The Company has experienced steady growth. Over the past four years, assets grew from $706.5 million at December 31, 2004 to $1.4 billion at December 31, 2008. From year end 2004 to year end 2008, loans increased $511.6 million, and deposits increased $582.8 million. Net interest income for the year ended 2004 was $25.7 million compared to net interest income of $40.2 million in 2008. The Company has paid cash dividends of $0.13 per share each quarter since 2004.
The Company meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of investment securities, principal repayments received from mortgage backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Company funds loan and investment growth with core deposits, securities sold under repurchase agreements and Federal Home Loan Bank advances. During inflationary periods, interest rates generally increase and operating expenses generally rise. When interest rates rise, variable rate loans and investments produce higher earnings; however, deposit and other borrowings interest expense also rise. The Company monitors its interest rate risk as it applies to net income in a ramp up and down annually 200 basis points (2%) scenario and as it applies to economic value of equity in a shock up and down
200 (2%) basis points scenario. The Company monitors operating expenses through responsibility center budgeting. See "Interest Rate Sensitivity" below. Critical Accounting Estimates
The accounting and financial reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Of these policies, management has identified the allowance for loan losses as a critical accounting estimate that requires difficult, subjective judgment and is important to the presentation of the financial condition and results of operations of the Company.
The allowance for loan losses is established through a provision for loan losses charged to expense, which affects the Company's earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred losses in the portfolio at the reporting date, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower's ability to repay.
The Company segments its allowance for loan losses into the following three major categories: 1) identified losses for impaired loans; 2) general allocation for Classified/Watch rated loans; and 3) general allocation for loans with satisfactory ratings. Risk ratings are initially assigned in accordance with the Company's loan and collection policy. An organizationally independent department reviews grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers' financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based upon the present value of future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if collection of the loan is deemed to be dependent upon the collateral. Regulatory guidance is also considered. Cash receipts for accruing

loans are applied to principal and interest under the contractual terms of the loan agreement; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are generally applied first to principal and then to interest income depending upon the overall risk of principal loss to the Company. Impaired and Classified/Watch rated loans are aggressively monitored. The allocation for loans rated satisfactory is further subdivided into various types of loans as defined by regulatory reporting codes. The Company's management also gives consideration to subjective factors such as, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, and competitive factors in the local market. These factors represent uncertainties in the Company's business environment and are included in the various individual components of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. The loan portfolio is comprised of 86.3% real estate loans; 10.9% commercial, financial and agricultural loans; and 2.8% consumer loans. Commercial real estate comprises 26.5% of the loan portfolio, and of these loans 53.9% are owner occupied properties where the operations of the commercial entity provide the necessary cash flow to service the debt. For this portion of the real estate loan portfolio, repayment is not dependent upon the sale of the real estate held as collateral. Construction and development loans, 36.8% of the portfolio, have been an increasingly important portion of the real estate loan portfolio. The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the sale of the real estate in the normal course of business and can be impacted by national and local economic conditions. The residential category, 21.2% of the portfolio, represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons and commercial loans secured by residential real estate. The residential held for sale category, 1.9% of the portfolio, comprises loans that are in the process of being sold into the secondary market. In these loans, the credit has been approved by the investor and the interest rate locked so that the Company minimizes credit and interest rate risk with respect to these loans. The Company has no large loan concentrations to individual borrowers. Unsecured loans at December 31, 2008 were $17.2 million. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may advise additions to the allowance based on their judgments about information available to them at the time of their examination. Such regulatory guidance is considered, and the Company may recognize additions to the allowance as a result.
Please see "Provision for Loan Losses, Net Charge-offs, and Allowance for Loan Losses" and "Non-Performing Assets" for a further discussion of the Company's loans, loss experience, and methodology in determining the allowance. Results of Operations
Total assets increased $198.1 million, or 16.3% in 2008 compared to year end 2007, primarily due to growth in loans, available for sale investment securities and federal funds sold. Asset growth included the purchase of a $29.7 million portfolio of loans in the Athens, Georgia market. The Company recorded net income of $7.6 million in 2008, a 35.6% decrease over 2007. The decrease in net income is primarily attributable to a $5.2 million increase in provision for loan losses associated with increased levels of nonperforming assets and loan chargeoffs. Loan chargeoffs increased $4.2 million and resulted primarily from segments of the Company's acquisition development and construction loan portfolio ("ADC") outside of its primary market. In particular, loans participated with other banks on properties in the metro Atlanta market as well as ADC loans in the Athens and Savannah Georgia markets experienced a level of charge offs higher than that experienced in the

