in the Charlotte region remains relatively stable compared to other regions of the country; however, housing starts and demand for commercial real estate have slowed during 2008. As a result, management expects that loan growth will slow during the remainder of 2008. Management will seek to continue to grow the loan portfolio in a prudent manner with an emphasis on borrowers that have a demonstrated capacity to meet their debt obligations, even as the local economy slows.

As of September 30, 2008, $268.2 million, or 43.1%, of the Company's loan portfolio, was scheduled to reprice in one month. This sensitivity to falling short-term interest rates was a factor in the Company's margin compression during the first half of 2008 as the prime rate decreased by 275 basis points during the period. However, during the third quarter of 2008, there were no decreases in short-term interest rates and a large number of time deposits repriced at lower rates, resulting in a decreased cost of funds. As a result, the Company's net interest margin improved by 11 basis points from 2.91% for the second quarter of 2008 to 3.02% for the third quarter of 2008. However, the recent 50 basis point decrease in short-term interest rates in the fourth quarter of 2008 by the Federal Reserve will likely result in margin compression for the fourth quarter of 2008.

Cash and cash equivalents decreased by $15.8 million, or 53.2%, from $29.7 million at December 31, 2007, to $13.9 million at September 30, 2008. This decrease was primarily attributable to loan growth of $68.5 million, an $11.1 million increase in mortgage-backed securities ("MBS") and decreases in deposits of $5.8 million. These outlays of cash were partly offset by a $20.0 million decrease in investment securities and a $51.2 million increase in borrowed money. Management expects that the level of cash and cash equivalents will remain relatively stable through the remainder of 2008. Proceeds needed to fund future loan growth are expected to be generated from growth in deposits, maturing investments and MBS and / or additional borrowings.

During the nine-month period ended September 30, 2008, investment securities decreased by $20.0 million, or 43.0%, to $26.5 million. The decrease in investment securities was primarily due to normal maturities of $2.3 million and the sale of $19.3 million of investment securities during the period. These decreases in investment securities were partly offset by the purchase of $3.7 million of investment securities during the period. MBS increased $11.1 million, or 15.9%, to $81.0 million. The increase in MBS was due to the purchase of $35.0 million of MBS during the period, the effects of which were partly offset by the sale of $12.5 million in MBS and by $11.4 million of normal principal amortization. The investment securities and MBS were primarily sold to fund loan growth. Management expects the investment and MBS portfolios to decrease as a percentage of total assets as the cash flows generated from these investments and MBS are used to fund loan growth or repay borrowings. This rebalancing of the balance sheet from lower-yielding cash and cash equivalents, investments, and MBS to higher-yielding loans is expected to be a positive factor in improving the Company's net interest margin.

Other real estate owned, which consisted of 14 one-to-four family residential dwellings, one residential lot, and one commercial building acquired by the Bank through foreclosure, totaled $1.2 million at September 30, 2008, compared to $529,000 at December 31, 2007. All foreclosed properties are written down to their estimated fair value at acquisition, and are located in the Bank's primary lending area. Management will continue to aggressively market foreclosed properties for a timely disposition.

Allowance for loan losses and nonperforming assets. The Company has established a systematic methodology for determining the adequacy of the allowance for loan losses as previously discussed. The allowance for loan losses is increased by charging provisions for loan losses against income. As of September 30, 2008, the allowance for loan losses was $7.0 million, or 1.12% of total loans. Management believes that this amount meets the requirement for losses on loans that management considers to be impaired, for known losses, and for losses inherent in the remaining loan portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the determinations. The following table presents an analysis of changes in the allowance for loan losses for the comparable periods and information with respect to nonperforming assets at the dates indicated.

                                  At and For the Three              At and For the Nine
                               Months Ended September 30,        Months Ended September 30,
                                  2008             2007            2008               2007
                                 (dollars in thousands)            (dollars in thousands)
Allowance for loan losses:
Beginning of period          $        6,757     $     6,128   $         6,144     $      5,764
Add:
Provision for loan losses               720             300             1,815              960
Recoveries                                3              66                52               86
Less:
Charge-offs                             453             202               984              519
End of period                $        7,027     $     6,292   $         7,027     $      6,292

Nonaccrual loans             $        3,335     $     2,528   $         3,335     $      2,528
Real estate owned                     1,214             636             1,214              636
Nonperforming assets         $        4,549     $     3,164   $         4,549     $      3,164

Allowance for loan losses
as a percentage of total
loans                                  1.12 %          1.15 %            1.12 %           1.15 %

Nonperforming loans to
total loans                            0.53 %          0.46 %            0.53 %           0.46 %

Nonperforming assets to
total assets                           0.55 %          0.42 %            0.55 %           0.42 %

Premises and equipment decreased by $631,000, or 3.5%, to $17.3 million at September 30, 2008. During 2008, the Company opened a full-service office located in a leased facility in Rock Hill, South Carolina. Also during 2008, the Company closed its mortgage loan production office and consolidated the operations of its two commercial loan production offices into existing branch facilities. As a result, there were no loan production offices operating as of September 30, 2008. This consolidation of loan production offices was a cost cutting measure that was done as a part of the Company's reorganization efforts during the first quarter of 2008. No significant changes to the Company's premises and equipment are anticipated for the remainder of 2008.

