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. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements.

Certain accounting policies involve significant judgments and assumptions by management which 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 nature 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 loans 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 specific 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. See Notes 1 and 3 of the Notes to the Consolidated Financial Statements included in this annual report for a detailed description of the Corporation's estimation process and methodology related to allowance for loans losses.

Average Balances, Interest and Average Yields/Cost

The following table sets forth certain information for the periods indicated
regarding: (1) average balances of assets and liabilities; (2) the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities; and (3) average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented.

                                                                                Years Ended December 31,
                                             2008                                         2007                                         2006
                            Average                       Average        Average                       Average        Average                       Average
                            Balance       Interest      Yield/Cost       Balance       Interest      Yield/Cost       Balance       Interest      Yield/Cost
                                                                                 (Dollars in thousands)
Interest-earning assets:
Loans receivable, net
(1)                        $ 275,238     $   17,230            6.26 %   $ 240,192     $   19,048            7.93 %   $ 211,799     $   16,924            7.99 %
Mortgage-backed
securities                    50,255          2,710            5.39        30,059          1,492            4.96        24,249          1,041            4.29
Investment securities:
Taxable                       41,147          2,319            5.64        83,833          4,708            5.62        96,489          4,738            4.91
Nontaxable                     9,991            471            4.71        12,906            603            4.67        15,860            736            4.64
Total investment
securities                    51,138          2,790            5.46        96,739          5,311            5.49       112,349          5,474            4.87
Deposits and federal
funds sold                     4,364             55            1.26         3,413            158            4.63         1,117             52            4.66
Total interest-earning
assets                       380,995         22,785            5.98       370,403         26,009            7.02       349,514         23,491            6.72
Non-interest-earning
assets                        31,509                                       29,752                                       24,569
Total assets               $ 412,504                                    $ 400,155                                    $ 374,083

Interest-bearing
liabilities:
Savings accounts              12,888             83            0.64        14,486            111            0.77        16,137            106            0.66
Negotiable order of
withdrawal accounts (2)       83,966          2,147            2.55        74,326          2,426            3.26        74,411          2,339            3.14
Certificate accounts         164,077          6,729            4.10       155,490          7,295            4.69       137,663          5,291            3.84
FHLB advances and other
borrowings                   104,496          4,247            4.06       107,823          5,382            4.99       103,034          5,231            5.08
Total interest-bearing
liabilities                  365,427         13,206            3.61       352,125         15,214            4.32       331,245         12,967            3.91

Noninterest-bearing
sources:
Non-interest-bearing
deposits                      16,807                                       18,288                                       15,397
Non-interest-bearing
liabilities                    3,026                                        3,007                                        2,183
Total liabilities            385,260                                      373,420                                      348,825
Shareholders' equity          27,244                                       26,735                                       25,258
Total liabilities and
shareholders' equity       $ 412,504                                    $ 400,155                                    $ 374,083

Net interest income                      $    9,579                                   $   10,795                                   $   10,524
Interest rate spread (3)                                       2.37 %                                       2.70 %                                       2.81 %
Impact of
noninterest-bearing
sources                                                        0.14                                         0.21                                         0.20
Net interest margin (4)                                        2.51 %                                       2.91 %                                       3.01 %
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    1.04x                                        1.05x                                        1.06x


________________________________

(2) Average costs include the affects of non-interest bearing deposits.

(3) Represents difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities.

(4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Corporation for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by prior rate) and (2) changes in rate (changes in rate multiplied by prior volume). The net change attributable to the combined impact of rate and volume has been allocated to rate and volume variances consistently on a proportionate basis.