Company's primary market area of the Augusta-Richmond County, GA-SC metropolitan statistical area (MSA).
Interest income decreased $3.5 million or 4.4% to $75.7 million in 2008. Interest income on loans, including loan fees, was the principal contributor, representing a decrease of $4.7 million over 2007. This was primarily the result of a decline in average yield on loans from 8.16% in 2007 to 6.46% in 2008. During 2008, the Federal Reserve reduced rates by 400bp causing a corresponding reduction in the prime lending rate from 7.25% to 3.25%. Declining yields more than offset the $123.0 million in loan growth for the Company in 2008. Interest income on investment securities increased $1.8 million in 2008 as a result of a $27.7 million increase in the annual average balance of the investment portfolio in 2008. Noninterest income increased $537 in 2008. Significant changes to noninterest income in 2008 include an $882 increase in service charges and fees on deposits related to new account growth, a $562 increase in gain in sale of loans somewhat offset by a decrease in gain on sale of fixed assets of $1.0 million.
Interest expense decreased $5.4 million to $35.5 million in 2008. The Company had total deposit growth of $187.4 million, or 19.7% in 2008. Interest expense on deposits decreased $3.1 million to $30.0 million primarily due to significantly lower interest rates somewhat offset by the growth of deposits. The most significant increase was in time deposits with a $208.7 million balance increase over 2007 year end with a corresponding $2.5 million increase in interest expense. Included in this category are brokered CDs which increased from $78.5 million at year end 2007 to $244.5 million at year end 2008. Noninterest expense increased $4.2 million or 13.1% in 2008. Salaries and other personnel expense increased $1.5 million primarily as a result of additional employees in 2008 related to the Company's continued growth and expansion into new markets. Premises and equipment expense increased $916 or 26.5% from 2007 due to increased depreciation expense and expenses associated with the Company's new operations center in Martinez, Georgia and the full year operation of two branch offices and a loan production office in Greenville, South Carolina. Other operating expenses increased $1.8 million with the most significant increases reflected in FDIC insurance premiums, data processing expense and professional fees. The Company continues to monitor operating expenses and uses responsibility center budgeting to assist in this endeavor. The operating efficiency ratio of 64.52% in 2008 is a 3.88% increase from 2007.
The earnings performance of the Company is reflected in its return on average assets and average equity of 0.57% and 8.48%, respectively, during 2008 compared to 1.04% and 14.03%, respectively, during 2007. Basic net income per share on weighted average common shares outstanding declined to $1.27 in 2008 compared to $1.97 in 2007 and $1.91 in 2006. Diluted net income per share on weighted average common and common equivalent shares outstanding declined to $1.26 in 2008 compared to $1.95 in 2007 and $1.89 in 2006. The Company has paid cash dividends of $0.13 per share each quarter since 2004. Net Interest Income
The primary source of earnings for the Company is net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The following table shows the average balances of interest-earning assets and interest-bearing liabilities, average yields earned and rates paid on those respective balances, and the resulting interest income and interest expense for the periods indicated. Average balances are calculated based on daily balances, yields on non-taxable investments are not reported on a tax equivalent basis and average balances for loans include nonaccrual loans even though interest was not earned.

