The following is our discussion and analysis of certain significant factors that have affected our financial position and operating results and those of our subsidiary, CBC National Bank, during the periods included in the accompanying financial statements. This commentary should be read in conjunction with the financial statements and the related notes and the other statistical information included in this report.

This report contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by and information currently available to management. The words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "expect," "estimate," "continue," and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission, including, without limitation:

·

significant increases in competitive pressure in the banking and financial services industries;

·

changes in the interest rate environment which could reduce anticipated or actual margins;

·

changes in political conditions or the legislative or regulatory environment;

·

general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

·

changes occurring in business conditions and inflation;

·

changes in technology;

·

the level of allowance for loan loss;

·

the rate of delinquencies and amounts of charge-offs;

·

the rates of loan growth;

·

adverse changes in asset quality and resulting credit risk-related losses and expenses;

·

changes in monetary and tax policies;

·

loss of consumer confidence and economic disruptions resulting from terrorist activities;

·

changes in the securities markets; and

·

other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

Overview

The following discussion describes our results of operations for the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007 and our results for the nine months ended September 30, 2008 and 2007. The following discussion also analyzes our financial condition as of September 30, 2008 as compared to December 31, 2007. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2007, as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management's estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Results of Operations

Net Interest Income

Our level of net interest income is determined by the level of our earning assets, primarily loans outstanding, and the management of our net interest margin. For the nine months ended September 30, 2008, net interest income totaled $7,845,000, as compared to $9,588,000 for the same period in 2007 for a decrease of $1,743,000.

Total interest income decreased by $3,014,000 or 13.77%, to $18,870,000 for the nine months ended September 30, 2008 compared to $21,884,000 for the nine months ended September 30, 2007. This decline in interest income was primarily due to the interest rate environment and occurred despite an increase in the level of the Bank's earning assets. The average Prime interest rate was 5.43% and 8.23% during the nine month periods ended September 30, 2008 and 2007, respectively. This 280 basis point decline in the average Prime interest rate had an extremely negative impact on the yield earned by the Bank on that portion of the loan portfolio that carry rates based on the Prime interest rate index. At September 30, 2008 and 2007 the Bank held $162,374,000 and $166,711,000, respectively, in loans carrying rates based on the Prime interest rate index. Interest and fees on loans decreased by $2,104,000, or 11.81%, to $15,712,000 in the nine months ended September 30, 2008 from $17,816,000 in the nine months ended September 30, 2007.

Total interest expense decreased by $1,271,000, or 10.34%, to $11,025,000 for the nine months ended September 30, 2008 compared to $12,296,000 for the same period in 2007. The net interest margin realized on earning assets and the interest rate spread were 2.55% and 2.13%, respectively, for the nine months ended September 30, 2008. The net interest margin and the interest rate spread were 3.25% and 2.79%, respectively, for the nine months ended September 30, 2007.

For the quarter ended September 30, 2008, net interest income totaled $2,626,000, as compared to $3,155,000 for the quarter ended September 30, 2007 for a decrease of $529,000 or 16.77%. Total interest income decreased by $1,234,000 or 16.89%, to $6,072,000 for the three months ended September 30, 2008 compared to $7,306,000 for the three months ended September 30, 2007. As with the year to date decline, the primary cause of the decline in interest income between the third quarter of 2008 compared to the same quarter in 2007 was the interest rate environment. The average Prime interest rate was 5.00% and 8.18% during the three month periods ended September 30, 2008 and 2007, respectively. This 318 basis point decline in the average Prime interest rate between comparable year over year quarters represents a 38.88% decline in this key interest rate index, negatively impacting a substantial portion of the Bank's loan portfolio. Additionally, the Bank experienced an increase in non earning assets from loans on non accrual and other real estate owned, which was $11,777,000 at September 30, 2008 versus $2,850,000 at September 30, 2007. This increase of $8,927,000 in non earning assets placed further downward pressure on interest income in the most recent quarter. Interest and fees on loans decreased by $834,000, or 14.04%, to $5,106,000 in the three months ended September 30, 2008 from $5,940,000 in the three months ended September 30, 2007.

