EXHIBIT 13

                       CORNERSTONE BANCORP AND SUBSIDIARY
                            Portions of Registrant's
                              2008 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2008 Form 10-K











<PAGE>


          CAUTIONARY NOTICE WITH RESPECT TO FORWARD LOOKING STATEMENTS

         Statements  included in this report which are not  historical in nature
are intended to be, and are hereby  identified as "forward  looking  statements"
for  purposes  of the safe  harbor  provided  by Section  21E of the  Securities
Exchange Act of 1934, as amended. Words such as "estimate," "project," "intend,"
"expect,"  "believe,"  "anticipate,"  "plan," "may," "will," "should,"  "could,"
"would," assume," "indicate,"  "contemplate," "seek," "target," "potential," and
similar expressions identify  forward-looking  statements.  The Company cautions
readers that forward looking  statements  including  without  limitation,  those
relating to the  Company's new offices,  future  business  prospects,  revenues,
working capital, adequacy of the allowance for loan losses,  liquidity,  capital
needs,   interest  costs,   and  income,   are  subject  to  certain  risks  and
uncertainties  that could cause actual results to differ from those indicated in
the forward looking  statements,  due to several important factors identified in
this report,  among others,  and other risks and factors identified from time to
time in the  Company's  other  reports  filed with the  Securities  and Exchange
Commission.

         These forward-looking statements are based on our current expectations,
estimates  and  projections  about  our  industry,   management's  beliefs,  and
assumptions made by management.  Such information includes,  without limitation,
discussions  as to estimates,  expectations,  beliefs,  plans,  strategies,  and
objectives concerning the Company's future financial and operating  performance.
These  statements  are not guarantees of future  performance  and are subject to
risks, uncertainties and assumptions that are difficult to predict, particularly
in light of the fact that the Company is a  relatively  new company with limited
operating  history.  Therefore,  actual results may differ materially from those
expressed  or  forecasted  in such  forward-looking  statements.  The  risks and
uncertainties include, but are not limited to:

          o    future economic and business conditions;
          o    the Company's growth and ability to maintain growth;
          o    governmental monetary and fiscal policies,
          o    legislative and regulatory changes;
          o    the effect of  interest  rate  changes  on our  level,  costs and
               composition of deposits,  loan demand, and the values of our loan
               collateral,   securities,   and  interest  sensitive  assets  and
               liabilities;
          o    the indirect  effects on demand for the  Company's  mortgage loan
               products  arising  from  effects  on the  overall  market  of the
               subprime mortgage loan situation;
          o    the  effects  of  competition  from  a  wide  variety  of  local,
               regional,  national and other providers of financial,  investment
               and insurance services, as well as competitors that offer banking
               products and services by mail,  telephone,  computer,  and/or the
               Internet;
          o    credit risks;
          o    higher than anticipated levels of defaults on loans;
          o    perceptions by depositors about the safety of deposits;
          o    failure of our customers to repay loans;
          o    failure  of  assumptions  underlying  the  establishment  of  the
               allowance  for loan  losses,  including  the value of  collateral
               securing loans;
          o    the risks of opening new offices, including,  without limitation,
               the related costs and time of building customer relationships and
               integrating  operations,  and the  risk  of  failure  to  achieve
               expected gains, revenue growth and/or expense savings;
          o    changes in accounting policies, rules, and practices;
          o    cost and  difficulty  of  implementing  changes in  technology or
               products;
          o    loss of consumer  confidence and economic  disruptions  resulting
               from terrorist activities;
          o    ability to weather the current economic downturn;
          o    loss of consumer or investor confidence; and
          o    other factors and information described in this report and in any
               of the other  reports we file with the  Securities  and  Exchange
               Commission under the Securities Act of 1934.
<PAGE>

         All  forward-looking   statements  are  expressly  qualified  in  their
entirety by this  cautionary  notice.  The Company  undertakes  no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new  information,   future  events  or  otherwise.  In  light  of  these  risks,
uncertainties,  and assumptions,  the  forward-looking  events discussed in this
report might not occur.

                               WEBSITE REFERENCES

         References  to the  Bank's  website  included  in, or  incorporated  by
reference  into,  this report are for  information  purposes  only,  and are not
intended to incorporate the website by reference into this report.

                             BUSINESS OF THE COMPANY

         Cornerstone Bancorp,  (the "Company") is a bank holding company and has
no  operations  other than those  carried  on by its  wholly  owned  subsidiary,
Cornerstone National Bank (the "Bank"). The Bank commenced business in 1999, and
conducts a general  banking  business  from three  offices in the Easley area of
Pickens County, in the Berea area of Greenville  County, and in the Powdersville
area of Anderson County, South Carolina.  In 2004, the Bank established a wholly
owned subsidiary,  Crescent Financial Services,  Inc. ("Crescent"),  which is an
insurance agency that has not yet engaged in any significant operations.


Services of the Bank

Deposits

         The Bank offers the full range of deposit services typically  available
in most banks and savings and loan  associations,  including  checking accounts,
NOW accounts,  retirement accounts (including  Individual  Retirement Accounts),
and savings and other time deposits of various  types,  ranging from daily money
market accounts to longer-term certificates of deposit. The transaction accounts
and  time  certificates  are  tailored  to the  principal  market  area at rates
competitive  with those offered in the area. All deposit accounts are insured by
the Federal  Deposit  Insurance  Corporation  ("FDIC") up to the maximum  amount
permitted by law. The Bank solicits these accounts from individuals, businesses,
associations and organizations, and government authorities.

Lending Activities

         The Bank  offers a range of  lending  services,  including,  commercial
loans,  consumer  loans,  and real estate  mortgage  loans. To address the risks
inherent in making  loans,  management  maintains an  allowance  for loan losses
based on, among other things,  an evaluation of the Bank's loan loss experience,
management's experience at other financial institutions in the market area, peer
data,  the amount of and  trends in past due and  nonperforming  loans,  current
economic conditions and the values of loan collateral.  Based upon such factors,
management   makes  various   assumptions   and  judgments  about  the  ultimate
collectibility  of the loan  portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and specific loans. However,
because   there  are  certain   risks  that  cannot  be  precisely   quantified,
management's judgment of the allowance is necessarily approximate and imprecise.
The adequacy and methodology of the allowance for loan losses is also subject to
regulatory examination.

Real Estate Loans

         One of the primary  components  of the Bank's loan  portfolio  is loans
secured by first or second  mortgages on residential and commercial real estate.
These loans generally consist of short to mid-term commercial real estate loans,
construction and development  loans and residential real estate loans (including
home  equity  and  second  mortgage  loans).  Interest  rates  may be  fixed  or
adjustable and the Bank frequently charges an origination fee. The Bank seeks to
manage credit risk in the commercial real estate portfolio by emphasizing  loans
on owner-occupied  office and retail buildings where the loan-to-value  ratio at
origination,  established  by  independent  appraisals,  does not exceed 80%. In
addition,  the Bank  generally  requires  personal  guarantees  of the principal
owners of the property.  The at  origination  loan-to-value  ratio for first and
second mortgage loans and for construction  loans generally does not exceed 80%.


                                       2
<PAGE>

In an effort to control interest rate risk, long-term  residential mortgages are
underwritten and funded by, and closed in the name of, third party investors.

         The principal  economic risk associated with all loans,  including real
estate  loans,  is the  creditworthiness  of the  borrowers.  The  ability  of a
borrower to repay a real estate loan depends upon a number of economic  factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate  construction  loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically  limited.  Borrowers may not be able to
maintain adequate cash flow during times of disruption in credit markets similar
to the difficulties in the current mortgage market. In the case of a real estate
purchase loan which is not fully amortized,  the borrower may be unable to repay
the loan at the end of the loan  term and thus may be forced  to  refinance  the
loan at a higher  interest rate, or, in certain cases,  the borrower may default
as a result of its inability to refinance the loan. In either case,  the risk of
nonpayment by the borrower is increased.

         The Bank also  faces  additional  credit  risks to the  extent  that it
engages in making  adjustable  rate mortgage loans  ("ARMs").  In the case of an
ARM, as interest rates increase, the borrower's required payments increase, thus
increasing  the  potential  for default.  The  marketability  of all real estate
loans,  including  ARMs, is also generally  affected by the prevailing  level of
interest rates.

Commercial Loans

         The Bank  makes  loans for  commercial  purposes  in  various  lines of
business.  Commercial loans include both secured and unsecured loans for working
capital  (including  inventory and  receivables),  loans for business  expansion
(including acquisition of real estate and improvements), and loans for purchases
of equipment and  machinery.  Equipment  loans are typically  made for a term of
five  years or less at  either  fixed or  variable  rates,  with the loan  fully
amortized over the term and secured by the financed  equipment.  Working capital
loans  typically  have terms not exceeding  one year and are usually  secured by
accounts  receivable,  inventory or personal guarantees of the principals of the
business.  Commercial loans vary greatly  depending upon the  circumstances  and
loan terms are  structured  on a  case-by-case  basis to better  serve  customer
needs.

         The risks  associated  with  commercial  loans vary with many  economic
factors,  including the economy in the Bank's market areas. The well-established
banks in the Bank's market areas make  proportionately  more loans to medium- to
large-sized  businesses than the Bank makes. Many of the Bank's commercial loans
are made to small- to  medium-sized  businesses,  which  typically  are not only
smaller, but also have shorter operating histories and less sophisticated record
keeping systems than larger entities. As a result, these smaller entities may be
less able to withstand adverse  competitive,  economic and financial  conditions
than  larger  borrowers.  In  addition,  because  payments  on loans  secured by
commercial  property  generally  depend  to a large  degree  on the  results  of
operations  and  management  of the  properties,  repayment of such loans may be
subject, to a greater extent than other loans, to adverse conditions in the real
estate market or the economy.

Consumer Loans

         The Bank  makes a variety  of loans to  individuals  for  personal  and
household purposes,  including secured and unsecured installment and term loans,
home equity loans and lines of credit and unsecured  revolving  lines of credit.
The secured  installment and term loans to consumers  generally consist of loans
to  purchase  automobiles,   boats,  recreational  vehicles,  mobile  homes  and
household  furnishings,  with the  collateral  for each loan being the purchased
property.  The  underwriting  criteria for home equity loans and lines of credit
are generally the same as applied by the Bank when making a first mortgage loan,
as described above, and home equity lines of credit typically expire 15 years or
less after origination, unless renewed or extended.

         Consumer  loans  generally  involve  more credit risks than other loans
because of the type and nature of the  underlying  collateral  or because of the
absence  of any  collateral.  Consumer  loan  repayments  are  dependent  on the
borrower's  continuing  financial  stability  and  are  likely  to be  adversely
affected by job loss,  divorce and  illness.  Furthermore,  the  application  of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency  laws,  may limit the amount  which can be recovered on such loans in
the case of default. In most cases, any repossessed  collateral will not provide
an adequate  source of repayment of the outstanding  loan balance.  Although the
underwriting  process for consumer  loans  includes a comparison of the value of


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<PAGE>

the security,  if any, to the proposed loan amount,  the Bank cannot predict the
extent to which the  borrower's  ability to pay, and the value of the  security,
will be affected by prevailing economic and other conditions.

Other Services

         The  Bank  participates  in a  regional  network  of  automated  teller
machines  that may be used by Bank  customers  in major  cities  throughout  the
Southeast.  The Bank offers both VISA and MasterCard  brands of credit and debit
cards together with related lines of credit. The lines of credit may be used for
overdraft protection as well as pre-authorized credit for personal purchases and
expenses.  Credit cards are  underwritten  and funded by a third party provider.
The Bank also provides stored value cards,  direct deposit of payroll and social
security  checks,  and  automatic  drafts  for  various  accounts,  but does not
currently provide  international or trust banking  services,  other than foreign
currency  exchange  through a  correspondent  bank.  The Bank offers an Internet
banking    product    accessible    via   the   Bank's    custom    website   at
www.cornerstonenationalbank.com.  The interactive  banking  product  includes an
electronic bill payment service that allows  customers to make scheduled  and/or
recurring  bill  payments  electronically.  The Bank also  offers  remote  check
deposit  services to commercial  and small business  customers.  The Bank offers
merchant and other business  related services to its commercial  customers.  The
Bank also has a residential  mortgage loan department with a highly  experienced
staff qualified to make virtually any type of residential mortgage loan.


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The following  information  describes  various financial aspects of the
Bank's  business.  This  information  should  be read in  conjunction  with  the
consolidated financial statements of the Company, which appear elsewhere in this
document,  and the Company's  Form 10-K,  filed with the Securities and Exchange
Commission.

Critical Accounting Policies

         The Company has adopted various accounting  policies,  which govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  the  Company's  financial   statements.   The
significant accounting policies of the Company are described in the notes to the
consolidated financial statements.

         Certain   accounting   policies  involve   significant   judgments  and
assumptions by management, which 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
Company.

         The  Company  believes  the  allowance  for loan  losses is a  critical
accounting  policy that  requires the most  significant  judgments and estimates
used in  preparation  of its  consolidated  financial  statements.  Refer to the
sections  "Allowance  for Loan Losses",  "Potential  Problem  Loans",  "Impaired
Loans"  and  note 1 to the  consolidated  financial  statements  for a  detailed
description of the Company's  estimation process and methodology  related to the
allowance for loan losses.

         Management  also believes that current  economic  conditions have added
complexity to the process involved in evaluating other-than temporary-impairment
("OTTI") of the Company's debt  securities.  The process of determining  OTTI is
inherently  judgmental,  involving the weighing of positive and negative factors
and evidence that may be objective or  subjective.  In the current  environment,
the factors that must be evaluated are numerous,  and changing  rapidly,  making
the evaluation more difficult.

Effect of Economic Trends

         The  current  outlook  for the  national  economy in the United  States
("U.S.") is negative.  Since September 2008, the U.S.  financial system has been


                                       4
<PAGE>

in turmoil.  Several  unprecedented steps have been taken by the U.S. government
to restore  capital,  confidence,  and liquidity to the U.S.  financial  system.
Currently,  depository  institutions  in the U.S. are assessing the effect these
steps are likely to have, and how deeply economic conditions have affected,  and
are likely to affect,  their local  economies  and customer  bases.  Many of the
programs made available by the government are not fully  implemented,  and their
effects will not be immediately known.

         Over the previous fifteen months, the Federal Reserve has decreased its
target  short-term  interest rates  significantly.  These decreases have been in
response to the turmoil in the overall  economy,  the market for mortgages,  and
the  housing  industry in the United  States.  As a result of the  decreases  in
interest rates by the Federal Reserve,  interest rates applicable to many of the
Bank's loans,  which are tied to the Prime Rate,  have also  decreased  rapidly.
However,  due to  competitive  pressures  for  funds  and  an  overall  lack  of
confidence in depository  institutions and concerns over future events, interest
rates on the Bank's interest-bearing  liabilities have not decreased as quickly,
placing pressure on the Bank's net interest margin. In addition, the uncertainty
in the national  mortgage  market has  impacted  our ability to broker  mortgage
loans for our  customers.  Many third party lenders have changed their  programs
frequently  or  discontinued  them  completely,  and all have  tightened  credit
standards.  The  result  has been a  decrease  in income  earned  from  mortgage
brokerage  fees in 2008.  Additionally,  problems in the economy have  adversely
impacted  the ability of some  borrowers  to repay  their  loans.  Although  the
Company's  market area has not experienced  the negative  effects of the slowing
economy and  declines  in real  estate  markets to the same extent as some other
markets in the country,  these  factors have had an effect on our  operations as
evidenced by the  increases in our potential  problem  loans,  charge-offs,  and
nonaccrual loans.

Governmental Response to 2008 Financial Crisis

         During the fourth quarter of 2008 and continuing into the first quarter
of 2009 the FDIC,  the Federal  Reserve,  the  Department  of the  Treasury  and
Congress  took a number of actions  designed to  alleviate  or correct  mounting
problems in the financial services industry.  A number of these initiatives were
directly applicable to community banks.