                                       Years Ended December 31,
                                             2008 vs. 2007
                                  Volume         Rate          Total
                                        (Dollars in Thousands)
Change in interest income:
Loans                           $    2,779     $  (4,597 )   $   (1,818 )
Mortgage-backed securities           1,002           216          1,218
Investment securities (1)           (2,438 )        (186 )       (2,624 )
   Total interest income             1,343        (4,567 )       (3,224 )

Change in interest expense:
Deposits                               567        (1,440 )         (873 )
Borrowings and other                  (166 )        (969 )       (1,135 )
   Total interest expense              401        (2,409 )       (2,008 )

Change in net interest income   $      942     $  (2,158 )   $   (1,216 )


________________________________

Results of Operations

Comparison of Years Ended December 31, 2008 and December 31, 2007

The Corporation recorded a net loss for year ended December 31, 2008 of approximately $397,000 compared to net income of approximately $2.2 million for the year ended December 31, 2007. Net loss per share was ($0.22) per share
(basic) and ($0.22) per share (diluted) for the year ended December 31, 2008 compared to $1.21 per share (basic) and $1.19 per share (diluted) for the year ended December 31, 2007. Net interest income before the loan loss provision for the year ended December 31, 2008 decreased $1.2 million, or 11.3%, to $9.6 million compared to $10.8 million for the previous year. The decrease 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 non-performing loans, classified loans and charge-offs, offset by an increase in non-interest income and a reduction in non-interest expense.

Interest Income. Total interest income decreased $3.2 million, or 12.4%, from $26.0 million for the year ended December 31, 2007 to $22.8 million for the year ended December 31, 2008. Interest income on loans decreased $1.8 million, or 9.5%, from $19.0 million for 2007 to $17.2 million for 2008 due primarily to declining market rates, offset by higher average balance of loans. The Corporation's continued focus on variable and prime-based lending resulted in net growth in consumer and commercial real estate loans of 12.6% while residential mortgage loans declined 2.9%. Interest income on deposits, federal funds sold and investment securities decreased $1.4 million, or 20.2%, from $7.0 million for 2007 to $5.6 million for 2008. The decrease was due primarily to lower average balances as proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans, offset by higher investment yields.

Interest Expense. Interest expense decreased 13.2% to $13.2 million for 2008 from $15.2 million for 2007. Interest expense decreased $873,000 for deposits and decreased $1.1 million for other borrowings and floating rate junior subordinated deferrable interest debentures. Interest expense for deposits decreased due primarily to lower market interest rates, offset by higher average balances. Interest expense on other borrowings decreased due to lower market interest rates and lower average balances.

Provision for Loan Loss. Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for estimated loan losses based on management's evaluation of the collectibility of the loan portfolio. The allowance for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is risk rated for all loans including performing groups. The weight assigned to each performing group is developed from a three-year historical average loan loss experience ratio and as the loss experience changes, the category weight is adjusted accordingly. In addition to loan loss experience, management's evaluation of the loan portfolio includes the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically, and the allowance for loan losses is adjusted accordingly. Consumer and commercial loans carry higher risk weighted rates in the allowance calculation as compared to residential mortgage loans. See "Item 1-Business Lending Activities-Allowance for Loan Losses" for more information on the determination of the allowance for loan losses.

The provision for loan losses increased from $1.1 million for 2007 to $4.2 million for 2008 primarily due to: (1) an increase in non-performing and classified assets; (2) increased growth, primarily in commercial real estate and consumer loans, which carry a higher risk of default than one-to four-family residential mortgage loans; and (3) an increase in charge-offs. The allowance for loan losses increased $3.4 million to $6.8 million as of December 31, 2008 compared to $3.3 million as of December 31, 2007. Non-performing assets increased $12.9 million from $3.8 million at December 31, 2007 to $16.7 million at December 31, 2008. The majority of this increase relates primarily to four commercial real estate relationships totaling $10.7 million that have been affected by the downturn in the residential housing market. Slow housing conditions have affected these borrowers's ability to sell the completed projects in a timely manner. The Corporation considers all non-accrual loans to be impaired. Therefore, at December 31, 2008, loans classified as impaired under FASB 114 totaled $16.0 million and carried a specific reserve of $3.5 million. Management believes the specific reserves allocated to these and other non accrual loans will offset losses, if any, arising from less than full recovery of the loans from the supporting collateral. Management continues to evaluate and assess all nonperforming assets on a regular basis as part of its well-established loan monitoring and review process. Total classified loans, including non-performing loans, increased $27.1 million to $36.1 million as of December 31, 2008 compared to $9.0 million as of December 31, 2007. The majority of this increase relates primarily to commercial real estate relationships that have been affected by the current economic downturn.