Total interest expense decreased by $705,000, or 16.98%, to $3,446,000 for the three months ended September 30, 2008 compared to $4,151,000 for the same period in 2007. The net interest margin realized on earning assets and the interest rate spread were 2.52% and 2.16%, respectively, for the three months ended September 30, 2008. The net interest margin and the interest rate spread were 3.18% and 2.71%, respectively, for the three months ended September 30, 2007. The decrease in net interest income for the quarter ended September 30, 2008 and the nine months ended September 30, 2008, is due to the previously described declines in the Prime interest rate index on a substantial portion of our interest-earning assets, which was only partially offset by a gradual decrease in the rate paid for interest-bearing liabilities.

Interest Rate Sensitivity and Asset Liability Management

Interest rate sensitivity measures the timing and magnitude of the repricing of assets compared with the repricing of liabilities and is an important part of asset/liability management of a financial institution. The objective of interest rate sensitivity management is to generate stable growth in net interest income, and to control the risks associated with interest rate movements. Management constantly reviews interest rate risk exposure and the expected interest rate environment so that adjustments in interest rate sensitivity can be made on a timely basis. Since the assets and liabilities of the Company are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.

Net interest income is the primary component of net income for financial institutions. Net interest income is affected by the timing and magnitude of repricing of as well as the mix of interest sensitive and noninterest sensitive assets and liabilities. "Gap" is a static measurement of the difference between the contractual maturities or repricing dates of interest sensitive assets and interest sensitive liabilities within the following twelve months. Gap is an attempt to predict the behavior of the Company's net interest income in general terms during periods of movement in interest rates. In general, if the Company is asset sensitive, more of its interest sensitive assets are expected to reprice within twelve months than its interest sensitive liabilities over the same period. In a rising interest rate environment, assets repricing more quickly are expected to enhance net interest income. Alternatively, decreasing interest rates would be expected to have the opposite effect on net interest income since assets would theoretically be repricing at lower interest rates more quickly than interest sensitive liabilities. Although it can be used as a general predictor, gap as a predictor of movements in net interest income has limitations due to the static nature of its definition and due to its inherent assumption that all assets will reprice immediately and fully at the contractually designated time. At September 30, 2008, the Company, as measured by gap, and adjusted for its expectations of changes in interest bearing categories that might not move completely in tandem with changing interest rates, is asset sensitive when measured at three months and is liability sensitive when cumulatively measured at one year. Management has several tools available to it to evaluate and affect interest rate risk, including deposit pricing policies and changes in the mix of various types of assets and liabilities. The company also forecasts its sensitivity to interest rate changes using modeling software. For more information on asset-liability management, see the annual report on Form 10-K filed with the Securities and Exchange Commission.

Provision and Allowance for Loan Losses

The provision for loan losses is the charge to operating earnings that management believes is necessary to maintain the allowance for possible loan losses at an adequate level. The provision charged to expense was $1,269,000 for the nine months ended September 30, 2008, as compared to $196,000 for the nine months ended September 30, 2007. The provision charged to expense for the quarter ended September 30, 2008 was $250,000, as compared to $181,000 for the quarter ended September 30, 2007. Of the $1,269,000 provision during the first nine months of 2008, $737,000 was due to specific reserves on one SBA loan and three residential construction borrowers, $292,000 was due to providing a general reserve increase on loan portfolio growth, and the remaining $240,000 was the result of management's assessment of overall portfolio credit quality and other economic factors. The loan portfolio, net of provision for loan losses, increased by $28,757,000 during the nine months ended September 30, 2008 from $277,638,000 at December 31, 2007. The allowance for loan losses totaled $4,474,000, or 1.44% of gross loans outstanding at September 30, 2008, as compared to $3,653,000, or 1.30% of gross loans outstanding at December 31, 2007.

There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. We maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which we believe to be reasonable, but which may not prove to be accurate.

Noninterest Income

Noninterest income for the nine months ended September 30, 2008 totaled $4,056,000, as compared to $1,450,000 for the nine months ended September 30, 2007. The largest single factor behind the increase was the $2,438,000 gain on sale of residential mortgage loans of which $2,298,000 was generated by the wholesale mortgage banking division during the first nine months of 2008. This division was not in operation during the first eight months of 2007, so nearly the entire gain on sale of residential mortgage loans in 2008 reflects a year over year increase. Also, swap transactions of securities available for sale were completed in March and September 2008 to reduce the duration extension risk and market value risk in a rising interest rate environment. In addition to lowering the risk profile on securities available for sale, the swap transactions resulted in recognition of a non-recurring gain of $219,000. Finally, service charges on deposit accounts increased $210,000 during the nine months ended September 30, 2008 to $545,000 compared to $335,000 for the same period in 2007 reflecting changes to fee levels and policies adopted in November 2007.