         Congress  enacted  the  Emergency  Economic  Stabilization  Act of 2008
which,  among other things,  temporarily  increased  the maximum  amount of FDIC
deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief
Program ("TARP") administered by Treasury. In October,  2008, Treasury announced
a Capital Purchase Program ("CPP") under TARP to increase the capital of healthy
banks. Under the CPP, Treasury would purchase preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighted  assets  as  of  September  30,  2008.   Institutions  wishing  to
participate in the CPP were required to file an application with their principal
federal  regulators.   The  Company  filed  such  an  application  and  received
preliminary  approval to sell  preferred  stock to the Treasury,  but ultimately
elected not to  participate  in the CPP because of (i) the cost of the preferred
stock, (ii) the open-ended  administrative burdens associated with the preferred
stock,  including  having to agree to allow Treasury to amend  unilaterally  the
stock purchase agreement to comply with subsequent changes in applicable federal
statutes,  (iii)  the fact  that the  Company  and the Bank  were  already  well
capitalized  under regulatory  guidelines and expected to continue to be so, and
(iv) management's  belief that other sources of capital were, and would continue
to be, available should additional capital be needed.

         The FDIC  also  implemented  in  October,  2008 a  Temporary  Liquidity
Guarantee Program consisting of a deposit insurance  component pursuant to which
it  undertook  to  provide  deposit   insurance  in  an  unlimited   amount  for
non-interest  bearing  transaction  accounts,  and a  debt  guarantee  component
pursuant to which it undertook to fully guarantee senior,  unsecured debt issued
by banks or bank holding  companies.  Coverage of both  components was automatic
until December 5, 2008, at which time covered  institutions could opt out of one
or both of the components. Institutions not opting out would be charged fees for
their  participation  in the  components.  The  Bank  did not opt out of  either
component.

         An  unfortunate  consequence  of the  difficulties  that have beset the
banking  industry in the last year has been a large  increase in bank  failures,
which has led to  substantial  claims  being made  against  the  FDIC's  Deposit
Insurance Fund. In order to increase the amount in the Deposit Insurance Fund to
reflect the increased risk of additional bank failures and insurance claims, the
FDIC has  raised  its  assessments  on banks  for 2009 and has also  proposed  a
special one-time assessment of 20 cents per $100 of assessable  deposits,  to be
paid in  September,  2009 based on deposits  at June 30,  2009.  There  appears,
however,  to be a possibility  that the  assessment  will be reduced if Congress
authorizes  the FDIC to  borrow  sufficient  funds.  Assuming  that the  special
assessment is imposed as proposed and without reduction,  the additional cost to
the Bank in 2009 would be approximately $285,000.



                                       5
<PAGE>

Additional  governmental  efforts to  ameliorate  the  problems  afflicting  the
banking  industry  have been adopted or  proposed,  or are being  considered  by
Congress and various governmental  entities.  The Company is presently unable to
predict the impact of any such changes, although it appears that they are likely
to increase  operating  expenses in the near term  without  creating  completely
offsetting benefits.

Earnings Performance

         The  Company  earned  $225,316  in 2008,  or $.11 per basic and diluted
common  share  compared to $1.6  million or $.82 per basic common share and $.80
per diluted common share for the year ended December 31, 2007.  This compares to
$1.7  million or $.85 per basic and $.83 per diluted  common  share for the year
ended December 31, 2006. The Company's earnings in 2008 were significantly lower
than in 2007 and 2006 due to four  specific  factors.  First,  the  Company  was
required to  recognize  an  impairment  loss on  preferred  stock of the Federal
National Mortgage  Association  ("FNMA") during the third quarter as a result of
FNMA's being placed into  conservatorship by The United States Department of the
Treasury in September  2008.  Second,  the drastic  decreases in interest  rates
initiated by the Federal  Reserve in 2008 led to compression of our net interest
margin.  Third,  turmoil in the housing markets  decreased our ability to broker
mortgage  loans  for  our  local  customers,   which   significantly   decreased
noninterest  income in 2008.  Fourth,  our provision  for loan losses  increased
significantly  in  comparison to previous  years due to  increasing  pressure on
borrowers  from the slowing  economy.  The  Company's  net interest  income (the
difference  between interest earned on interest earning assets and interest paid
on interest  bearing  liabilities)  decreased  to $5.3  million,  down from $5.8
million in 2007 and $5.5 million for 2006. The Company had noninterest income of
$63,966 after  absorbing  the other than  temporary  loss on the FNMA  preferred
stock.  This  compared  to $1.1  million  and $1.4  million  in 2007  and  2006,
respectively.  Noninterest  income in 2006  included a gain on the sale of land.
The Company provided $815,000, $196,636, and $445,896, to the allowance for loan
losses in 2008, 2007 and 2006, respectively, and had other operating expenses of
$4.3 million in 2008 and 2007 and $3.9 million in 2006.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of
interest  rates,  volume and mix of  interest  earning  assets and the  relative
funding of these  assets.  Due to the fact that the Bank's  and  therefore,  the
Company's,  assets are largely monetary in nature,  material changes in interest
rates can have a material impact on the Bank's net interest income.  The Company
and the  Bank  monitor  the  Bank's  assets  and  liabilities  and the  interest
sensitivity  of these assets and  liabilities  using  various  tools,  including
models which attempt to calculate  the impact on the Bank's net interest  margin
as interest rates change.  However, these models, as well as the tables included
here,  employ  assumptions  about  the  Bank's  interest  sensitive  assets  and
liabilities which may or may not prove to be accurate. Such assumptions include,
but are not limited to,  repayment  patterns of borrowers,  calls of securities,
and  unscheduled  redemptions  of  certificates  of  deposit.  The tables on the
following pages include  historical  analyses of yields earned and rates paid on
interest sensitive assets and liabilities,  the effects of changes in the volume
and relative mix of interest  sensitive  assets and  liabilities,  the effect of
changes in interest  rates,  and the ratio of assets and  liabilities  repricing
over specific  time  horizons.  While the  Company's  and the Bank's  management
cannot  predict  the timing and extent of  changes in  interest  rates,  they do
attempt to manage the Bank's interest rate  sensitivity to enable the Company to
react to protect the Company's  earnings stream throughout various interest rate
cycles.

         For the years ended  December 31, 2008,  2007,  and 2006,  net interest
income was $5.3 million,  $5.8  million,  and $5.5  million,  respectively.  The
decrease  in 2008 is  attributable  to the  rapid  decline  in  interest  rates,
partially offset by increases in the volume of loans (see "Rate/Volume  Analysis
of Net Interest  Income" below).  In 2008, total average interest earning assets
increased to $141.2  million from $125.4  million in 2007.  The average yield on
interest  earning assets decreased 153 basis points to 6.45% in 2008 compared to
7.98% in 2007.  The average cost of interest  bearing  liabilities  decreased 90
basis  points to 3.12% in 2008 from  4.02% in 2007.  Rates on  interest  earning
assets  and  interest  bearing  liabilities  adjusted  downward  since the third
quarter of 2007.  The Company's  loan  portfolio  adjusted more quickly than the
interest  bearing  deposit  portfolio  due to  liquidity  pressures in the local
deposit market and in the brokered CD market.  While the Company's time deposits
matured,  rates  could not be lowered  by the same  magnitude  as the  Company's
interest earning assets repriced.  The result was narrowed interest margins. The


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<PAGE>

net yield on average  interest  earning  assets  decreased in 2008 to 3.76% from
4.65% in 2007.  The interest rate spread in 2008 was 3.33%  compared to 3.96% in
2007.

The table, "Average Balances, Yields and Rates", provides a detailed analysis of
the effective  yields and rates on the categories of interest earning assets and
interest  bearing  liabilities  for the Company for the years ended December 31,
2008 and 2007.
                       Average Balances, Yields and Rates
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                             Year ended December 31, 2008       Year ended December 31, 2007
                                                             ----------------------------       ----------------------------
                                                                         Interest   Average                  Interest    Average
                                                            Average       Income/   Yields/     Average       Income/    Yields/
                                                          Balances(1)     Expense   Rates(2)   Balances(1)    Expense   Rates(2)
                                                          -----------     -------   --------   -----------    -------   --------
Assets
<S>                                                         <C>           <C>        <C>        <C>           <C>        <C>
Securities ..............................................   $ 22,607      $1,161     5.14%      $ 17,978      $   944    5.25%
Federal Funds Sold ......................................      3,429          92     2.68%         4,538          228    5.02%
Loans (3), (4) ..........................................    115,162       7,849     6.82%       102,917        8,835    8.58%
                                                            --------      ------                --------      -------
       Total interest earning assets ....................    141,198       9,102     6.45%       125,433       10,007    7.98%
Cash and due from banks .................................      3,624                               2,468
Allowance for loan losses ...............................     (1,394)                             (1,263)
Premises and equipment ..................................      5,687                               5,214
Cash surrender value of life insurance policies .........      1,731                               1,660
Other assets ............................................      1,861                               1,486
                                                            --------                            --------
       Total assets .....................................   $152,707                            $134,998
                                                            ========                            ========

Liabilities and shareholders' equity
Interest bearing liabilities:
     Interest bearing transaction accounts ..............   $ 13,502         125      .92%      $ 13,708          157    1.15%
     Savings and money market ...........................     14,994         296     1.98%        10,461          222    2.12%
     Time deposits ......................................     76,234       2,808     3.68%        71,613        3,444    4.81%
                                                            --------      ------                --------      -------

       Total interest bearing deposits ..................    104,730       3,229     3.08%        95,782        3,823    3.99%
Federal Funds purchased and
    customer repurchase agreements ......................      5,351         170     3.18%         5,335          238    4.47%
FHLB advances ...........................................      6,955         228     3.28%         2,805          116    4.13%
                                                                                                --------      -------
Broker repurchase agreements ............................      4,836         171     3.53%
                                                            --------      ------
       Total interest bearing liabilities ...............    121,872       3,798     3.12%       103,922        4,177    4.02%
                                                            --------      ------                --------      -------
Noninterest bearing demand deposits and other
    liabilities .........................................     11,466                              12,577
Shareholders' equity ....................................     19,369                              18,499
                                                            --------                            --------
       Total liabilities and shareholders' equity .......   $152,707                            $134,998
                                                            ========                            ========
Interest rate spread (5) ................................                            3.33%                               3.96%
                                                                                     -----                               -----
Net interest income and net yield on earning assets(6)...                 $5,304     3.76%                    $ 5,830    4.65%
                                                                          ======     -----                    =======    -----

Interest free funds supporting earning assets (7) .....     $ 19,326                            $ 21,511
</TABLE>

(1)  Average balances calculated based on a daily basis.
(2)  Calculated  based on the number of days in the year that each type of asset
     or liability was in existence.  Yield  calculated on a pre-tax  basis.  The
     estimated tax equivalent yield on securities was 5.63% in 2008 and 5.53% in
     2007.
(3)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis. (
(4)  Interest  income on loans  includes  loan fee  income  as well as  interest
     income.  The amount of loan fees  included is $401,297 and $371,754 in 2008
     and 2007, respectively.
(5)  Total yield on interest earning assets less the rate paid on total interest
     bearing liabilities.
(6)  Net interest income divided by total interest earning assets.
(7)  Total interest earning assets less total interest bearing liabilities.

                                       7
<PAGE>

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                              Year ended December 31, 2007      Year ended December 31, 2006
                                                              ----------------------------      ----------------------------
                                                                          Interest    Average                  Interest    Average
                                                             Average       Income/    Yields/     Average       Income/    Yields/
                                                           Balances(1)     Expense    Rates(2)  Balances(1)     Expense   Rates(2)
                                                           -----------     -------    --------  -----------     -------   --------
Assets
<S>                                                         <C>           <C>         <C>        <C>            <C>       <C>
Securities ...............................................  $ 17,978      $   944     5.25%      $ 17,234       $  792    4.59%
Federal Funds Sold .......................................     4,538          228     5.02%         5,864          294    5.01%
Loans (3), (4) ...........................................   102,917        8,835     8.58%        90,018        7,538    8.37%
                                                            --------      -------                --------       ------
       Total interest earning assets .....................   125,433       10,007     7.98%       113,116        8,624    7.62%
Cash and due from banks ..................................     2,468                                2,396
Allowance for loan losses ................................    (1,263)                              (1,120)
Premises and equipment ...................................     5,214                                4,472
Cash surrender value of life insurance policies ..........     1,660                                1,600
Other assets .............................................     1,486                                1,250
                                                            --------                             --------
       Total assets ......................................  $134,998                             $121,714
                                                            ========                             ========

Liabilities and shareholders' equity
Interest bearing liabilities:
     Interest bearing transaction accounts ...............  $ 13,708          157     1.15%       $14,112          155    1.10%
     Savings and money market ............................    10,461          222     2.12%        10,074          165    1.64%
     Time deposits .......................................    71,613        3,444     4.81%        60,252        2,577    4.28%
                                                            --------      -------                --------       ------

       Total interest bearing deposits ...................    95,782        3,823     3.99%        84,438        2,897    3.43%
Federal Funds purchased and
    customer repurchase agreements .......................     5,335          238     4.47%         4,795          116    2.42%
FHLB advances ............................................     2,805          116     4.13%         3,973          149    3.75%
                                                            --------      -------                --------       ------
       Total interest bearing liabilities ................   103,922        4,177     4.02%        93,206        3,162    3.39%
                                                                          -------                               ------
Noninterest bearing demand deposits and other
    liabilities ..........................................    12,577                               12,389
Shareholders' equity .....................................    18,499                               16,119
                                                            --------                             --------
       Total liabilities and shareholders' equity ........  $134,998                             $121,714
                                                            ========                             ========
Interest rate spread (5) .................................                            3.96%                               4.23%
                                                                                      -----                               -----
Net interest income and net yield on earning assets(6) ...                $ 5,830     4.65%                     $5,462    4.83%
                                                                          =======     -----                     ======    -----
Interest free funds supporting earning assets (7) ........  $ 21,511                             $ 19,910
</TABLE>

(1)  Average balances calculated based on a daily basis.
(2)  Calculated  based on the number of days in the year that each type of asset
     or liability was in existence.  Yield  calculated on a pre-tax  basis.  The
     estimated tax equivalent yield on securities was 5.53% in 2007 and 4.80% in
     2006.
(3)  Nonaccruing  loans are included in the average loan balances and income
     on such loans is recognized on a cash basis.
(4)  Interest  income on loans  includes  loan fee  income  as well as  interest
     income. The amount of loan fees included is not considered material.
(5)  Total yield on interest earning assets less the rate paid on total interest
     bearing liabilities.
(6)  Net interest income divided by total interest earning assets.
(7)  Total interest earning assets less total interest bearing liabilities.



                                       8
<PAGE>

                   Rate/Volume Analysis of Net Interest Income

         As discussed  under the caption "Net  Interest  Income," the Bank's net
income is largely  dependent on net interest income.  The table below calculates
the  relative  impact on net  interest  income  caused by changes in the average
balances  (volume) of interest  sensitive  assets and liabilities and the impact
caused by changes in interest  rates  earned or paid.  Each table  compares  two
years as  indicated  below.  The effect of a change in average  balance has been
determined  by applying  the average  rate in the earlier  year to the change in
average balance in the later year, as compared with the earlier year. The effect
of a change in the average  rate has been  determined  by  applying  the average
balance in the earlier year to the change in the average rate in the later year,
as compared  with the earlier  year.  In 2008 changes in interest  rates had the
most significant  impact on interest income. In 2007,  changes in balances had a
more significant impact on net interest income than changes in interest rates.