The Corporation experienced loan charge-offs, net of recoveries, of approximately $776,000 for 2008 compared to $476,000 for 2007. The loan charge-offs for 2008 related primarily to write-downs required in the disposition of commercial loans. The allowance for loan losses to total loans at December 31, 2008 was 2.36% compared to 1.28% at December 31, 2007. The allowance for loan losses to non-performing loans at December 31, 2008 was 40.6% compared to 88.37% at December 31, 2007.

Non-Interest Income. Non-interest income increased 16.5% to $3.7 million for the year ended December 31, 2008 from $3.2 million for the year ended December 31, 2007. Fees for financial services increased $73,000 to $3.1 million, primarily due to higher fees as a result of an increase in transaction accounts, offset by lower fees generated from third party investment brokerage and financing receivables programs as a result of lower product volumes. Gain on sale of investments were $498,000 for 2008 as the Corporation sold $30.9 million in investment securities to improve yield spreads and to fund growth in higher-yielding loans.

Non-Interest Expense. Non-interest expense decreased 1.2% to $10.0 million for the year ended December 31, 2008 from $10.2 million for the year ended December 31, 2007. Compensation and employee benefits decreased .08%, or $4,000, compared to the year ended December 31, 2007 due primarily to reductions in accrued incentive compensation expense and reductions in employee pension benefit costs, offset by normal merit salary increases. Occupancy and equipment expenses decreased 2.1%, or $52,000, due to the closing of a banking center in the previous year. Deposit insurance premiums expense increased $70,000, or 233.3%, to $100,000 for 2008 from $30,000 for 2007, due to higher FDIC premium assessments as a result of a one-time assessment credit under the Federal Insurance Reform Act becoming fully utilized. Professional services expense decreased 22.1%, or $102,000, due primarily to lower legal and consultant expenses. Advertising and public relations expense decreased 11.6%, or $29,000, from the year ended December 31, 2007 to the year ended December 31, 2008 due primarily to lower product and promotion expenses. Loan operations costs increased $36,000, or 24.0%, to $186,000 for the year ended December 31, 2008 from $150,000 for the year ended December 31, 2007, due to higher disposition costs associated with foreclosed real estate properties. Intangible amortization expense decreased $64,000, or 13.3%, to $416,000 for the year ended December 31, 2008 from $480,000 for 2007, due to deposit premiums related to branch acquisitions becoming fully amortized. Items processing expense increased $38,000, or 17.2%, to $259,000 for the year ended December 31, 2008 from $221,000 for the year ended December 31, 2007 due to an increase in transaction accounts. Other operating expense decreased 1.5%, or $14,000, for the year ended December 31, 2008 compared to the year ended December 31, 2007 due primarily to lower postage and office supply expense.

Income Tax Expense. Due to the net loss that the Corporation recorded for the year ended December 31, 2008, the net income tax benefit was $596,000 compared to a net income tax expense of $534,000 for the year ended December 31, 2007 with an effective income tax rate of 19.60%.

Financial Condition, Liquidity and Capital Resources

Financial Condition

Assets. At December 31, 2008, the Corporation's assets totaled $434.2 million, an increase of $26.6 million, or 6.5%, as compared to $407.6 million at December 31, 2007. Cash and due from banks increased $9.5 million to $21.4 million from $11.9 million at December 31, 2007. The increase was due primarily to an increase in overnight deposits as a result of significant deposit growth in the last month of the fiscal year. Investment and mortgage-backed securities decreased $8.3 million to $102.8 million from $111.2 million at December 31, 2007 as proceeds from the maturity and sale of investment securities were utilized to fund growth in higher-yielding loans. The Corporation increased its level of mortgage-backed securities by $12.2 million to $57.4 million with reductions in municipal and government sponsored enterprises securities due to cash flow liquidity generated with the securities along with lower risk weights required for risk-based capital.