Noninterest income for the three months ended September 30, 2008 totaled $1,332,000, as compared to $407,000 for the three months ended September 30, 2007. As with the comparison above, the largest increase in noninterest income between the same quarters year over year was caused by the $817,000 gain on sale of residential mortgage loans of which $783,000 was generated by the wholesale banking division during the three months ended September 30, 2008. The Bank also generated a $177,000 gain on the sale of SBA Loans during the three months ended September 30, 2008 that represented a near doubling of the $92,000 gain on the sale of SBA Loans during the same period in 2007. The final significant increase in noninterest income occurred in service charges on deposit accounts which were $72,000 higher during the three months ended September 30, 2008 at $191,000 when compared to $119,000 for the same period in 2007.

Noninterest Expense

Total noninterest expense for the nine months ended September 30, 2008 was $10,803,000, as compared to $7,991,000 for the same period in 2007. The largest single factor behind this increase was the $2,241,000 in noninterest expenses incurred by the wholesale mortgage banking division during the first nine months of 2008. This division was not in operation during the first eight months of 2007, so most of the noninterest expense incurred by the wholesale mortgage banking division reflects a year over year increase. The other significant factor in the year over year increase in noninterest expense was the impact of a one-time charge of $508,000 to salaries and employee benefits to recognize the retirement benefits due to Mr. Randy Kohn upon his retirement as President of the Company on April 30, 2008. Excluding the impact of the wholesale mortgage banking expenses and the non-recurring retirement benefits charge, noninterest expense was $8,049,000 for the first nine months of 2008, an increase of $57,000 or 0.72% from the same period in 2007.

Total noninterest expense for the three months ended September 30, 2008 was $3,427,000, as compared to $2,787,000 for the same period in 2007. As with the above comparison, the largest contributor to this increase was the $738,000 in increased noninterest expenses, for the same quarter's year over year, incurred by the wholesale mortgage banking division during the three months ended September 30, 2008. Excluding the impact of the wholesale mortgage banking expenses in both 2007 and 2008, noninterest expense was $2,601,000 and $2,700,000 for the three months ended September 30, 2008 and 2007, respectively, for a decrease of $99,000 or 3.66% from the same period in 2007.

Wholesale Mortgage Banking Division

The wholesale mortgage banking division began operations in September 2007, so comparisons of the results during the three and nine months ended September 30, 2008 to the same periods in 2007 are not meaningful. The primary source of direct income generated by this division is the gain on sale of mortgage loans which was $783,000 and $2,298,000 for the three and nine months ended September 30, 2008, respectively. The direct noninterest expenses incurred by the wholesale division were $826,000 and $2,241,000 for the three and nine months ended September 30, 2008, respectively.

Beyond the impact of the noninterest income and expense from this division, the Bank earns interest income at the respective note rates on the balance of loans originated by the division from the time the loan is funded until it is sold to a secondary market investor. The average outstanding daily balance of wholesale residential mortgage loans available for sale was $22,231,000 for the nine months ended September 30, 2008 and $21,834,000 for the three months ended September 30, 2008. The interest income earned on these loans available for sale was $337,000 and $979,000 during the three and nine months ended September 30, 2008, respectively.

Income Taxes

The income tax benefit for the nine months ended September 30, 2008 was $231,000 compared to an income tax expense of $997,000 for the same period in 2007. Income tax expense was $30,000 for the quarter ended September 30, 2008 compared to income tax expense of $210,000 for the same period in 2007. The effective tax rate was (136%) for the nine months ended September 30, 2008 and 11% for the three months ended September 30, 2008. The effective tax rate was 35% for the three and nine months ended September 30, 2007. The effective tax rates are unusual because of the impact of permanent book-to-tax differences from tax exempt income on bank owned life insurance and municipal securities. The tax benefit from these tax preference items is relatively large when compared to the lower level of earnings, which results in an unusually high effective tax benefit rate.