                  Year ended December 31, 2008 compared to 2007

<TABLE>
<CAPTION>
                                                                                        Increase (Decrease) Due to
                                                                                        --------------------------
                                                                        Rate            Volume        Rate/Volume(1)        Change
                                                                        ----            ------        --------------        ------
                                                                                         (Dollars in Thousands)
Interest earned on:
<S>                                                                   <C>               <C>               <C>               <C>
     Securities (2) ........................................          $   (20)          $   243           $    (5)          $   218
     Federal Funds sold ....................................             (107)              (56)               26              (137)
     Loans .................................................           (1,821)            1,051              (216)             (986)
                                                                      -------           -------           -------           -------
         Total interest income .............................           (1,948)            1,238              (195)             (905)

Interest paid on:
     Deposits ..............................................             (851)              316               (58)             (593)
     Federal Funds purchased and customer
             repurchase agreements .........................              (69)                1                 -               (68)
     FHLB advances .........................................              (24)              171               (35)              112
     Broker repurchase agreements ..........................                -                 -               171               171
                                                                      -------           -------           -------           -------
              Total interest expense .......................             (944)              488                78              (378)
                                                                      -------           -------           -------           -------

Change in Net Interest Income ..............................          $(1,004)          $   750           $  (273)          $  (527)
                                                                      =======           =======           =======           =======
</TABLE>

(1)  Volume/Rate  is calculated as the difference  between the average  balances
     for the periods  multiplied by the difference between the average rates for
     the periods.
(2)  Income calculated on a pre-tax basis.

                  Year ended December 31, 2007 compared to 2006

<TABLE>
<CAPTION>
                                                                                       Increase (Decrease) Due to
                                                                                       --------------------------
                                                                        Rate            Volume        Rate/Volume(1)        Change
                                                                        ----            ------        --------------        ------
                                                                                         (Dollars in Thousands)
Interest earned on:
<S>                                                                   <C>               <C>               <C>               <C>
   Securities (2) ..........................................          $   113           $    34           $     5           $   152
   Federal Funds sold ......................................                1               (66)                -               (65)
   Loans ...................................................              189             1,080                27             1,296
                                                                      -------           -------           -------           -------
         Total interest income .............................              303             1,048                32             1,383

Interest paid on:
   Deposits ................................................              376               488                62               926
   Federal Funds purchased and customer ....................               98                13                11               122
        repurchase agreements
   FHLB advances ...........................................               15               (44)               (4)              (33)
                                                                      -------           -------           -------           -------
              Total interest expense .......................              489               457                69             1,015
                                                                      -------           -------           -------           -------

Change in Net Interest Income ..............................          $  (186)          $   591           $   (37)          $   368
                                                                      =======           =======           =======           =======
</TABLE>


                                       9
<PAGE>

Interest Rate Sensitivity

         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.  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 in a
timely manner.

         On  a  cumulative  basis,  rate  sensitive  liabilities  exceeded  rate
sensitive assets, resulting in a liability sensitive position at the end of 2008
of $22.9  million,  for a cumulative gap ratio of .79 calculated at the one-year
time horizon.  When interest  sensitive  liabilities  exceed interest  sensitive
assets for a specific repricing  "horizon," a negative interest  sensitivity gap
results,  as was the case at the end of 2008 with respect to the  one-year  time
horizon.  The gap is positive when  interest  sensitive  assets exceed  interest
sensitive  liabilities.  For a bank with a negative gap,  falling interest rates
would  be  expected  to  have a  positive  effect  on net  interest  income  and
increasing rates would be expected to have the opposite effect.  However, if one
or more  assumptions  prove  incorrect,  the margin may not be  impacted  in the
manner expected.

         The following  table  reflects the balances of interest  earning assets
and interest  bearing  liabilities at the earlier of their repricing or maturity
dates.  Amounts of fixed rate loans are  reflected at the loans' final  maturity
dates.  Variable  rate loans are  reflected at the earlier of their  contractual
maturity  date or the date at which  the  loan  may be  repriced  contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's  repricing  date for  variable  rate  instruments  or the  ultimate
maturity  date for fixed  rate  instruments.  Overnight  federal  funds sold are
reflected in the earliest  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest  repricing  interval due to  contractual  arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits,  principally  certificates  of deposit,  are  reflected at their
contractual  maturity  dates.  Federal  funds  purchased  are  presented  in the
immediate  repricing  interval  because the  interest  rate paid  adjusts at the
beginning of each month.  The table does not reflect  repricing that could occur
as a result of  prepayment  of loans or early  withdrawal  of time  deposits  or
movement into or out of non-maturing deposit accounts.


                                       10
<PAGE>

                          Interest Sensitivity Analysis
<TABLE>
<CAPTION>
                                                                                 December 31, 2008
                                                                                 -----------------
                                                              1-3       3-12       1-3        3-5       5-15       > 15
                                                Immediate    Months    Months     Years      Years      Years     Years     Total
                                                ---------    ------    ------     -----      -----      -----     -----     -----
                                                                              (Dollars in thousands)
Interest earning assets ......................
<S>                                               <C>       <C>       <C>        <C>        <C>         <C>      <C>        <C>
    Securities (1) ...........................          -          -         -      1,541     1,617       9,718    7,915     20,791
    Federal funds sold .......................        140          -         -          -         -           -        -        140
    Loans (2)(3) .............................     75,418      2,468    10,245     13,671    27,135       2,105      140    131,182
                                                  -------   --------  --------   --------   -------     -------  -------    -------
        Total interest earning assets ........     75,558      2,468    10,245     15,212    28,752      11,823    8,055    152,113
                                                  -------   --------  --------   --------   -------     -------  -------    -------

Interest bearing deposits
    Interest bearing transaction accounts ....     13,013          -         -          -         -           -        -     13,013
    MMDAs & Savings ..........................     21,135          -         -          -         -           -        -     21,135
    Time deposits ............................      3,174     22,566    41,584      9,647     1,393           -        -     78,364
    Federal Funds purchased and
      Customer repurchase agreements .........      3,243        150     2,650        350         -           -        -      6,393
    FHLB advances ............................      3,500         38       113      4,302       301       2,140        -     10,394
    Broker repurchase agreements .............          -          -         -          -     2,000       3,000        -      5,000
                                                  -------   --------  --------   --------   -------     -------  -------    -------
        Total interest bearing liabilities ...     44,065     22,754    44,347     14,299     3,694       5,140        -    134,299
                                                  -------   --------  --------   --------   -------     -------  -------    -------

Interest sensitivity gap .....................    $31,493   $(20,286) $(34,102)  $    913   $25,058     $ 6,683  $ 8,055    $17,814
Cumulative interest sensitivity gap ..........    $31,493   $ 11,207  $(22,895)  $(21,982)   $3,076     $ 9,759  $17,814
Gap ratio ....................................       1.71        .11       .23       1.06      7.78        2.30
Cumulative gap ratio .........................       1.71       1.17       .79        .82      1.02        1.07     1.13
</TABLE>

<TABLE>
<CAPTION>
                                                                                 December 31, 2007
                                                                                 -----------------
                                                              1-3       3-12       1-3        3-5        5-15       > 15
                                                Immediate    Months    Months     Years      Years      Years      Years       Total
                                                ---------    ------    ------     -----      -----      -----      -----       -----
                                                                              (Dollars in thousands)
Interest earning assets
<S>                                              <C>        <C>       <C>        <C>        <C>        <C>        <C>       <C>
    Securities (1) ..........................    $     -    $     -   $     -    $ 1,018    $ 3,660    $ 9,310    $ 4,883   $ 18,871
    Federal funds sold ......................        967          -         -          -          -          -          -        967
    Loans(2)(4) .............................     57,213      3,635    11,294     14,154     19,248      2,680        419    108,643
                                                 -------    -------   -------    -------    -------    -------    -------   --------
        Total interest earning assets .......     58,180      3,635    11,294     15,172     22,908     11,990      5,302    128,481
                                                 -------    -------   -------    -------    -------    -------    -------   --------

Interest bearing deposits
    Interest bearing transaction accounts ...     15,083          -         -          -          -          -          -     15,083
    MMDAs & Savings .........................     10,804          -         -          -          -          -          -     10,804
    Time deposits ...........................      6,707     23,820    31,308      9,070        496          -          -     71,401
    Customer repurchase agreements ..........      2,893      2,910         -          -          -          -          -      5,803
    FHLB advances ...........................          -      1,038     1,613        302        301        291          -      3,545
                                                 -------    --------  --------   -------    -------    -------    -------   --------
        Total interest bearing liabilities ..     35,487     27,768    32,921      9,372        797        291          -    106,636
                                                 -------    --------  --------   -------    -------    -------    -------   --------

Interest sensitivity gap ....................    $22,693    $(24,133) $(21,627)  $  5,800   $22,111    $11,699    $ 5,302   $ 21,845
Cumulative interest sensitivity gap .........    $22,693    $ (1,440) $(23,067)  $(17,267)  $ 4,844    $16,543    $21,845
Gap ratio ...................................       1.64         .13       .34       1.62     28.73      41.20          -
Cumulative gap ratio ........................       1.64         .98       .76        .84      1.05       1.16       1.20
</TABLE>


(1)  Securities with call features have been included in the period in which the
     security matures in both periods.
(2)  There were no  unamortized  deferred loan fees included in the above tables
     in either year.
(3)  Nonaccruing  loans of $2.4  million  are  included  in the  2008  schedule.
     Nonaccrual  loans  totaling  $1.8  million are  included  in the  immediate
     category,  loans totaling  $221,672 are included in the 1-3 month category,
     loans totaling $116,870 are included in the 3-12 months category, and loans
     totaling $261,556 are included in the 1-3 year category.
(4)  Nonaccruing loans of $291,697 are included in the 2007 schedule. Nonaccrual
     loans  totaling  $8,300  are  included  in the  immediate  category,  loans
     totaling  $118,611  are  included  in the 3-12 months  category,  and loans
     totaling $164,786 are included in the 1-3 year category.


                                       11
<PAGE>

     Provision for Loan Losses

         The  provision  for  loan  losses  is  charged  to  earnings  based  on
management's  continuing review and evaluation of the loan portfolio and general
economic  conditions.  The  following  table  summarizes  the  activity  in  the
allowance for loan losses.

<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                     2008               2007              2006
                                                                                     ----               ----              ----
                                                                                                (Dollars in thousands)
<S>                                                                                 <C>                 <C>                 <C>
Allowance for loan losses, beginning of year ...........................            $ 1,293             $ 1,200             $ 1,058
Provision for loan losses ..............................................                815                 197                 446
Charge-offs ............................................................               (685)               (104)               (304)
Recoveries .............................................................                276                   -                   -
                                                                                    -------             -------             -------

Allowance for loan losses, end of year .................................            $ 1,699             $ 1,293             $ 1,200
                                                                                    =======             =======             =======
</TABLE>


         See "Impaired  Loans" and  "Allowance for Loan Losses" for a discussion
of the  factors  management  considers  in its  review  of the  adequacy  of the
allowance and provision for loan losses.

Noninterest Income

         Noninterest   income,   which  consists   primarily  of  mortgage  loan
origination  fees,  service charges on deposit  accounts,  and other fee income,
decreased  by $1.0  million to $.1 million in 2008 from $1.1 million in 2007 and
from $1.4 million in 2006.  The 2008  decrease is primarily  from the Other Than
Temporary  Impairment  charge in the amount of $918,264  taken on FNMA Preferred
stock in  September  2008.  An  additional  cause of the  decrease was a drop in
mortgage loan  origination  fees of $161,436.  The decrease in 2007 is primarily
the result of a gain on sale of land of  $241,696  in 2006 which  related to the
sale of  property  adjacent to one of the  Company's  branch  offices.  As noted
above,  the  mortgage  origination  industry  experienced   significant  changes
beginning in the fourth quarter of 2007 and continuing  throughout  2008.  While
the Company does not originate long-term  residential mortgage loans for its own
portfolio,  the effect on credit  policies  of third  party  lenders  and on the
overall  market  did affect  demand for the  Company's  brokered  mortgage  loan
products.  The decline in  mortgage  origination  fee income and the  impairment
charge on the FNMA  preferred  stock were  partially  offset by an  increase  in
service  fees  on  deposits.  Service  fees on  deposit  accounts  increased  by
approximately $36,000 in 2008 over 2007.

Noninterest Expenses

         Noninterest expenses,  which consist primarily of salaries and employee
benefits,  occupancy  costs,  data  processing  expenses  and  professional  and
regulatory  fees,  totaled  $4.3  million in 2008 and 2007,  and $3.9 million in
2006.  Salaries  and  employee  benefits  decreased  slightly in 2008 due to the
retirement  of certain  employees  and no accrual  of  bonuses  due to  economic
conditions.  Salaries  and  benefits  rose in 2007  compared  to 2006 due to the
hiring of  additional  staff to  support  the Bank's  growth  and annual  salary
increases.  As of the end of 2008, the Company employed 38 full-time  personnel.
Net  occupancy  increased to $600,426 in 2008 from $567,222 in 2007 and $502,807
in 2006.  The  increase in 2008 is  primarily  due to a full year of expenses to
maintain the operations center opened in August 2007. Supplies expense decreased
23.3%  in 2008  compared  to  2007.  The  higher  supplies  expense  in 2007 was
primarily due to costs  associated  with opening the  Company's  new  operations
center in August 2007. Other operating  expenses include various costs of normal
operations. Certain loan costs such as appraisal costs, software licensing fees,
and costs to process ATM  transactions  each increased in 2008 over 2007 levels.
OREO expenses in 2008 were $50,889 in 2008 compared to $7,207 in 2007.  Property
taxes on real estate owned is the primary driver of the increase.  The Company's
efficiency ratio,  which is measured as the ratio of noninterest  expense to the
sum of net interest income plus other income expressed as a percentage,  was 81%
in 2008  compared to 62% in 2007 and 58% in 2006. In 2008 the ratio was severely
impacted by the other-than-temporary-impairment on FNMA Preferred Stock.


                                       12
<PAGE>

Income Taxes

         For 2008 the Company recorded an income tax benefit of $17,600 compared
to tax expense of $810,232 in 2007 and $794,998 in 2006. The primary reasons for
the benefit in 2008 are the  exclusion of  nontaxable  municipal  bond income in
2008 and the tax effect of the other  than  temporary  impairment  charge on the
FNMA preferred  stock.  In the fourth quarter of 2008  legislation was passed by
Congress  making the OTTI charge  includable  in ordinary  income for holders of
FNMA and Federal Home Loan Mortgage Corporation  ("FHLMC") preferred stocks. The
Company  recorded a deferred tax asset in the amount of $312,210  related to the
other than temporary  impairment of the FNMA preferred  stock. The Bank accounts
for  income  taxes  under  Financial  Accounting  Standards  ("SFAS")  No.  109,
"Accounting for Income Taxes." Certain items of income and expense  (principally
provision for loan losses,  depreciation,  and prepaid expenses) are included in
one reporting  period for financial  accounting  purposes and another for income
tax  purposes.  Refer  to the  notes  to the  Company's  consolidated  financial
statements contained elsewhere herein for more information.

Investment Securities

         Management  assigns securities upon purchase into one of the categories
(trading,  available-for-sale  and held-to-maturity)  designated by Statement of
SFAS No. 115 based on intent,  taking into consideration other factors including
expectations  for  changes  in  market  rates  of  interest,   liquidity  needs,
asset/liability  management strategies,  and capital requirements.  The Bank has
not historically held securities for trading purposes.  As of December 31, 2008,
2007, and 2006, the Bank's investment  portfolio comprised  approximately 12.7%,
13.4%, and 14.1%, respectively, of total assets.

         The following table  summarizes the carrying amounts of securities held
by the Bank at December  31, 2008 and 2007.  Available-for-sale  securities  are
stated at estimated fair value. The Company had no  Held-to-maturity  securities
in either period. Federal Reserve Bank of Richmond and Federal Home Loan Bank of
Atlanta stocks have no quoted market value, but have  historically been redeemed
at par  value,  and are  therefore  carried  at cost.  However,  there can be no
assurance  that these stocks will be redeemed at par value in the future.  There
are no individual issuers,  other than government sponsored  enterprises,  whose
securities represent more than 10% of the Company's  consolidated  shareholders'
equity at December  31,  2008.  Government  sponsored  enterprises  ("GSEs") are
agencies and corporations  established by the U. S. Government,  including among
others,  the Federal Home Loan Banks,  Federal  National  Mortgage  Association,
Federal Home Loan  Mortgage  Corporation  and Federal Farm Credit  Banks.  Until
2008,  securities  issued by these enterprises were not obligations of the U. S.
Government  and were  not  backed  by the full  faith  and  credit  of the U. S.
Government or otherwise  guaranteed by the U. S. Government,  although they were
commonly  treated as  guaranteed.  In 2008, in an attempt to stabilize  U.S. and
international  financial  markets,  the U.S.  Government  explicitly  guaranteed
certain debt  instruments of the GSEs.  These securities have generally been and
will  continue to be eligible to be used as security for public  deposits of the
U. S.  Treasury,  government  agencies  and  corporations  and  states and other
political  subdivisions.  At December 31, 2008 and 2007,  securities with a fair
value  of  $18.4  million  and  $13.0  million  respectively,  were  pledged  to
collateralize  public  deposits,   sweep  accounts,   and  customer  and  broker
repurchase  agreements.  Refer  to  the  notes  to  the  Company's  consolidated
financial statements contained elsewhere herein for more information.