                                             Average Balances, Income and Expenses, Yields and Rates

                                   Year Ended Dec. 31, 2008                           Year Ended Dec. 31, 2007                         Year Ended Dec. 31, 2006
                                              Average         Amount                             Average         Amount                         Average         Amount
                            Average          Yield or        Paid or           Average          Yield or        Paid or         Average        Yield or        Paid or
                             Amount            Rate           Earned           Amount             Rate           Earned         Amount           Rate           Earned
                                                                               (Dollars in thousands)
ASSETS
Interest-earning
assets:
Loans                     $    952,800            6.46 %     $ 61,568       $     811,509            8.16 %     $ 66,219       $ 664,101            8.18 %     $ 54,338
Investments
Taxable                        239,253            5.38 %       12,875             209,082            5.27 %       11,023         189,321            5.09 %        9,633
Tax-exempt                      16,266            4.40 %          716              18,734            4.27 %          800          24,658            4.18 %        1,030
Federal funds sold              29,916            1.57 %          470              21,434            5.19 %        1,112          12,248            4.90 %          600
Interest-bearing
deposits in other
banks                            2,557            1.80 %           46                 506            5.34 %           27             612            4.08 %           25

Total
interest-earning
assets                       1,240,792            6.10 %     $ 75,675           1,061,265            7.46 %     $ 79,181         890,940            7.37 %     $ 65,626

Cash and due from
banks                           22,846                                             25,624                                         19,977
Premises and
equipment                       33,584                                             26,676                                         22,242
Other                           34,581                                             30,527                                         27,486
Allowance for loan
losses                         (13,419 )                                          (11,029 )                                       (9,530 )

Total assets              $  1,318,384                                      $   1,133,063                                      $ 951,115

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW accounts              $    147,227            1.46 %     $  2,149       $     127,093            2.30 %     $  2,926       $ 114,021            2.00 %     $  2,277
Savings and money
management accounts            353,719            2.52 %        8,912             341,097            4.04 %       13,788         305,186            3.93 %       11,996
Time deposits                  446,434            4.25 %       18,956             317,298            5.18 %       16,433         213,889            4.59 %        9,826
Federal funds
purchased /
securities sold under
repurchase agreements           60,629            2.17 %        1,317              65,735            5.03 %        3,305          62,451            4.93 %        3,079
Other borrowings                98,741            4.21 %        4,155              79,250            5.65 %        4,480          75,034            5.66 %        4,245

Total
interest-bearing
liabilities                  1,106,750            3.21 %       35,489             930,473            4.40 %       40,932         770,581            4.08 %       31,423

Noninterest-bearing
demand deposits                109,818                                            108,470                                        102,032
Other liabilities               12,479                                             10,270                                          9,185
Stockholders' equity            89,337                                             83,850                                         69,317

Total liabilities and
stockholders' equity      $  1,318,384                                      $   1,133,063                                      $ 951,115


Net interest spread                               2.89 %                                             3.06 %                                         3.29 %
Benefit of
noninterest sources                               0.35 %                                             0.54 %                                         0.55 %
Net interest
margin/income                                     3.24 %     $ 40,186                                3.60 %     $ 38,249                            3.84 %     $ 34,203

Comparing 2008 to 2007, interest earning asset yields declined sharply, decreasing 136 basis points while interest bearing liability rates declined only 119 basis points. As a result the Company's average interest rate spread declined to 2.89% in 2008 as compared to 3.06% in 2007. The year over year decline in asset yields and liability costs were a result of decreased market interest rates. The Federal Reserve Board decreased its target Federal Funds rate seven times totaling 400 basis points during 2008. As a result, the prime interest rate dropped from 7.25% at year end 2007 to 3.25% at year end 2008. A significant portion of the Company's loan portfolio adjusts immediately to these changes in rates while deposit liabilities typically lag. In addition, the yield on federal funds sold declined 362 basis points and negatively impacted overall asset yields. These factors contributed to the net interest margin declining from 3.60% in 2007 to 3.24% in 2008.
The increase in average loans of $141.3 million, average investments of $27.7 million and average federal funds sold of $8.5 million were funded by increases in average interest bearing deposits of $161.9 million and Federal Home Loan Bank borrowings of $19.5 million, offset in part by