Net Income

The impact of the factors described above resulted in net income of $61,000 for the nine months ended September 30, 2008, compared to net income of $1,854,000 for the nine months ended September 30, 2007. The net income for the quarter ended September 30, 2008 was $251,000 compared to net income of $384,000 for the quarter ended September 30, 2007.

The basic and diluted earnings per share was $.02 for the nine months ended September 30, 2008, compared to basic and diluted earnings per share of $0.73 and $0.68, respectively, for the same period in 2007. For the three months ended September 30, 2008 the basic and diluted earnings per share was $.10, compared to basic and diluted earnings per share of $.15 and $.14, respectively, for the same period in 2007.

Financial Condition

As of September 30, 2008, total assets increased $9,691,000, or 2.25%, when compared to December 31, 2007. The primary source of growth in assets was in the loan portfolio, which increased $29,578,000, or 10.52%, as of September 30, 2008. This was partially offset by a decrease in investment securities available for sale of $18,422,000, or 21.13%, as of September 30, 2008. Total liabilities increased $10,206,000, or 2.65%, as of September 30, 2008 when compared to December 31, 2007. The primary source of growth in liabilities was in time deposits, which increased $15,025,000, or 6.99%, as of September 30, 2008.

Investment Securities

Investment securities available for sale decreased to $68,749,000 at September 30, 2008 from $87,171,000 at December 31, 2007. This decrease was due to scheduled calls and maturities of investment securities. The only investment securities that were sold during the first nine months of 2008 were concurrently replaced with purchases of securities at similar values as part of a swap transaction. The purpose of these transactions was to reduce the duration extension risk and market value risk exposure in the event of an upward movement in interest rates. During September 2008, the Company purchased a $2 million corporate bond, which will receive interest payments at an annual rate of 6.05% and is scheduled to mature on September 15, 2011. The Company has elected to hold the corporate bond to maturity.

Premises and Equipment

Premises and equipment, net of depreciation, totaled $7,913,000 at September 30, 2008. The decrease of $263,000 from the December 31, 2007 amount of $8,176,000 was due to regular depreciation of assets.

Loans

Gross loans totaled $310,869,000 at September 30, 2008, an increase of $29,578,000, or 10.52%, as compared to December 31, 2007. The Bank has undertaken a targeted shift in its loan concentrations, reducing the emphasis on construction lending in favor of permanent financing loans. The result of this strategy was a decline in residential real estate construction and commercial real estate construction loans of $23,951,000 or 18.48% from $129,607,000 at December 31, 2007 to $105,656,000 at September 30, 2008. At the same time, the bank experienced an increase in residential real estate loans of $39,033,000 or 56.76%, to $107,805,000 at September 30, 2008, and an increase in commercial real estate loans of $13,540,000 or 19.83% to $81,821,000 at September 30, 2008. Balances within the major loans receivable categories as of September 30, 2008 and December 31, 2007 were as follows:

                                                   September 30,
                                                        2008                  December 31, 2007
Commercial and financial                           $    9,554,000     $                       10,235,000
Agricultural                                              570,000                                519,000
Real estate - construction, commercial                 92,477,000                            111,988,000
Real estate - construction, residential                13,179,000                             17,619,000
Real estate - mortgage, farmland                           92,000                                 94,000
Real estate - mortgage, residential                   107,805,000                             68,772,000
Real estate - mortgage, commercial                     81,821,000                             68,281,000
Consumer installment loans                              5,109,000                              2,626,000
Other                                                     262,000                              1,157,000
Gross loans                                        $  310,869,000     $                      281,291,000

Risk Elements in the Loan Portfolio

The following is a summary of risk elements in the loan portfolio:


                                                  September 30, 2008       December 31, 2007
Loans: Nonaccrual loans                          $          9,693,000     $       2,018,000
Accruing loans more than 90 days past due        $            128,000     $            69,000
Other real estate and repossessions              $          2,084,000     $           319,000
Other loans identified by internal review
mechanism as impaired                            $          1,325,000      $        1,561,000

Activity in the Allowance for Loan Losses is as follows:

                                                               September 30,
                                                           2008            2007
  Balance, January 1,                                  $   3,653,000       3,475,000
  Provision for loan losses for the period                 1,269,000         196,000
. . .