                   Investment Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                                                                  December 31,
                                                                                                              2008              2007
                                                                                                             -----             ----
                                                                                                             (Dollars in thousands)
 Available for sale:
<S>                                                                                                        <C>               <C>
   Government sponsored enterprise bonds .......................................................           $ 9,293           $10,619
   Mortgage-backed securities ..................................................................             4,280             3,446
   Municipal bonds .............................................................................             6,072             2,977
   FNMA preferred stock ........................................................................                32             1,012
                                                                                                           -------           -------
      Total available for sale .................................................................            19,677            18,054

Federal Reserve Bank of Richmond stock .........................................................               394               389
Federal Home Loan Bank of Atlanta stock ........................................................               720               428
                                                                                                           -------           -------

Total ..........................................................................................           $20,791           $18,871
                                                                                                           =======           =======
</TABLE>

                                       13
<PAGE>

         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2008 and 2007.  Securities  are
presented at their carrying value  (available for sale securities are carried at
fair value and other  securities  are carried at book  value,  which is equal to
their amortized cost.)

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                    December 31, 2008          December 31, 2007
                                                                 Amount        Yield(1)      Amount          Yield(1)
                                                                 ------        --------      ------          --------
                                                                 (Dollars in thousands)      (Dollars in thousands)
  Available for sale securities:
  Government sponsored enterprises
<S>                                                            <C>               <C>         <C>               <C>
       Within one year .....................................   $     -              -%       $     -             - %
       After one through five years ........................     2,631           4.44%         3,035           5.14%
       After five through ten years ........................     6,662           5.90%         7,585           5.87%

  FNMA and FHLMC Mortgage-backed securities (2)
       After one through five years ........................       280           3.84%           182           4.25%
       After five through ten years ........................         -              -%           210           3.50%
       After 10 years ......................................     4,000           5.75%         3,054           5.91%

  Municipal bonds
          After one through five years .....................       247           3.25%             -              -%
          After five through ten years .....................     1,888           3.80%         1,711           3.66%
          After 10 years ...................................     3,937           4.09%         1,266           4.10%

  Other securities
       No stated maturity ..................................     1,146           2.06%         1,828           7.09%
                                                               -------                       -------
       Total ...............................................   $20,791           4.88%       $18,871           5.53%
                                                               =======                       =======
</TABLE>

(1)  Yields calculated on a pre-tax basis.
(2)  These securities  mature on an amortizing  basis. They are included here in
     the period of final maturity.

         While twelve of the Company's  Government  sponsored  enterprise bonds,
municipal  bonds and  mortgage-backed  securities  available-for-sale  are in an
unrealized  loss position as of December 31, 2008,  none of these  securities is
expected to have a loss of  principal at final  maturity.  Only one security has
been in an unrealized loss position for more than twelve months. The Company has
the intent and  ability  to hold these  securities  until such time as the value
recovers  or  the  securities  mature.   During  2008,  the  Company  recognized
other-than  temporary-impairment on the FNMA preferred stock of $606,054, net of
tax,   based  on   analysis   under  FSP  115-1  and  FNMA  being   placed  into
conservatorship by the U.S. Treasury Department.  The Company believes, based on
industry analyst reports and credit ratings, that the remaining deterioration in
value is attributable to market volatility.  For the municipal  securities,  the
Company  believes  that  the  unrealized  losses  are  the  result  of a lack of
confidence in insurers of municipal  securities and not in the credit quality of
the underlying issuers. Therefore, as of December 31, 2008, these losses are not
considered  other-than-temporary.  The Company's  investments are obligations of
the United States, its sponsored  enterprises,  or municipal securities.  In the
opinion  of  Management,  there  is no  concentration  of  credit  risk  in  the
investment portfolio.

Loan Portfolio

         Management  believes  the loan  portfolio  is  adequately  diversified,
although real estate collateral is the predominant  collateral in the portfolio.
There are no significant  concentrations of loans to any particular individuals,
and there are no  foreign  loans.  The Bank does  have  loans in  certain  broad
categories  that comprise over 25% of Tier 1 Capital  adjusted for the allowance
for loan  losses.  Those  categories  are as  follows:  real  estate  rental and
leasing,  accommodation and food services,  construction,  retail trade,  health
care and social  assistance,  and other services.  The Company believes that the
Bank has  appropriate  controls in place to monitor  risks that may arise due to
concentrations in the loan portfolio.

                                       14
<PAGE>

         Loans made outside the loan policy  guidelines  may present  additional
credit risk to the Company. In order to monitor these loans and the total number
and amount of loans made with exceptions to loan policies, the Bank monitors all
loans approved with policy exceptions.  Monthly, statistics regarding the number
of loans and the amount of loans with  policy  exceptions  are  reported  to the
Board of Directors. One of the policy exceptions reported is for loans exceeding
the regulatory  guidelines on loan to value ratios. The regulatory loan to value
guidelines  permit  exceptions  to the  guidelines  not to exceed  100% of Total
Regulatory Capital for single family  residential  mortgage loans ($20.4 million
at December 31, 2008), or 30% of Total Regulatory  Capital for real estate loans
other than single  family  residential  loans ($6.1  million as of December  31,
2008).  As of  December  31,  2008,  the Bank had $1.2  million  of loans  which
exceeded regulatory loan to value guidelines, an amount which is well within the
allowable maximum of exceptions to the guidelines.

         In  2007,  the  Company  increased  real  estate   construction   loans
approximately  60%.  This segment of the Bank's  business is managed in specific
ways in order to  minimize  the  risks  normally  associated  with  construction
lending.  Management  requires  lending  personnel to visit job sites,  maintain
frequent  contact  with  borrowers  and  perform or  commission  inspections  of
completed work prior to issuing additional construction loan draws. In addition,
management employs additional procedures for monitoring  construction loans such
as  engaging  an  independent  appraiser  to  perform  routine  reviews  of  the
percentage  complete  inspection reports for a sample of construction  projects.
Senior  management  compares the  independent  review  report to the  percentage
complete  report in the Bank's  loan  files.  Any  discrepancy  is  investigated
immediately  to insure that the Bank's  investment is protected.  However,  even
tight internal controls and management oversight will not prevent some borrowers
from  defaulting on these types of loans.  In the current market where declining
conditions last for a long period of time, many  participants in the housing and
real estate  construction  industries cannot continue to perform as specified in
their loan agreements for long periods of time without sales activity.  The Bank
has agreed to work with various  borrowers  in the real estate and  construction
industry to  minimize  the effect on the Bank and the  borrowers.  Loans in this
situation  are placed on  nonaccrual,  and  included in the  Company's  impaired
loans. See "Impaired Loans" below.

         The banking  industry  offers  products  that can increase  credit risk
should   economic   conditions   change  over  the  course  of  a  loan's  life.
Interest-only loans,  adjustable rate loans, and loans with amortization periods
that differ from the maturity date (i.e., balloon payment loans) are examples of
products that could  subject the Company to increased  credit risk in periods of
changing  economic  conditions.  The Company  evaluates each  customer's  credit
worthiness based on current and expected economic conditions and underwrites and
monitors each such loan for associated  risks.  Therefore,  Management  does not
believe that these  particular  products  subject the Company to unusual  credit
risk.  As of  December  31,  2008,  the Bank did not have in its  portfolio  any
residential  mortgage  loans  with  negative  amortization  features,  long term
principal  only  payment  features,  or loan to value ratios at  origination  in
excess of 100%.

         The Bank has a mortgage loan brokerage department that accepts mortgage
applications  for  terms  greater  than  15  years.  Mortgage  applications  are
processed and sent to third parties for underwriting.  Approved loans are funded
by,  and  closed  in the  name  of,  third  parties  and the  Bank  receives  an
origination fee.


                                       15
<PAGE>

         The amount of loans outstanding at December 31, 2008 and 2007 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                                               2008                            2007
                                                                               ----                            ----
                                                                                      (Dollars in thousands)
                                                                                       % of                           % of
                                                                        Amount        Loans              Amount       Loans
                                                                        ------        -----              ------       -----
<S>                                                                     <C>          <C>                <C>         <C>
        Commercial and industrial ...........................           $18,597       14.2%             $18,753      17.3%
        Real Estate - construction ..........................            49,670       37.9               43,333      39.9
        Real Estate - mortgage
               1-4 family residential .......................            26,429       20.1               18,948      17.4
               Nonfarm, nonresidential ......................            33,214       25.3               24,248      22.3
               Multifamily residential ......................             1,223         .9                1,621       1.5
        Consumer installment ................................             2,049        1.6                1,740       1.6
                                                                       --------      -----             --------     -----
                   Total Loans ..............................           131,182      100.0%             108,643     100.0%
                                                                                     =====                          =====
                Less allowance for loan losses ..............            (1,699)                         (1,293)
                                                                       --------                        --------
                   Net Loans ................................          $129,483                        $107,350
                                                                       ========                        ========
</TABLE>

Maturity Distribution of Loans

         The Bank's loan  portfolio  has a large  component of  adjustable  rate
loans.  As of December 31,  2008,  approximately  $78.8  million or 60.0% of the
Bank's loan portfolio was variable.

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2008,  as well as the  type of  interest
requirement on such loans.  For purposes of this table,  variable rate loans are
included in the period of their final  maturity,  as opposed to their  repricing
date.

                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                                              December 31, 2008
                                                                                              -----------------
                                                                                            (Dollars in thousands)
                                                                              1 Year           1-5          5 Years
                                                                             or Less          Years         or More           Total
                                                                             -------          -----         -------           -----

<S>                                                                         <C>             <C>             <C>             <C>
Commercial and industrial ..........................................        $ 10,200        $  8,213        $    184        $ 18,597
Real Estate-construction ...........................................          40,099           9,141             430          49,670
Real Estate-mortgage ...............................................          11,574          39,483           9,809          60,866
Consumer ...........................................................           1,206             843               -           2,049
                                                                            --------        --------        --------        --------
      Total ........................................................        $ 63,079        $ 57,680        $ 10,423        $131,182
                                                                            ========        ========        ========        ========

Predetermined rate, maturity greater than one year .................                        $ 40,899        $  2,106        $ 43,005

Variable rate, maturity greater than one year ......................                        $ 16,780        $  8,318        $ 25,098
</TABLE>

Impaired Loans

         A loan will be considered to be impaired when, in management's judgment
based on  current  information  and  events,  it is  probable  that  the  loan's
principal or interest will not be  collectible  in accordance  with the terms of
the original loan agreement.  Impaired loans, when not material, will be carried
in the balance sheet at a value not to exceed their  observable  market price or
the fair value of the  collateral if the repayment of the loan is expected to be
provided  solely  by the  underlying  collateral.  The  carrying  values  of any
material  impaired loans will be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is the
contractual  interest rate adjusted for any deferred loan fees or costs, premium
or discount existing at the inception or acquisition of the loan.



                                       16
<PAGE>

         Loans  which  management  identifies  as  impaired  generally  will  be
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more  delinquent  as to  principal  or interest  payments.  As of
December 31, 2008,  the Bank had nonaccrual  loans of $2.4 million.  This amount
includes  ten loans to one  customer  totaling  $1.3 million and two other loans
totaling $1.1 million,  all of which are collateral  dependent.  These loans are
secured  by real  estate,  and  were in the  process  of  foreclosure  or  other
collection  processes as of December 31, 2008.  If these loans had been current,
the Company would have recorded  additional  interest income of $76,238 on these
loans.  All previously  accrued but  uncollected  income on these loans has been
eliminated  from the  accompanying  consolidated  income  statement.  Impairment
reserves of $150,000 are included in the  allowance  for loan losses  related to
loans on nonaccrual as of December 31, 2008. Refer to the notes to the Company's
consolidated   financial   statements   contained   elsewhere  herein  for  more
information.  The allowance for loan losses includes  management's best estimate
of the  possible  losses  on these  loans.  At  December  31,  2007 the Bank had
nonaccrual  loans  or  loans  90  days  or  more  past  due of  $291,697  and no
restructured loans.

         Generally,  the accrual of interest  will be  discontinued  on impaired
loans when  principal  or interest  becomes 90 days past due, or when payment in
full is not anticipated,  and any previously accrued interest on such loans will
be reversed  against  current  income.  Any subsequent  interest  income will be
recognized on a cash basis when received unless  collectibility of a significant
amount of principal is in serious doubt. In such cases, collections are credited
first to the remaining  principal  balance on a cost recovery basis. An impaired
loan will not be returned to accrual  status  unless  principal and interest are
current  and the  borrower  has  demonstrated  the  ability to  continue  making
payments as agreed.

Potential Problem Loans

         Management  identifies and maintains a list of potential problem loans.
These are loans that are not included in  nonaccrual  status,  or loans that are
past due 90 days or more and  still  accruing  interest.  A loan is added to the
potential  problem  list when  management  becomes  aware of  information  about
possible  credit  problems of  borrowers  that causes  serious  doubts as to the
ability of such borrowers to comply with the current loan repayment terms. These
loans are  designated  as such in order to be monitored  more closely than other
credits in the Bank's portfolio.  There were loans in the amount of $4.7 million
that have  been  determined  by  management  to be  potential  problem  loans at
December  31,  2008.  The  majority of these  loans are secured by real  estate.
Management  is  currently  assessing  the  potential  impact on the Bank and the
Company.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the
period in which  management  determines  that it is likely  that such loans have
become  uncollectible.  Recoveries  of  previously  charged  off  loans  will be
credited to the  allowance.  In reviewing the adequacy of the allowance for loan
losses at each year end, management takes into consideration the historical loan
losses  experienced  by the bank,  current  economic  conditions  affecting  the
borrowers'  ability to repay, the volume of loans, and the trends in delinquent,
nonaccruing,  and any  potential  problem  loans,  and the quality of collateral
securing nonperforming and problem loans. Management considers the allowance for
loan losses to be adequate to cover its estimate of loan losses  inherent in the
loan portfolio as of December 31, 2008.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio.  Also,  the
calculation provides for management's assessment of trends in national and local
economic conditions that might affect the general quality of the loan portfolio.