decreases in federal funds purchased and securities sold under repurchase agreements of $5.1 million. For 2008, average total assets were $1.3 billion, a 16.4% increase over 2007. Average interest-earning assets for 2008 were $1.2 billion, or 94.1% of average total assets.
Interest income is the largest contributor to income. Interest income on loans, including loan fees, decreased $4.7 million from 2007 to $61.6 million in 2008. Declining interest rates on variable rate loans accounted for approximately $14 million reduction in interest but was offset by approximately $12.0 million due to increased balances of loans. Affecting the overall yield on loans was $29.2 million increase in non accrual loans which resulted in reversal of interest income of $1.0 million for the year ended 2008. Investment income increased $1.8 million to $13.6 million primarily as a result of higher volume and slightly higher investment yields in 2008. Interest income on federal funds sold decreased as the result of a 400 basis point decrease in the Federal Funds rate during 2008. Interest expense on deposits decreased $3.1 million from 2007 to $30.0 million in 2008. Declining interest rates paid on deposits more than offset the additional interest due to growth. The mix of interest bearing deposits also affects the interest rate spread. During 2008 the proportion of higher cost time deposits as a percent of interest bearing liabilities increased from 34% to 40% while lower cost money management and savings accounts decreased from 37% to 32%. The overall result was an increase in net interest income of $1.9 million or 5.1% in 2008 from 2007. Average yields on interest-earning assets were 6.10% in 2008, compared to 7.46% in 2007.
Net interest income increased $4.0 million in 2007 compared to 2006 as a result of the growth in the volume of average earning assets and an increase in interest rates. Interest earning assets averaged $1.1 billion in 2007, an increase of 19.1%, from the $890.9 million averaged in 2006. Average yields on earning assets increased to 7.46% in 2007, compared to 7.37% in 2006.
A key performance measure for net interest income is the "net interest margin", or net interest income divided by average interest-earning assets. Unlike the "net interest spread" (the difference between interest rates earned on assets and interest rates paid on liabilities), the net interest margin is affected by the level of non-interest sources of funding used to support interest-earning assets. The Company's net interest margin decreased to 3.24% in 2008 from 3.60% in 2007. In 2006, the net interest margin was 3.84%. The net interest margin deteriorated in 2008 as the average rate paid on interest-bearing deposits decreased less than the average rate on interest-earning assets. The high level of competition in the local market for both loans and particularly deposits continues to influence the net interest margin. The net interest margin continues to be supported by demand deposits which provide a noninterest-bearing source of funds. The Company's marketing efforts continue to be focused on increasing demand deposits and NOW accounts to help prevent further deterioration in the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing sources of funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in interest rates in 2008, the net interest spread decreased 17 basis points to 2.89% in 2008. The 2007 net interest spread of 3.06% also represented a decrease from 2006's 3.29%.
Changes in the net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases in the average rates earned and paid on such assets and liabilities, the ability to manage the earning asset portfolio, and the availability of particular sources of funds, such as noninterest-bearing deposits. The following table: "Analysis of Changes in Net Interest Income" indicates the changes in the Company's net interest income as a result of changes in volume and rate from 2008 to 2007, and 2007 to 2006. The analysis of changes in net interest income included in the following table indicates that on an overall basis in 2008 to 2007, the increase in the balances or volumes of interest-earning assets created a positive impact in

net income. This was somewhat offset by the impact of increased volumes of interest-bearing liabilities. The rate environment of 2008 resulted in significant rate decreases on interest-earning assets and interest-bearing liabilities. In 2007 to 2006, the increase in the balances or volumes of interest-earning assets created a positive impact in net income which was partially offset by the impact of increased volumes of interest-bearing liabilities. Rising rates in 2007 resulted in rate increases on interest-bearing liabilities that exceeded rate increases on interest-earning assets.

. . .