Liabilities. Total liabilities increased by $45.1 million, or 6.5%, from $695.1 million at December 31, 2007, to $740.2 million at September 30, 2008. This increase was primarily due to a $51.2 million increase in borrowed money which was partly offset by a $5.8 million decrease in total deposits.

While total deposits decreased by $5.8 million, or 1.0%, to $584.9 million at September 30, 2008, demand deposit accounts (checking accounts) increased by $12.3 million, or 12.1%, to $114.3 million at September 30, 2008. The increase in demand deposit accounts was primarily due to a continued emphasis on increasing the Company's number of retail and business customers through employee incentive plans and enhanced treasury service products. Also, time deposits increased by $4.7 million, or 1.4%, to $351.8 million at September 30, 2008. The increase in demand deposit accounts and time deposits was offset by a $22.1 million, or 17.1%, decrease in money market deposit accounts to $107.6 million and a $749,000, or 6.2%, decrease in savings accounts to $11.3 million at the end of the reporting period. The decrease in these interest-sensitive money market deposit accounts was largely due to the Company's action to aggressively lower its deposit rates more quickly than some of its competitors in response to the Federal Reserve Board's actions to lower the federal funds rate by 225 basis points during the nine-month period ended September 30, 2008. The Company will continue to actively market the Company's deposit products at pricing points that management believes to be profitable. Management has always focused on increasing deposits by building customer relationships and typically avoids growing deposits by offering the highest rates in the market. The Company opened its 15th full-service office in Rock Hill, South Carolina during the first quarter of 2008. This additional office, the Company's first in South Carolina, will be an integral part of the Company's efforts to continue growing core deposits and market share in the Charlotte region. However, if loan growth continues to significantly outpace deposit growth, management may be more aggressive in pricing retail deposits, which may increase the Company's cost of funds. In addition, management may use brokered deposits to fund future loan growth if additional liquidity is needed. Brokered deposits totaled $12.4 million, or 2.1% of total deposits, at September 30, 2008, compared to $3.6 million, or 0.6%, of total deposits at December 31, 2007.

Borrowed money increased by $51.2 million, or 53.2%, to $147.5 million at September 30, 2008. This increase was primarily due to additional Federal Home Loan Bank ("FHLB") advances that were obtained primarily for the purpose of funding loan growth and $20.0 million in repurchase agreements with Citigroup Global Market, Inc. that were used to purchase MBS. Additional borrowed money may be used in the future to fund additional loan growth or purchase investment or mortgage-backed securities. However, maturing advances will generally be repaid if there is a sufficient level of cash and cash equivalents.

Stockholders' Equity. Total stockholders' equity decreased by $1.2 million, or 1.4%, from $84.0 million at December 31, 2007, to $82.8 million at September 30, 2008. The decrease in stockholders' equity was partly due to a $1.1 million increase in unrealized losses on available-for-sale investment securities and MBS. This increase in unrealized losses was primarily due to increases in long-term interest rates and higher spreads resulting from increased volatility in the securities markets. With the exception of the $468,000 other-than-temporary impairment that was discussed earlier in the "Critical Accounting Policies" section of this report, management expects that these losses are temporary in nature and that the market value of the securities portfolio will recover in the foreseeable future.

Also, during the nine-month period the Company repurchased 102,828 shares of common stock at an average cost of $9.91 per share, resulting in a $1.0 million decrease in stockholders' equity. On October 22, 2007, the Board of Directors authorized the repurchase of up to 200,000 shares, or approximately 2.5%, of the then outstanding shares of common stock. This repurchase plan was completed in June 2008. An additional repurchase plan was authorized by the Board of Directors on June 16, 2008. The new plan authorized the repurchase of 200,000 shares, or approximately 2.7% of the Company's then outstanding shares of common stock. These repurchases may be carried out through open market purchases, block trades, and negotiated private transactions. The stock may be repurchased on an ongoing basis and will be subject to the availability of stock, general market conditions, the trading price of the stock, alternative sources and uses for capital, and the Company's financial performance. Under the current plan the Company had repurchased a total of 9,476 shares at an average price of $7.91 per share and had 190,524 shares remaining to be repurchased at September 30, 2008. . . .