                                       17
<PAGE>



                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                      Year ended December 31,
                                                                                                      2008                 2007
                                                                                                      ----                 ----
                                                                                                        (Dollars in thousands)

<S>                                                                                                <C>                   <C>
Total loans outstanding at end of period ...............................................           $ 131,182             $ 108,643
Average amount of loans outstanding ....................................................           $ 115,162             $ 102,917
                                                                                                   ---------             ---------

Balance of allowance for loan losses-beginning .........................................           $   1,293             $   1,200
Loans charged-off
      Commercial .......................................................................                 186                     -
      Commercial real estate ...........................................................                 498                    91
      Consumer installment .............................................................                   1                    13
                                                                                                   ---------             ---------
         Total charge-offs .............................................................                 685                   104
Recoveries of loans previously charged-off - commercial loans ..........................                 276                     -
                                                                                                   ---------             ---------
Net (charge-offs) recoveries ...........................................................                (409)                 (104)

Additions to allowance charged to expense ..............................................                 815                   197
                                                                                                   ---------             ---------
Balance of allowance for loan losses-ending ............................................           $   1,699             $   1,293
                                                                                                   =========             =========


Ratios
      Net (charge-offs) recoveries to average loans outstanding ........................                (.35%)                (.10%)
      Net (charge-offs) recoveries to loans at end of period ...........................                (.31%)                (.10%)
      Allowance for loan losses to average loans .......................................                1.48%                 1.27%
      Allowance for loan losses to loans at end of period ..............................                1.30%                 1.19%
      Net (charge-offs) recoveries to allowance for loan losses ........................               (24.1%)                (8.0%)
      Net (charge-offs) recoveries to provision for loan losses ........................               (50.3%)               (52.6%)
</TABLE>

         The allowance for loan losses is not restricted to specific  categories
of loans and is available to absorb losses in all  categories.  Each category of
loans is reviewed for  characteristics  that  increase or decrease risk of loss,
such  as  the   availability  and   marketability   of  collateral,   degree  of
susceptibility  to  changes  in  economic  conditions,  etc.,  for  purposes  of
estimating   the   allowance   for   loan   losses.   (See   "Business   of  the
Company--Services of the Bank" for a discussion of risk characteristics for each
loan  category.)  Individual  loans are graded using an internal  grading system
that  considers  information  specific  to the loan.  If  warranted,  a specific
allocation  may be  associated  with that loan for  purposes of  estimating  the
adequacy of the allowance for loan losses.  During 2008, the Company charged off
loans  totaling  $685,166.  Management  continues to pursue  recovery of amounts
charged-off  in previous  years.  However,  it is not possible to determine  the
amount, if any, that can be recovered at this time.

Real Estate Owned

         The Bank had  $575,000  and  $69,000 of real estate  owned  pursuant to
foreclosure  or  in-substance   foreclosure  at  December  31,  2008  and  2007,
respectively.  The real estate owned as of December 31, 2008 was under  contract
for  sale.  An  immaterial  amount  of costs  are  expected  to be  recorded  in
conjunction  with  sale of the real  estate.  Real  estate  owned  is  initially
recorded at the lower of net loan principal balance or its estimated fair market
value less estimated  selling  costs.  The estimated fair value is determined by
appraisal at the time of acquisition.



                                       18
<PAGE>

Deposits

         The amounts and percentage  composition of deposits held by the Bank as
of December 31, 2008 and 2007 are summarized below:

                               Deposit Composition

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                                             2008                               2007
                                                                             ----                               ----
                                                                                     (Dollars in thousands)
                                                                                        % of                               % of
                                                                    Amount            Deposits          Amount            Deposits
                                                                    ------            --------          ------            --------

<S>                                                                <C>                  <C>            <C>                  <C>
Noninterest bearing demand .................................       $ 10,070               8.2%         $ 13,646              12.3%
Interest bearing transaction accounts ......................         13,013              10.6            15,083              13.6
Savings ....................................................         13,849              11.3             2,712               2.5
Money market ...............................................          7,286               6.0             8,092               7.3
Time deposits $100,000 and over ............................         41,810              34.1            31,976              28.8
Other time deposits ........................................         36,554              29.8            39,425              35.5
                                                                   --------             -----          --------             -----
    Total deposits .........................................       $122,582             100.0%         $110,934             100.0%
                                                                   ========             =====          ========             =====
</TABLE>

         The average  amounts of and average  rate paid on deposits  held by the
Bank for the years ended December 31, 2008 and 2007, are summarized below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                                  -----------------------
                                                                              2008                        2007
                                                                              ----                        ----
                                                                      Amount         Rate         Amount         Rate
                                                                      ------         ----         ------         ----
                                                                                    (Dollars in thousands)

<S>                                                                   <C>            <C>         <C>             <C>
Noninterest bearing demand ........................................   $ 10,914          -%       $ 11,984           -%
Interest bearing transaction accounts .............................     13,502        .92%         13,708        1.15%
Savings and money market ..........................................     14,994       1.98%         10,461        2.12%
Time deposits .....................................................     76,234       3.68%         71,613        4.81%
                                                                      --------                   --------
      Total average deposits ......................................   $115,644                   $107,766
                                                                      ========                   ========
</TABLE>

         As of December 31, 2008,  the Bank held $41.8  million of time deposits
with balances of $100,000 or more. Of that amount,  $12.6 million  mature within
three months,  $14.5 million mature over three through six months,  $8.2 million
mature over six  through  twelve  months,  and $6.5  million  mature over twelve
months. $600,000 of time deposits over $100,000 or more are at floating rates of
interest at December 31, 2008.

         While many of the large time deposits are acquired from  customers with
standing  relationships  with the Bank, it is a common industry  practice not to
consider these types of deposits as core deposits because their retention can be
expected to be heavily influenced by rates offered,  and therefore such deposits
may have the characteristics of shorter-term  purchased funds.  Certain deposits
included  in total  deposits  over  $100,000  are  brokered  deposits.  Brokered
deposits  are  acquired in the  wholesale  market but are issued to the eventual
customer in increments of less than $100,000. The majority of these deposits are
not redeemable  prior to maturity except in the case of death. All time deposits
over $100,000  involve the  maintenance of an  appropriate  matching of maturity
distribution and a diversification of sources to achieve an appropriate level of
liquidity.

Customer Repurchase Agreements

         Customer  repurchase  agreements  consist of sweep  accounts and retail
repurchase agreements, and totaled $4.6 million and $5.8 million at December 31,
2008  and  2007,   respectively.   Securities  issued  by  government  sponsored
enterprises  with an amortized cost of $5.6 million and $6.6 million (fair value
of $5.9 million and $6.8 million) were used as collateral for the sweep accounts
and retail repurchase agreements,  at December 31, 2008 and 2007,  respectively.


                                       19
<PAGE>

All of the sweep  accounts pay interest on a floating  rate basis.  The customer
repurchase  agreements pay interest on a fixed rate basis and have maturities of
varying  lengths.  As of December 31, 2008,  $2.8 million of the Bank's customer
repurchase  agreements  mature in 2009 and $350,000 mature in 2010.  During 2008
the average amount of customer repurchase  agreements and sweep accounts totaled
$5.0 million.  The Bank paid an average interest rate of 3.21% on these funds in
2008.

Broker Repurchase Agreements

         Broker  repurchase   agreements  consist  of  two  separate  borrowings
totaling $5.0 million.  These borrowings carry fixed rates of interest with call
features. The agreements mature as follows: $3.0 million maturing on January 15,
2015,  callable by the broker quarterly after January 15, 2012, and $2.0 million
maturing  on January  15,  2013,  callable  by the broker  quarterly,  beginning
January 10, 2010.  Securities with fair value of $6.2 million and amortized cost
of $6.5 million  collateralize the agreements.  During 2008, the highest balance
as of any month end for broker  repurchase  agreements  was $5.0 million and the
average  balance  for 2008 was $4.8  million.  The  average  rate paid on broker
repurchase  agreements  during 2008 was 3.53%.  There were no broker  repurchase
agreements as of December 31, 2007.

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner.  Some liquidity is ensured by maintaining assets that may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less time deposits  greater than $100,000)  provide a relatively  stable funding
base, and were equal to 49.3% of total assets at December 31, 2008.

         Asset liquidity is provided from several sources, including amounts due
from banks and federal funds sold, unpledged securities, and funds from maturing
loans. The Company had $4.0 million in cash and cash equivalents at December 31,
2008.  The Bank has access to $5.3  million in lines of credit  with other banks
and a line of credit  with the  Federal  Home Loan Bank of Atlanta  ("FHLB")  as
additional sources of liquidity funding.  The lines with the other banks are for
short-term  use only and are unsecured.  $3.5 million was available  under these
lines as of December 31, 2008.  There were no amounts  outstanding on short-term
lines of credit with other banks as of December 31, 2007.

         The line with the FHLB is equal to 10% of assets provided that adequate
collateral  is available  for  pledging.  The line may be used for short or long
term  funding  needs and may be used on a fixed or  variable-rate  basis.  As of
December  31,  2008,  the Bank had $10.4  million at various  rates of interest,
maturing at various dates through 2018, borrowed from the FHLB. During 2008, the
highest  balance  as of any  month  end for  borrowings  from the FHLB was $10.4
million.  The  average  rate paid on the  advances  during  2008 was 3.28%.  The
average balance of FHLB advances for 2008 was $7.0 million.

         During 2007, the highest balance outstanding from the FHLB at any month
end was $3.6  million.  The average  balance of FHLB  advances for 2007 was $2.8
million. The average interest rate paid on advances in 2007 was 4.13%.

         At December 31, 2008,  approximately  $6.0 million of additional  funds
were  available  under  the FHLB  line  provided  that  eligible  collateral  is
available.  Management  believes that the Bank's overall  liquidity  sources are
adequate to meet its operating needs in the ordinary course of its business.


Off-Balance Sheet Risk

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These  commitments are legally binding  agreements to lend money to customers of
the Bank at  predetermined  interest  rates for a specified  period of time.  At
December 31, 2008,  the Bank had issued  commitments  to extend  credit of $21.9
million through  various types of lending  arrangements.  Of these  commitments,
$21.1 million are at variable rates and $14.4 million of the total expire within
one year.  Past  experience  indicates that many of these  commitments to extend
credit will expire  unused and it is unlikely that a large portion would be used


                                       20
<PAGE>

in a short  period of time.  However,  through its various  sources of liquidity
discussed above, the Bank believes that it will have the necessary  resources to
meet these obligations should the need arise.

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby letters of credit which are assurances to a third party that it will not
suffer a loss if the Bank's customer fails to meet its contractual obligation to
the third party. Standby letters of credit totaled approximately $1.1 million at
December 31, 2008. Past experience  indicates that many of these standby letters
of credit will expire unused. However,  through its various sources of liquidity
discussed above, the Bank believes that it will have the necessary  resources to
meet these obligations should the need arise.

         The  Bank   offers   an   automatic   overdraft   protection   product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December 31, 2008.  The Bank expects the majority of this capacity
will not be  utilized.  During  2008,  the  average  balance  of demand  deposit
overdrafts was $25,935.

         Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships, unconsolidated related entities that have off-balance
sheet arrangements or transactions that could result in liquidity needs or other
commitments or significantly  impact earnings.  The Company did not maintain any
obligations  under  non-cancelable  operating  lease  agreements at December 31,
2008. The Company has less than one year remaining on a five-year  contract with
a company which provides data,  item and ATM  processing  services.  The monthly
costs  are  approximately  $19,000.  Refer to  notes 11 and 15 to the  Company's
consolidated  financial statements for additional  discussion on commitments and
contingencies and financial instruments with off-balance sheet risk.

Capital Resources

         At  December  31,  2008,  total   shareholders'   equity  decreased  by
approximately  $443,000 from $19.5 million at December 31, 2007 to $19.1 million
at December 31, 2008. The decrease was due to dividends paid of $597,471, offset
by net income of $225,316, items related to stock based compensation,  including
option exercises, of $138,005 and an unrealized loss on investment securities of
$170,344.  The  Company  does  not  anticipate  it will  be  required  to  raise
additional  capital in 2009 if growth  occurs in line with current  expectations
and the broader economy does not deteriorate further.

         The Company made capital  expenditures  for  furniture and equipment in
2008  totaling  approximately  $32,300.  No sizeable  capital  expenditures  for
premises are planned for 2009.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under  these  standards,  financial  institutions  are  required  to
maintain certain minimum ratios of capital to  risk-weighted  assets and average
total assets. Under the provisions of the Federal Deposit Insurance  Corporation
Improvements Act of 1991, federal financial institution  regulatory  authorities
are  required  to  implement  prescribed  "prompt  corrective  action"  upon the
deterioration  of the capital  position of a bank. If the capital position of an
affected institution were to fall below certain levels,  increasingly  stringent
regulatory  corrective  actions  are  mandated.  The  Company's  and the  Bank's
regulatory  capital  requirements and positions are summarized in note 19 to the
consolidated financial statements.


                                       21
<PAGE>

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend payout ratio (cash  dividends  declared per share divided by net income
per share),  and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2008 and 2007.

                                            December 31,           December 31,
                                                2008                  2007
                                                ----                  ----
Return on assets .........................      .15%                  1.18%
Return on equity .........................     1.16%                  8.73%
Dividend payout ratio ....................      265%                     -%
Equity to assets ratio (average) .........    12.68%                 13.56%


         In May, 2008 the Company  declared its first cash dividend.  The amount
of the dividend was determined based on a number of factors,  including previous
year's  earnings,  capital levels,  prospects for growth and earnings during the
coming  twelve  months,  and  availability  of  dividends  from  the Bank to the
Company.  There can be no assurance  that cash dividends will be declared in the
future.

          During  2009,  the Bank's plan of  operation is to attract new deposit
and loan customers, especially in the market areas around our branch offices, to
increase   the  ratio  of  services   per  customer  and  increase  the  account
profitability  of the Bank's current  customers.  The Bank plans to seek deposit
accounts from individuals and businesses in the Easley, Berea,  Powdersville and
surrounding  markets.  The Bank  intends  to offer  competitive  rates  for such
accounts  and may seek new  accounts  by  offering  rates  slightly  above those
prevailing  in the  market.  Management  will  continue  to  emphasize  personal
service, accessibility,  and flexibility as reasons for customers to do business
with the Bank.  Personal  contacts by management,  advertising,  and competitive
prices and services will be the Bank's principal marketing tools.

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank 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.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those businesses that have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally  corresponding  increases in the money supply,  and banks will normally
experience  above-average  growth in assets,  loans and  deposits.  Also general
increases  in the  prices  of goods and  services  usually  result in  increased
operating expenses.

Market for Common Equity and Related Stockholder Matters

         The  following  table  shows the high and low bid  prices of our common
stock  reported  by the  Over-the-Counter  Bulletin  Board.  The prices  reflect
inter-dealer prices,  without retail mark-up,  mark-down,  or commission and may
not represent  actual  transactions.  The prices have been adjusted to reflect a
10% stock dividend declared in April 2007 to shareholders of record as of May 8,
2007.

                                      Year ended              Year ended
                                  December 31, 2008       December 31, 2007
                                  -----------------       -----------------
                                    Low        High        Low        High
                                    ---        ----        ---        ----
         First Quarter .......    $11.25      $15.50     $13.18      $14.64
         Second Quarter ......    $13.75      $14.00     $13.86      $16.59
         Third Quarter .......    $10.30      $13.90     $15.75      $15.85
         Fourth Quarter ......    $10.00      $11.50     $12.00      $15.10


         Although  the common  stock of the  Company  may be traded from time to
time on an individual basis, no active trading market has developed and none may


                                       22
<PAGE>

develop  in the  foreseeable  future.  The  common  stock is not  listed  on any
exchange.  The stock is quoted on the Over-the-Counter  Bulletin Board under the
symbol "CTOT.OB."

         As of March 1, 2009, there were  approximately 596 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         The Company paid cash dividends of $597,471 for the first time in 2008.
The dividend  policy of the Company is subject to the discretion of the Board of
Directors and depends upon a number of factors,  including  earnings,  financial
conditions,  cash needs and general business  conditions,  as well as applicable
regulatory  considerations.  Because the Company  has no  operations  other than
those of the Bank and only has limited income of its own, the Company would rely
on  dividends  from  the  Bank as its  principal  source  of  cash  to pay  cash
dividends.

         Each national banking  association is required by federal law to obtain
the prior  approval of the OCC for the payment of  dividends if the total of all
dividends  declared  by the  board of  directors  of such  bank in any year will
exceed the total of (i) such bank's net profits (as defined and  interpreted  by
regulation)  for that year plus (ii) the  retained  net  profits (as defined and
interpreted  by  regulation)  for the  preceding  two years,  less any  required
transfers to surplus. In addition,  national banks can only pay dividends to the
extent that retained net profits (including the portion  transferred to surplus)
exceed bad debts (as defined by regulation).

         The  payment  of  dividends  by the  Company  and the  Bank may also be
affected  or limited by other  factors,  such as the  requirements  to  maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which,  depending on the
financial  condition of the Bank, could include the payment of dividends),  such
authority may require, after notice and hearing, that such bank cease and desist
from such practice.  The OCC has indicated that paying  dividends that deplete a
national  bank's  capital  base to an  inadequate  level  would be an unsafe and
unsound banking practice.  The Federal Reserve, the OCC and the FDIC have issued
policy  statements,  which provide that bank holding companies and insured banks
should generally only pay cash dividends out of current operating earnings.