Total loans, net, increased $22.2 million, or 8.6%, to $278.7 million at December 31, 2008 from $256.5 million at December 31, 2007. The Corporation continues to focus on originating higher yielding consumer and commercial loans through the use of specialized loan officers and products that are intended to provide improvements in interest rate risk exposure. Consumer loans increased $5.2 million, or 9.9%, during 2008, commercial loans increased $23.5 million, or 13.0%, and residential mortgage loans decreased $3.6 million or 12.3%. Other assets increased $3.0 million, or 87.5%, to $6.5 million at December 31, 2008 from $3.4 million at December 31, 2007 due to an increase in deferred income taxes as a result of the $397,000 net loss in 2008 compared to the net income of $2.2 million for 2007.

Liabilities. Total liabilities increased $30.0 million, or 7.9%, to $410.3 million at December 31, 2008 from $380.3 million at December 31, 2007.

Total deposits increased $36.4 million, or 13.5%, from $270.4 million at December 31, 2007 to $306.8 million at December 31, 2008. Time deposits increased $25.5 million, or 15.8%, from $161.6 million at December 31, 2007 to $187.1 million at December 31, 2008 while transaction deposit accounts increased $10.9 million, or 10.1%, from $108.8 million at December 31, 2007 to $119.8 million at December 31, 2008. The increase in transaction accounts was due primarily to a special account promotion. The Corporation continues to target lower cost demand deposit accounts versus traditional higher cost certificates of deposits. The increase in deposits was utilized to fund the loan growth and to pay down borrowings for the year.

Shareholders' Equity. Shareholders' equity decreased $3.4 million, or 12.4%, to $23.9 million at December 31, 2008 from $27.3 million at December 31, 2007 due to a net loss of $397,000, a $1.9 million increase in unrealized losses on securities available for sale, the payment of $822,000 in dividends and $345,000 used to repurchase shares of the Corporation's common stock. During fiscal year 2003, the Corporation implemented a share repurchase program under which the Corporation may repurchase up to 5% of outstanding shares. The program was expanded by an additional 5% in fiscal 2004, 2005 and 2006. During 2008, the Corporation repurchased a total of 19,706 shares at a weighted average cost of $17.51 per share for a total of $345,000 compared to the repurchase of 53,119 shares at a weighted average cost of $20.65 per share for a total of $1.1 million for 2007. However, as part of the Company's participation in the Capital Repurchase Program of the U.S. Department of Treasury's Troubled Asset Repurchase Program, prior to the earlier of March 13, 2012 or the date on which the preferred stock issued in that transaction has been redeemed in full or the Treasury has transferred its shares to non-affiliates, the Company cannot increase repurchase any shares of its common stock, without the prior approval of the Treasury.

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 sales and repayments, borrowings, maturities, prepayment and sales 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 the utilization of FHLB advances. During the year ended December 31, 2008, the Corporation originated $89.6 million in loans and purchased $13.5 million in loan participations. At December 31, 2008, the Corporation's holdings of investment and mortgage-backed securities totaled $102.8 million, $100.4 million of which was available for sale. Approximately $80.6 million and $74.1 million of investment securities at December 31, 2008 and December 31, 2007, respectively, were pledged as collateral to secure deposits of the State of South Carolina, and Union, Laurens and York counties along with additional borrowings and repurchase agreements.

During the year ended December 31, 2008, total deposits increased $36.4 million. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Corporation and its local competitors and other factors. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from December 31, 2008, totaled $141.9 million. 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 competitive 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 external sources of funds are available through FHLB advances, lines of credit and wholesale deposits. At December 31, 2008, the Corporation had outstanding $69.5 million of FHLB borrowings and $19.0 million of securities sold under agreements to repurchase. At December 31, 2008, the Corporation had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $12.3 million and the ability to borrow an additional $15.0 million from 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.

See Note 14 to the Consolidated Financial Statements for further information about commitments and contingencies.

Capital Resources

At December 31, 2008, the Bank exceeded the OCC's and the FRB's capital requirements. See Note 16 to the Consolidated Financial Statements for further discussion of these capital requirements.

Off-Balance Sheet Arrangements

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. . . .