Management's Annual Report on Internal Control Over Financial Reporting

         Management is responsible for  establishing  and  maintaining  adequate
internal control over financial  reporting,  as such term is defined in Exchange
Act Rule 13a-15(f).  A system of internal control over financial  reporting is a
process designed to provide  reasonable  assurance  regarding the reliability of
financial  reporting and the  preparation  of financial  statements for external
purposes in accordance with generally accepted accounting principles.

         Under  the  supervision  and  with  the  participation  of  management,
including the principal  executive officer and the principal  financial officer,
the Company's management has evaluated the effectiveness of its internal control
over  financial  reporting  as of  December  31,  2008  based  on  the  criteria
established in a report entitled "Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission" and the
interpretive  guidance  issued by the  Securities  and  Exchange  Commission  in
Release No.  34-55929.  Based on this evaluation,  the Company's  management has
evaluated  and  concluded  that the Company's  internal  control over  financial
reporting was effective as of December 31, 2008.

         This  annual  report  does not  include  an  attestation  report of the
Company's  independent  registered  public  accounting  firm regarding  internal
control over financial reporting because  management's report was not subject to
attestation  by the  Company's  registered  public  accounting  firm pursuant to
temporary  rules of the  Securities  and  Exchange  Commission  that  permit the
Company to provide only management's report in this annual report.



                                       23
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina


           We have  audited  the  accompanying  consolidated  balance  sheets of
Cornerstone  Bancorp and Subsidiary  (the "Company") as of December 31, 2008 and
2007,   and  the  related   consolidated   statements  of  income,   changes  in
shareholders'  equity and comprehensive  income,  and cash flows for each of the
three years in the period ended December 31, 2008. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

           We  conducted  our audits in  accordance  with the  standards  of the
Public Company  Accounting  Oversight  Board (United  States).  Those  standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

           In our opinion,  the consolidated  financial  statements  referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Cornerstone Bancorp and Subsidiary at December 31, 2008 and 2007 and
the results of their operations and their cash flows for each of the three years
in the period  ended  December  31,  2008,  in  conformity  with  United  States
generally accepted accounting principles.

         We were  not  engaged  to  examine  management's  assertion  about  the
effectiveness  of Cornerstone  Bancorp and  Subsidiary's  internal  control over
financial  reporting  as of  December  31,  2008  included  in the  accompanying
Management's  Annual Report on Internal  Control Over  Financial  Reporting and,
accordingly, we do not express an opinion thereon.


                                                          /s/ Elliott Davis, LLC


Greenville, South Carolina
March 24, 2009



                                       24
<PAGE>



                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                               December 31,
                                                                                                               ------------
                                                                                                         2008                 2007
                                                                                                         ----                 ----
Assets

<S>                                                                                                 <C>                 <C>
Cash and due from banks ....................................................................        $  3,820,227        $  4,266,777
Federal funds sold .........................................................................             140,000             967,000
                                                                                                    ------------        ------------
       Cash and cash equivalents ...........................................................           3,960,227           5,233,777

Investment securities
     Available-for-sale ....................................................................          19,676,604          18,054,409
     Other investments .....................................................................           1,114,150             816,500

Loans, net .................................................................................         129,483,130         107,350,202
Property and equipment, net ................................................................           5,551,275           5,808,568
Cash surrender value of life insurance policies ............................................           1,768,520           1,697,429
Other real estate owned ....................................................................             575,000              69,000
Other assets ...............................................................................           1,722,161           1,468,187
                                                                                                    ------------        ------------
              Total assets .................................................................        $163,851,067        $140,498,072
                                                                                                    ============        ============


Liabilities And Shareholders' Equity

Liabilities
     Deposits
         Noninterest bearing ...............................................................        $ 10,069,125        $ 13,645,852
         Interest bearing ..................................................................         112,512,449          97,288,616
                                                                                                    ------------        ------------
         Total deposits ....................................................................         122,581,574         110,934,468
     Federal funds purchased ...............................................................           1,810,000                   -
     Customer repurchase agreements ........................................................           4,582,619           5,802,935
     Borrowings from Federal Home Loan Bank of Atlanta .....................................          10,394,005           3,544,838
     Broker repurchase agreements ..........................................................           5,000,000                   -
     Other liabilities .....................................................................             345,922             635,001
                                                                                                    ------------        ------------

         Total liabilities .................................................................         144,714,120         120,917,242

Commitments and contingencies - Notes 11 and 15

Shareholders' equity
     Preferred stock, 10,000 shares authorized, no shares issued ...........................                   -                   -
     Common stock, no par value, 20,000,000 shares authorized, 1,991,565 and
       1,983,169 shares issued at December 31, 2008 and 2007, respectively .................          18,323,333          18,185,328
     Retained earnings .....................................................................             765,906           1,177,450
       Accumulated other comprehensive income ..............................................              47,708             218,052
                                                                                                    ------------        ------------

         Total shareholders' equity ........................................................          19,136,947          19,580,830
                                                                                                    ------------        ------------

         Total liabilities and shareholders' equity ........................................        $163,851,067        $140,498,072
                                                                                                    ============        ============
</TABLE>

         The  accompanying  notes  are an  integral  part of these  consolidated
financial statements.


                                       25
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                      2008                2007               2006
                                                                                      ----                ----               ----
Interest Income
<S>                                                                               <C>                 <C>                <C>
     Loans and fees on loans .............................................        $ 7,848,630         $ 8,834,764        $ 7,538,140
     Investment securities ...............................................          1,161,545             944,003            791,730
     Federal funds sold and other ........................................             91,870             228,687            294,579
                                                                                  -----------         -----------        -----------

          Total interest income ..........................................          9,102,045          10,007,454          8,624,449

Interest Expense
     Deposits ............................................................          3,229,237           3,822,618          2,896,671
     Federal funds sold and customer repurchase agreements ...............            170,090             238,562            116,409
     Federal Home Loan Bank advances .....................................            228,129             115,810            149,016
     Broker repurchase agreements ........................................            170,756                   -                  -
                                                                                  -----------         -----------        -----------

          Total interest expense .........................................          3,798,212           4,176,990          3,162,096
                                                                                  -----------         -----------        -----------

          Net interest income ............................................          5,303,833           5,830,464          5,462,353

     Provision for loan losses ...........................................            815,000             196,636            445,896
                                                                                  -----------         -----------        -----------

          Net interest income after provision for loan losses ............          4,488,833           5,633,828          5,016,457

Noninterest Income (Expense)
     Mortgage loan origination fees ......................................            275,721             437,157            582,290
     Service fees on deposit accounts ....................................            579,298             542,937            472,420
     Gain on sale of land ................................................                  -                   -            241,696
     Other-than-temporary-impairment of FNMA preferred stock .............           (918,264)                  -                  -
     Other ...............................................................            127,211              94,720             89,971
                                                                                  -----------         -----------        -----------

          Total noninterest income .......................................             63,966           1,074,814          1,386,377
                                                                                  -----------         -----------        -----------

Noninterest Expenses
     Salaries and benefits ...............................................          2,415,115           2,443,315          2,305,982
     Occupancy and equipment .............................................            600,426             567,222            502,807
     Data processing .....................................................            231,958             234,671            203,814
     Advertising .........................................................             69,859              76,530             90,423
     Supplies ............................................................             85,895             111,918             94,157
     Professional and regulatory fees ....................................            320,027             314,516            229,148
     Directors fees ......................................................            130,450             127,700            105,850
     Other real estate owned .............................................             50,889               7,207                  -
     Deposit charge-offs .................................................             26,461              39,387             51,516
     Other operating .....................................................            414,003             363,191            364,403
                                                                                  -----------         -----------        -----------

          Total noninterest expenses .....................................          4,345,083           4,285,657          3,948,100
                                                                                  -----------         -----------        -----------

          Income before income taxes .....................................            207,716           2,422,985          2,454,734

     Income tax provision (benefit) ......................................            (17,600)            810,232            794,998
                                                                                  -----------         -----------        -----------

          Net income .....................................................        $   225,316         $ 1,612,753        $ 1,659,736
                                                                                  ===========         ===========        ===========

Earnings Per Common Share
     Basic ...............................................................        $       .11         $       .82        $       .85
     Diluted .............................................................        $       .11         $       .80        $       .83

Weighted Average Common Shares Outstanding
     Basic ...............................................................          1,989,890           1,965,635          1,950,378
     Diluted .............................................................          2,041,860           2,016,850          2,002,524
</TABLE>

         The  accompanying  notes  are an  integral  part of these  consolidated
financial statements.

                                       26
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                              Common stock                               other             Total
                                                              ------------              Retained      comprehensive    shareholders'
                                                          Shares        Amount          earnings      income (loss)        equity
                                                          ------        ------          --------      -------------        ------

<S>                                                     <C>          <C>             <C>              <C>              <C>
Balance, December 31, 2005 ......................       1,475,743    $ 13,071,896    $    837,565     $    (81,476)    $ 13,827,985
                                                                                                                       ------------

Net income ......................................               -               -       1,659,736                -        1,659,736
   Other comprehensive income, net of
     income taxes:
   Unrealized gain on investment
       securities ...............................               -               -               -          147,734          147,734
                                                                                                                       ------------
   Comprehensive income .........................                                                                         1,807,470
Stock based compensation ........................               -          19,784               -                -           19,784
Stock dividend (10%), net of
       cash in lieu of fractional shares ........         161,375         994,462        (997,498)               -           (3,036)
Issuance of shares in secondary offering ........         140,195       1,886,524               -                -        1,886,524
                                                     ------------    ------------    ------------     ------------     ------------

Balance, December 31, 2006 ......................       1,777,313      15,972,666       1,499,803           66,258       17,538,727
                                                                                                                       ------------

Net income ......................................               -               -       1,612,753                -        1,612,753
   Other comprehensive income, net of
     income taxes:
   Unrealized gain on investment
       securities ...............................               -               -               -          151,794          151,794
                                                                                                                       ------------
   Comprehensive income .........................                                                                         1,764,547
Stock based compensation ........................               -          40,797               -                -           40,797
Stock option exercises, including
      Tax benefit of $54,550 ....................          27,306         238,990               -                -          238,990
Stock dividend (10%), net of
       cash in lieu of fractional shares ........         178,550       1,932,875      (1,935,106)               -           (2,231)
                                                     ------------    ------------    ------------     ------------     ------------

Balance, December 31, 2007 ......................       1,983,169      18,185,328       1,177,450          218,052       19,580,830
                                                                                                                       ------------

Net income ......................................               -               -         225,316                -          225,316
   Other comprehensive income, net of
     income taxes:
   Unrealized loss on investment
       securities ...............................               -               -               -         (170,344)        (170,344)
                                                                                                                       ------------
   Comprehensive income .........................                                                                            54,972
Cumulative effect of accounting
       change ...................................               -               -         (39,389)               -          (39,389)
Stock based compensation ........................               -          56,172               -                -           56,172
Stock option exercises ..........................           8,396          81,833               -                -           81,833
Cash dividend paid ..............................               -               -        (597,471)               -         (597,471)
                                                     ------------    ------------    ------------     ------------     ------------
Balance, December 31, 2008 ......................       1,991,565    $ 18,323,333    $    765,906     $     47,708     $ 19,136,947
                                                     ============    ============    ============     ============     ============
</TABLE>

         The  accompanying  notes  are an  integral  part of these  consolidated
financial statements


                                       27
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               Years ended December 31,
                                                                                               ------------------------
                                                                                          2008           2007             2006
                                                                                          ----           ----             ----
Operating Activities
<S>                                                                                <C>             <C>             <C>
       Net income ..............................................................   $    225,316    $  1,612,753    $  1,659,736
       Adjustments to reconcile net income to net cash provided
        by operating activities
             Depreciation and net amortization .................................        292,585         285,241         276,521
             Deferred income tax (benefit) expense .............................       (315,107)          4,508         (95,733)
             Provision for loan losses .........................................        815,000         196,636         445,896
             Other than temporary impairment of FNMA Preferred .................        918,264               -               -
             Gain on sale of land ..............................................              -               -        (241,696)
             (Gain) loss on sale of OREO .......................................         (3,464)          9,672               -
             (Gain) loss on sale of fixed assets ...............................           (481)              -               -
             Non-cash option expense ...........................................         56,172          40,797          19,784
             Increase in other assets ..........................................         (9,958)       (216,723)       (311,758)
             Increase (decrease) in other liabilities ..........................       (240,717)       (104,341)        193,791
                                                                                   ------------    ------------    ------------

               Net cash provided by operating activities .......................      1,737,610       1,828,543       1,946,541
                                                                                   ------------    ------------    ------------

Investing Activities
       Proceeds from maturities and principal paydowns of
        investment securities ..................................................      4,276,949       4,358,412       8,077,893
       Proceeds from sale of OREO ..............................................        399,208          96,528               -
       Purchase of investment securities .......................................     (7,085,514)     (5,005,942)    (11,643,855)
       Purchase of FHLB and Federal Reserve stock, net .........................       (297,650)         (2,900)       (203,800)
       Increase in loans, net ..................................................    (23,849,672)    (11,365,651)    (10,528,678)
       Proceeds from sale of property and equipment ............................          7,495               -         273,493
       Purchase of property and equipment ......................................        (32,295)     (1,679,829)       (137,001)
                                                                                   ------------    ------------    ------------

               Net cash used for investing activities ..........................    (26,581,479)    (13,599,382)    (14,161,948)
                                                                                   ------------    ------------    ------------

Financing Activities
       Net increase in deposits ................................................     11,647,106       9,268,272      10,014,155
       Net increase (decrease) in customer repurchase agreements ...............     (1,220,316)        738,795       1,980,256
       Net increase Federal funds purchased ....................................      1,810,000               -               -
       Borrowings from Federal Home Loan Bank of Atlanta .......................     11,800,000       1,000,000               -
       Repayments to Federal Home Loan Bank of Atlanta .........................     (4,950,833)       (150,833)     (1,650,834)
       Proceeds from broker repurchase agreements ..............................      5,000,000               -               -
       Proceeds from sale of common stock, net .................................              -               -       1,886,524
       Proceeds from exercise of stock options .................................         81,833         238,990               -
       Cash dividends paid .....................................................       (597,471)              -               -
       Cash paid in lieu of fractional shares ..................................              -          (2,231)         (3,036)
                                                                                   ------------    ------------    ------------

               Net cash provided by financing activities .......................     23,570,319      11,092,993      12,227,065
                                                                                   ------------    ------------    ------------

                    Net increase (decrease) in cash and cash
                      equivalents ..............................................     (1,273,550)       (677,846)         11,658

Cash and cash equivalents, beginning of year ...................................      5,233,777       5,911,623       5,899,965
                                                                                   ------------    ------------    ------------

Cash and cash equivalents, end of year .........................................   $  3,960,227    $  5,233,777    $  5,911,623
                                                                                   ============    ============    ============

Cash paid for:
       Interest ................................................................   $  3,803,188    $  4,145,118    $  3,118,302
                                                                                   ============    ============    ============
       Income taxes ............................................................   $    438,048    $    932,075    $    822,000
                                                                                   ============    ============    ============
Non-cash Supplemental information:
       Loans transferred to other real estate owned ............................   $    931,761    $     69,000    $          -
                                                                                   ============    ============    ============
       Loans charged-off, net ..................................................   $    409,567    $    103,505    $    304,192
                                                                                   ============    ============    ============
</TABLE>

         The  accompanying  notes  are an  integral  part of these  consolidated
financial statements


                                       28
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

         Cornerstone Bancorp, (the "Company") was incorporated under the laws of
the State of South  Carolina  for the  purpose of  operating  as a bank  holding
company  for  Cornerstone  National  Bank (the  "Bank").  The  Company  obtained
regulatory approval to acquire the Bank and opened the Bank for business in 1999
with a total  capitalization of $6.0 million.  To increase capital available for
growth,  the Company  offered  445,000  shares of its common stock pursuant to a
prospectus  dated October 4, 2005. Upon completion in January 2006, the offering
added approximately $6.0 million to the Company's total capitalization.

         The Bank provides full commercial  banking services to customers and is
subject to  regulation by the Office of the  Controller of the Currency  ("OCC")
and the  Federal  Deposit  Insurance  Corporation.  The  Company  is  subject to
regulation by Federal  Reserve and to limited  regulation by the South  Carolina
State Board of Financial  Institutions.  The Bank maintains  branch locations in
the Berea  area of  Greenville  County  and the  Powdersville  area of  Anderson
County,  South  Carolina in addition  to its  headquarters  in Easley in Pickens
County, South Carolina. In 2004, the Bank established a wholly owned subsidiary,
Crescent Financial Services, Inc. ("Crescent"), which is an insurance agency. In
2008, 2007 and 2006, Crescent's transactions were immaterial to the consolidated
financial statements.

   Basis of presentation

     The consolidated  financial  statements include the accounts of the Company
     and its  wholly-owned  subsidiary,  the Bank.  The Company  operates as one
     business segment.  All significant  intercompany  balances and transactions
     have been  eliminated.  The  accounting and reporting  policies  conform to
     accounting  principles  generally  accepted in the United States of America
     and to general  practices  in the banking  industry.  The Company  uses the
     accrual basis of accounting.

   Estimates

     The  preparation of  consolidated  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     ("GAAP") requires  management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and  liabilities as of the date of the financial  statements and the
     reported amount of income and expenses during the reporting periods. Actual
     results could differ from those  estimates.  The Company's most significant
     estimates relate to the allowance for loan losses and income taxes.

   Concentrations of credit risk

     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various personal and commercial purposes. The Bank has a
     diversified loan portfolio and the borrowers'  ability to repay their loans
     is not  dependent  upon any specific  economic  sector.  The Bank  monitors
     concentrations in its customer base using the North American Industry Codes
     ("NAIC"). As of December 31, 2008, the Bank has concentrations of credit in
     real  estate  rental  and  leasing,   accommodation   and  food   services,
     construction,  retail trade,  health care and social assistance,  and other
     services,  which  by NAIC  category  comprise  over  25% of Tier 1  Capital
     adjusted  for the  allowance  for loan  losses.  Although a majority of the
     Bank's loans are  collateralized by real estate,  the Bank believes that it
     has proper internal controls to identify and mitigate risks associated with
     this concentration in real estate collateral.

   Investment securities

     The  Company   accounts  for  investment   securities  in  accordance  with
     Statements of Financial  Accounting Standards ("SFAS") No. 115, "Accounting
     for  Certain  Investments  in Debt and Equity  Securities"  and SFAS No.157
     "Fair Value  Measurements." SFAS No.115 requires  investments in equity and
     debt securities to be classified into three categories:
                                                                     (Continued)



                                       29
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

1.      Available-for-sale   securities:  These  are  securities  that  are  not
        classified  as either held to maturity or as trading  securities.  These
        securities  are  reported at fair  market  value.  Unrealized  gains and
        losses are  reported,  net of income  taxes,  as separate  components of
        shareholders' equity (accumulated other comprehensive income).

2.      Held-to-maturity  securities:  These are investment  securities that the
        Company  has the  ability  and  intent  to hold  until  maturity.  These
        securities are stated at cost, adjusted for amortization of premiums and
        the accretion of discounts.

3.      Trading  securities:  These  are  securities  that are  bought  and held
        principally  for the  purpose  of selling  in the near  future.  Trading
        securities  are reported at fair market  value,  and related  unrealized
        gains and losses are recognized in the income statement. The Company has
        no trading securities.

    The Company reviews all investments with unrealized losses as of the balance
    sheet date for possible impairment. Our review consists of an examination of
    each security with regard to its issuer, credit rating, time to maturity and
    likelihood of sale prior to maturity. Any losses determined to be other than
    temporary are recognized through the income statement.

    SFAS No. 157 defines fair value,  establishes a framework for measuring fair
    value  under  generally   accepted   accounting   principles,   and  expands
    disclosures  about fair value  measurements.  Available for sale  securities
    owned  by  the  Company  include  government   sponsored  enterprise  bonds,
    mortgage-backed  securities,  municipal bonds, and preferred stock issued by
    the Federal National Mortgage  Association  ("FNMA"), a government sponsored
    enterprise. The fair values of the Company's available for sale investments,
    other than municipal  bonds,  are measured on a recurring basis using quoted
    market prices in active markets for identical assets and liabilities ("Level
    1 inputs" under SFAS No. 157). Due to the lower level of trading activity in
    municipal  bonds,  the fair market values of these  investments are measured
    based  on  other  inputs  such  as  inputs  that  are  observable  or can be
    corroborated by observable market data for similar assets with substantially
    the same terms ("Level 2 inputs" under SFAS No. 157).

     Other  investments  include  the Bank's  stock  investments  in the Federal
     Reserve Bank of Richmond ("Reserve Bank") and the Federal Home Loan Bank of
     Atlanta  ("FHLB").  The Bank, as a member  institution,  is required to own
     certain  stock  investments  in the  Reserve  Bank and  FHLB.  The stock is
     generally pledged against any borrowings from the Reserve Bank and FHLB. No
     ready  market  exists  for the  stock and it has no  quoted  market  value.
     Redemption of these stock  investments has historically  been at par value.
     However,  there can be no assurance that future  redemptions will be at par
     value. Other investments are carried at cost.

     Gains or losses on dispositions  of investment  securities are based on the
     differences  between the net proceeds and the adjusted  carrying  amount of
     the securities sold, using the specific identification method.

   Loans, interest and fee income on loans

     Loans are stated at the principal  balance  outstanding.  Unearned discount
     and the allowance for possible loan losses are deducted from total loans in
     the balance sheet.  Interest income is recognized over the term of the loan
     based on the principal amount outstanding.

     Generally,  the accrual of interest will be  discontinued on impaired loans
     when  principal  or interest  becomes 90 days past due, or when  payment in
     full is not anticipated,  and any previously accrued interest on such loans
     will be reversed  against  current income.  Any subsequent  interest income
     will be recognized on a cash basis when received unless collectibility of a
     significant  amount  of  principal  is in  serious  doubt.  In such  cases,
     collections are credited first to the remaining principal balance on a cost
     recovery  basis.  An impaired  loan will not be returned to accrual  status
     unless principal and interest are current and the borrower has demonstrated
     the ability to continue  making payments as agreed.  Non-performing  assets
     include real estate acquired  through  foreclosure or deed taken in lieu of
     foreclosure,  and  loans on  non-accrual  status.  Fee  income  on loans is
     recognized  as  income  at  the  time  loans  are  originated.  Due  to the
     short-term nature of the majority of the Bank's loans and the immateriality
     of the net deferred amount,  this method approximates the income that would
     be earned if the Company deferred loan fees and costs under SFAS No. 91.

                                                                     (Continued)



                                       30
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

Allowance for loan losses

     The Company provides for loan losses using the allowance method. Loans that
     are  determined  to be  uncollectible  are charged  against the  allowance.
     Provisions for loan losses and recoveries on loans  previously  charged off
     are added to the  allowance.  The  provision  for loan  losses  charged  to
     operating  expenses reflects the amount deemed appropriate by management to
     establish an adequate  reserve to meet the probable loan losses incurred in
     the current loan portfolio.  Management's judgment is based on periodic and
     regular evaluation of individual loans, the overall risk characteristics of
     the various portfolio  segments,  past experience with losses,  delinquency
     trends, and prevailing economic conditions.  While management uses the best
     information  available  to  make  evaluations,  future  adjustments  to the
     allowance may be necessary if economic conditions differ substantially from
     the  assumptions  used in making the  evaluations.  The  allowance for loan
     losses  is also  subject  to  periodic  evaluation  by  various  regulatory
     authorities and may be subject to adjustment upon their examination.

     The Bank  accounts  for  impaired  loans in  accordance  with SFAS No. 114,
     "Accounting by Creditors for Impairment of a Loan." This standard  requires
     that all  lenders  value a loan at the loan's  fair value if it is probable
     that the lender will be unable to collect all amounts due  according to the
     terms  of  the  loan  agreement.   Factors   considered  by  management  in
     determining  impairment  include payment status,  collateral value, and the
     probability of collecting  scheduled  principal and interest  payments when
     due.  Loans  that  experience  insignificant  payment  delays  and  payment
     shortfalls generally are not classified as impaired.  Management determines
     the significance of payment delays and payment shortfalls on a case-by-case
     basis taking into  consideration  all the circumstances of the loan and the
     borrower,  including  the length of the delay,  reasons for the delay,  the
     borrower's  payment  record and the amount of the  shortfall in relation to
     the principal and interest owed. Impairment is determined on a case-by-case
     basis.  The fair value of an impaired loan may be determined based upon the
     present  value  of  expected  cash  flows,  market  price of the  loan,  if
     available,  or value of the underlying collateral.  Expected cash flows are
     required to be discounted at the loan's effective interest rate.

     Under SFAS No. 114, when the ultimate  collectibility of an impaired loan's
     principal is in doubt,  wholly or partially,  all cash receipts are applied
     to principal. Once the reported principal balance has been reduced to zero,
     future cash receipts are applied to interest income, to the extent that any
     interest  has  been  foregone.   Further  cash  receipts  are  recorded  as
     recoveries of any amounts previously charged off.

     A loan is also considered  impaired if its terms are modified in a troubled
     debt  restructuring.  For these accruing  impaired loans, cash receipts are
     typically  applied to principal and interest  receivable in accordance with
     the terms of the restructured loan agreement. Interest income is recognized
     on these loans using the accrual method of accounting.

Other real estate owned

     Other  real  estate  owned is  carried  at the lower of cost or fair  value
     (market value less estimated selling cost), determined using an independent
     appraisal.

Property and equipment

     Property and equipment are stated at cost, net of accumulated depreciation.
     Depreciation is computed using the straight-line  method over the estimated
     useful lives of the related assets.  Maintenance and repairs are charged to
     operations, while major improvements are capitalized. Upon retirement, sale
     or other  disposition of property and equipment,  the cost and  accumulated
     depreciation are eliminated from the accounts, and gain or loss is included
     in income from operations.

Income taxes

     The Company  accounts  for income  taxes in  accordance  with SFAS No. 109,
     "Accounting for Income Taxes" and in accordance with  Interpretation No. 48
     ("FIN 48").  Under SFAS No. 109,  deferred tax assets and  liabilities  are
     recognized  for the expected  future tax  consequences  of events that have
     been recognized in the  consolidated  financial  statements or tax returns.
     Deferred  tax assets and  liabilities  are  measured  using the enacted tax
     rates  expected  to apply to  taxable  income in the  years in which  those
     temporary differences are expected to be realized
                                                                     (Continued)



                                       31
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     or settled.  FIN 48 seeks to reduce the  diversity  in practice  associated
     with  certain  aspects  of  the  recognition  and  measurement  related  to
     accounting for income taxes. The Company  implemented the provisions of FIN
     48 as of January 1, 2007, and has analyzed filing  positions in the federal
     and state jurisdictions where it is required to file income tax returns, as
     well as all open tax years in these  jurisdictions.  The  Company  believes
     that income tax filing  positions  taken or expected to be taken in its tax
     returns  will more  likely than not be  sustained  upon audit by the taxing
     authorities and does not anticipate any  adjustments  that will result in a
     material adverse impact on the Company's  financial  condition,  results of
     operations,  or cash flows. Therefore, no reserves for uncertain income tax
     positions have been recorded  pursuant to FIN 48. In addition,  the Company
     did not record a cumulative  effect  adjustment  related to the adoption of
     FIN 48.

Advertising and public relations expense

     Advertising, promotional and other business development costs are generally
     expensed  as  incurred.   External  costs   incurred  in  producing   media
     advertising  are  expensed  the first  time the  advertising  takes  place.
     External  costs relating to direct mailing costs are expensed in the period
     in which the direct mailings are sent.

Earnings per common share

     Basic  earnings  per common  share is computed on the basis of the weighted
     average  number of common shares  outstanding  in accordance  with SFAS No.
     128, "Earnings per Share." The treasury stock method is used to compute the
     effect of stock  options on the weighted  average  number of common  shares
     outstanding for diluted  earnings per common share. As of December 31, 2008
     there were 57,638 common stock equivalents  outstanding,  all of which were
     related to options issued by the Company. Options to purchase 52,414 shares
     of common stock were  antidilutive as of December 31, 2008 and were omitted
     from the diluted share  calculation.  The Company declared 10 percent stock
     dividends to shareholders of record as of May 8, 2007, May 9, 2006, May 10,
     2005, May 11, 2004,  March 17, 2003 and April 30, 2002.  2006 share and per
     share amounts on the  Consolidated  Statements of Income have been restated
     to reflect the applicable transactions.

Cash surrender value of life insurance policies

     Cash surrender value of life insurance  policies  represents the cash value
     of policies on certain officers of the Bank.

Statement of cash flows

     For purposes of reporting cash flows,  cash and cash  equivalents are those
     amounts which have an original maturity of three months or less.

Fair values of financial instruments

     SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments," as
     amended by SFAS No. 119, requires  disclosure of fair value information for
     financial instruments, whether or not recognized in the balance sheet, when
     it is  practicable  to  estimate  the fair  value.  SFAS No. 107  defines a
     financial  instrument  as cash,  evidence  of an  ownership  interest in an
     entity or  contractual  obligations  that  require the  exchange of cash or
     other financial  instruments.  Certain items are specifically excluded from
     the  disclosure  requirements,  including  the Company's  common stock.  In
     addition, other nonfinancial instruments such as premises and equipment and
     other   assets  and   liabilities   are  not  subject  to  the   disclosure
     requirements.

      The  following  methods  and  assumptions  were  used  by the  Company  in
      estimating fair values of financial instruments as disclosed herein:

          Cash and due from  banks - The  carrying  amounts of cash and due from
          banks approximate their fair value.

          Federal  funds  sold - The  carrying  amounts  of  federal  funds sold
          approximate their fair value.

          Investment  securities  - Fair values for  investment  securities  are
          based on quoted  market  prices as defined in SFAS 157.  The  carrying
          amounts of Reserve Bank and FHLB stocks approximate their fair values.

          Cash surrender  value of life insurance  policies - The cash surrender
          value of life insurance  policies held by the Bank  approximates  fair
          values of the policies.

                                                                     (Continued)

                                       32
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

         Loans - For variable rate loans that reprice  frequently  and for loans
         that mature within one year, fair values are based on carrying  values.
         Fair values for all other loans are  estimated  using  discounted  cash
         flow analyses,  with interest rates  currently  being offered for loans
         with similar terms to borrowers of similar credit quality.  Fair values
         for impaired loans are estimated using discounted cash flow analyses or
         underlying collateral values, where applicable.

         Deposits - Fair values for  deposits are  estimated  using a discounted
         cash flow  calculation  that applies  interest  rates  currently  being
         offered  on  similar  accounts  to a schedule  of  aggregated  expected
         monthly maturities. Repricing time frames for non-maturing deposits are
         estimated using FDICIA 305 guidelines.

         Customer repurchase  agreements - Fair values of repurchase  agreements
         are  estimated  using a  discounted  cash flow  analysis  that  applies
         interest  rates  currently  being  offered  on  similar  accounts  to a
         schedule of aggregated expected monthly maturities.

         Borrowings from Federal Home Loan Bank of Atlanta - Borrowings from the
         FHLB which have variable  rates of interest are deemed to be carried at
         fair value.  Fair values of fixed rate advances are  estimated  using a
         discounted cash flow  calculation that applies interest rates currently
         being  offered  on  advances  to  a  schedule  of  aggregated  expected
         maturities.

         Broker  repurchase  agreements  -  Fair  values  of  broker  repurchase
         agreements  are  estimated  using a discounted  cash flow analysis that
         applies interest rates currently being offered on similar accounts to a
         schedule of aggregated expected monthly maturities.


Stock Based Compensation

     The  Company  has  issued  stock  options  to  certain  directors  who were
     organizers of the Company and the Bank, and also has a stock-based director
     and employee  compensation  plan (the "2003 Plan") as further  described in
     Note 17. Under the 2003 Plan,  18,000  options were granted  during each of
     2004, 2005, 2006 and 2007. 19,200 options were granted in 2008.  Subsequent
     to the grant dates of the  Organizers'  options and some of the  employees'
     options,  10% stock  dividends were declared.  Pursuant to the terms of the
     2003 Plan and the  Organizers'  option  agreements,  the  number of options
     outstanding  was  increased  and the exercise  price was  decreased to give
     effect to these stock dividends.

     The Company  accounts for stock based  compensation in accordance with SFAS
     No. 123(R). Fair value of an option grant is estimated on the date of grant
     using the Black-Scholes  option pricing model. The risk free interest rates
     used for the 2008,  2007,  and 2006 grants were  3.91%,  4.68%,  and 4.36%,
     respectively,  which was the 10 Year Constant  Maturity Rate on US Treasury
     Securities during the months in which the options were granted. The assumed
     dividend rate was zero and the expected  option life was 10 years for 2008,
     2007, and 2006 grants. Volatility is difficult to measure accurately due to
     the low volume of trading of the Company's  stock.  The common stock is not
     listed on any exchange and has no active  trading  market.  Since 2006, the
     stock  has  been  quoted  on  the  Over-the-Counter   Bulletin  Board.  The
     volatility  assumption used for 2008 option grants was 28%, for 2007 option
     grants was 12%,  and for 2006  option  grants was 18% based on  information
     available at the date of the grant.

   Recently issued accounting standards

     The  following  is a summary of recent  authoritative  pronouncements  that
     affect accounting,  reporting,  and disclosure of financial  information by
     the Company:

     In September, 2006, The FASB ratified the consensuses reached by the FASB's
     Emerging Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for
     the Deferred Compensation and Postretirement Benefit Aspects of Endorsement
     Split-Dollar  Life Insurance  Arrangements."  EITF 06-4 addresses  employer
     accounting for endorsement  split-dollar  life insurance  arrangements that
     provide a benefit to an employee  that extends to  postretirement  periods.
     Employers  should  recognize a liability for future  benefits in accordance
     with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
     Than  Pensions," or  Accounting  Principles  Board ("APB")  Opinion No. 12,
     "Omnibus Opinion-1967." EITF 06-4 was effective January 1,

                                                                     (Continued)



                                       33
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     2008.  The  Company  recorded a  liability  of $39,389 in the  accompanying
     consolidated financial statements for the cumulative effect of the change.

     In March  2007,  the FASB  ratified  the  consensus  reached on EITF 06-10,
     "Accounting   for  Collateral   Assignment   Split-Dollar   Life  Insurance
     Arrangements"  ("EITF 06-10").  The  postretirement  aspect of this EITF is
     substantially  similar to EITF 06-4  discussed  above and requires  that an
     employer recognize a liability for the postretirement  benefit related to a
     collateral assignment split-dollar life insurance arrangement in accordance
     with either FASB  Statement No. 106 or APB Opinion No. 12, as  appropriate,
     if the employer has agreed to maintain a life  insurance  policy during the
     employee's retirement or provide the employee with a death benefit based on
     the substantive  agreement with the employee.  EITF 06-10 was effective for
     the Company on January 1, 2008.  The  adoption of EITF 06-10 did not have a
     material impact on the Company's financial position,  results of operations
     or cash flows.

     Effective  January 1, 2008,  the Company  adopted SFAS No. 157, "Fair Value
     Measurements." SFAS No. 157 defines fair value, establishes a framework for
     measuring fair value under generally accepted  accounting  principles,  and
     expands  disclosures  about fair value  measurements.  SFAS No. 157 defines
     fair value as the  exchange  price that would be  received  for an asset or
     paid to  transfer a  liability  (an exit  price) in the  principal  or most
     advantageous  market for the asset or liability  in an orderly  transaction
     between market  participants  on the  measurement  date.  SFAS No. 157 also
     establishes a fair value hierarchy which requires an entity to maximize the
     use of observable  inputs and minimize the use of unobservable  inputs when
     measuring fair value.  The standard  describes  three levels of inputs that
     may be used to measure fair value:

         Level  1-Quoted  prices  in  active  markets  for  identical  assets or
         liabilities.  Level 1 assets and  liabilities  include  debt and equity
         securities  and  derivative  contracts  that are  traded  in an  active
         exchange market, as well as U.S. Treasuries and money market funds.

         Level  2-Observable  inputs  other than  Level 1 prices  such as quoted
         prices for similar assets or liabilities; quoted prices in markets that
         are  not  active;  or  other  inputs  that  are  observable  or  can be
         corroborated by observable  market data for substantially the full term
         of the assets or liabilities.  Level 2 assets and  liabilities  include
         debt  with  quoted  prices  that  are  traded  less   frequently   than
         exchange-traded  instruments,   mortgage-backed  securities,  municipal
         bonds, corporate debt securities,  and derivative contracts whose value
         is determined  using a pricing model with inputs that are observable in
         the  market  or can be  derived  principally  from or  corroborated  by
         observable  market  data.  This  category  generally  includes  certain
         derivative contracts and impaired loans.

         Level  3-Unobservable  inputs that are supported by little or no market
         activity  and that are  significant  to the fair value of the assets or
         liabilities.   Level  3  assets  and  liabilities   include   financial
         instruments whose value is determined using pricing models,  discounted
         cash flow methodologies,  or similar techniques, as well as instruments
         for  which  the  determination  of  fair  value  requires   significant
         management judgment or estimation. For example, this category generally
         includes  certain  private  equity   investments,   retained   residual
         interests in  securitizations,  residential  mortgage servicing rights,
         and highly-structured or long-term derivative contracts.

     Adoption of SFAS No. 157 did not have a significant impact on the Company's
     financial position, results of operations, or cash flows.

     FSP EITF 99-20-1,  "Amendments to the Impairment Guidance of EITF Issue No.
     99-20," ("FSP EITF 99-20-1") was issued in January 2009. Prior to the Staff
     Position,  other-than-temporary  impairment  was determined by using either
     EITF Issue No. 99-20,  "Recognition  of Interest  Income and  Impairment on
     Purchased Beneficial Interests and Beneficial Interests that Continue to be
     Held by a Transferor in Securitized  Financial  Assets,"  ("EITF 99-20") or
     SFAS No.  115,  "Accounting  for  Certain  Investments  in Debt and  Equity
     Securities," depending on the type of security. EITF 99-20 required the use
     of market participant assumptions regarding future cash flows regarding the
     probability of collecting  all cash flows  previously  projected.  SFAS 115
     determined  impairment  to be other than  temporary if it was probable that
     the holder  would be unable to collect  all amounts  due  according  to the
     contractual   terms.  To  achieve  a  more  consistent   determination   of
     other-than-temporary  impairment,  the Staff Position  amends EITF 99-20 to
     determine any other-than-temporary
                                                                     (Continued)


                                       34
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     impairment  based on the guidance in SFAS No. 115,  allowing  management to
     use more judgment in determining any other-than-temporary  impairment.  The
     Staff  Position  is  effective  for the Company as of  December  31,  2008.
     Management has reviewed and evaluated the Company's  security portfolio for
     any other-than-temporary impairments as discussed in Note 4.

     The SEC's Office of the Chief  Accountant  and the staff of the FASB issued
     press release  2008-234 on September 30, 2008 ("Press  Release") to provide
     clarifications  on  fair  value  accounting.  The  Press  Release  includes
     guidance on the use of  management's  internal  assumptions  and the use of
     "market"  quotes.  It also  reiterates the factors in SEC Staff  Accounting
     Bulletin  ("SAB")  Topic 5M that  should  be  considered  when  determining
     other-than-temporary impairment: the length of time and extent to which the
     market value has been less than cost;  financial  condition  and  near-term
     prospects of the issuer; and the intent and ability of the holder to retain
     its investment for a period of time sufficient to allow for any anticipated
     recovery in market value.

     On October 10, 2008, the FASB issued FSP SFAS 157-3,  "Determining the Fair
     Value of a  Financial  Asset When the Market for That Asset Is Not  Active"
     ("FSP SFAS 157-3").  This Staff Position  clarifies the application of SFAS
     No.  157 in a  market  that is not  active,  and  provides  an  example  to
     illustrate key  considerations in determining the fair value of a financial
     asset when the market for that asset is not  active.  The FSP is  effective
     upon issuance,  including prior periods for which financial statements have
     not been issued.  For the Company,  this FSP was  effective for the quarter
     ended September 30, 2008. The Company  considered the guidance in the Press
     Release   and  in  FSP  SFAS   157-3   when   conducting   its  review  for
     other-than-temporary  impairment  as of December  31, 2008 as  discussed in
     Note 4.

     In May,  2008,  the FASB issued SFAS No. 162,  "The  Hierarchy of Generally
     Accepted  Accounting  Principles."  SFAS No. 162  identifies the sources of
     accounting  principles and the framework for selecting the principles  used
     in the preparation of financial statements of nongovernmental entities that
     are presented in conformity with GAAP.  SFAS NO. 162 is effective  November
     15,  2008.  The FASB has stated  that it does not expect  SFAS No. 162 will
     result in a change in current practice. The application of SFAS No. 162 had
     no effect on the  Company's  financial  position,  results of operations or
     cash flows.

     Accounting  standards that have been issued or proposed by the FASB that do
     not  require  adoption  until a  future  date  are not  expected  to have a
     material impact on the consolidated financial statements upon adoption.

Risks and Uncertainties

     In the normal course of its business the Company encounters two significant
     types of risks: economic and regulatory. There are three main components of
     economic risk: interest rate risk, credit risk and market risk. The Company
     is subject to interest  rate risk to the degree  that its  interest-bearing
     liabilities  mature or reprice at different  times, or on different  bases,
     than its interest-earning assets. Credit risk is the risk of default on the
     Company's  loan and  investment  portfolios  that results  from  borrowers'
     inability or unwillingness to make contractually required payments.  Market
     risk  reflects  changes  in  the  value  of  collateral   underlying  loans
     receivable and the valuation of real estate held by the Company.

     The Company is subject to the regulations of various governmental agencies.
     These  regulations can and do change  significantly  from period to period.
     The  Company  also  undergoes  periodic   examinations  by  the  regulatory
     agencies,  which may subject it to further  changes  with  respect to asset
     valuations,  amounts of required loss allowances and operating restrictions
     as a result of the regulators'  judgments based on information available to
     them at the time of their examination.

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

         The Bank is required to maintain average reserve balances,  computed by
applying prescribed percentages to its various types of deposits,  either at the
Bank or on deposit  with the Reserve  Bank.  At December 31, 2008 and 2007 these
required reserves were met by vault cash.


                                       35
<PAGE>

NOTE 3 - FEDERAL FUNDS SOLD

         When the Bank's cash  reserves  (Note 2) are in excess of the  required
amount,  it may lend any excess to other banks on a daily basis.  As of December
31,  2008 and 2007  federal  funds  sold  amounted  to  $140,000  and  $967,000,
respectively.

NOTE 4 - INVESTMENT SECURITIES

         The   amortized   cost  and  fair   value  of   investment   securities
available-for-sale are as follows:

<TABLE>
<CAPTION>
                                                                                           December 31, 2008
                                                                                           -----------------
                                                                                            Gross unrealized
                                                                    Amortized               ----------------                 Fair
                                                                      cost               Gains            Losses             value
                                                                      ----               -----            ------             -----
<S>                                                                <C>               <C>               <C>               <C>
Government sponsored enterprise bonds ......................       $ 8,859,181       $   433,569       $         -       $ 9,292,750
FNMA preferred stock .......................................            87,200                 -            54,800            32,400
Mortgage-backed securities .................................         4,173,881           113,419             7,611         4,279,689
Municipal bonds ............................................         6,484,056            46,120           458,411         6,071,765
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-
        for-sale ...........................................       $19,604,318       $   593,108       $   520,822       $19,676,604
                                                                   ===========       ===========       ===========       ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                                           December 31, 2007
                                                                                           -----------------
                                                                                            Gross unrealized
                                                                    Amortized               ----------------                 Fair
                                                                       cost             Gains             Losses             value
                                                                       ----             -----             ------             -----
<S>                                                                <C>               <C>               <C>               <C>
Government sponsored enterprise bonds ......................       $10,357,277       $   262,910       $       843       $10,619,344
FNMA preferred stock .......................................         1,007,025             4,975                 -         1,012,000
Mortgage-backed securities .................................         3,398,658            59,833            12,053         3,446,438
Municipal bonds ............................................         2,961,067            20,813             5,253         2,976,627
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-
         for-sale ..........................................       $17,724,027       $   348,531       $    18,149       $18,054,409
                                                                   ===========       ===========       ===========       ===========
</TABLE>

         While twelve of the Company's  Government  sponsored  enterprise bonds,
municipal  bonds and  mortgage-backed  securities  available-for-sale  are in an
unrealized  loss  position  as of  December  31,  2008,  only one has been in an
unrealized loss position for twelve months or more. None of these  securities is
expected  to have a loss of  principal  at final  maturity.  The Company has the
intent  and  ability  to hold  these  securities  until  such  time as the value
recovers  or  the  securities  mature.   During  2008,  the  Company  recognized
other-than  temporary-impairment on the FNMA preferred stock of $606,054, net of
tax,   based  on   analysis   under  FSP  115-1  and  FNMA  being   placed  into
conservatorship by the U.S. Treasury Department.  The Company believes, based on
industry analyst reports and credit ratings, that the remaining deterioration in
value is attributable to market volatility.  For the municipal  securities,  the
Company  believes  that  the  unrealized  losses  are  the  result  of a lack of
confidence in insurers of municipal  securities and not in the credit quality of
the underlying issuers. Therefore, as of December 31, 2008, these losses are not
considered  other-than-temporary.  The table  below  summarizes,  by  investment
category,  the  length  of  time  that  individual  securities  have  been  in a
continuous loss position as of December 31, 2008.

<TABLE>
<CAPTION>
                                                                                                                    Total Unrealized
                                                    Less than Twelve Months               Over Twelve Months              Losses
                                                  -----------------------------       -----------------------------  ---------------
                                                      Gross                             Gross
                                                   Unrealized                         Unrealized
                                                     Losses          Fair Value        Losses           Fair Value
                                                     ------          ----------        ------           ----------
<S>                                               <C>               <C>               <C>               <C>               <C>
FNMA Preferred stock .....................        $   54,800        $   32,400        $        -        $        -        $   54,800
Mortgage-backed securities ...............                 -                 -             7,611           156,163             7,611
Municipal bonds ..........................           458,411         4,089,308                 -                 -           458,411
                                                  ----------        ----------        ----------        ----------        ----------
           Total .........................        $  513,211        $4,121,708        $    7,611        $  156,163        $  520,822
                                                  ==========        ==========        ==========        ==========        ==========
</TABLE>
                                                                     (Continued)

                                       36
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         The  amortized  cost and fair value of securities at December 31, 2008,
by contractual  maturity,  are shown in the following chart. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

                                                         December 31, 2008
                                                         -----------------
                                                    Amortized            Fair
                                                      Cost              Value
                                                      ----              -----

Due after one through five years ...........       $ 3,027,793       $ 3,157,702
Due after five through ten years ...........         8,207,487         8,549,347
After ten years or no maturity .............         8,369,039         7,969,555
                                                   -----------       -----------

    Total investment securities ............       $19,604,319       $19,676,604
                                                   ===========       ===========

         At  December  31,  2008  and  2007,  securities  with a fair  value  of
$18,440,430 and $12,952,538,  respectively, were pledged to collateralize public
deposits,  sweep  accounts,  advances from the FHLB, and repurchase  agreements.
There were no gains or losses  realized from sales of  securities  for the years
ended December 31, 2008, 2007, or 2006.

         The Bank,  as a member  institution,  is  required  to own stock in the
Reserve Bank and the FHLB. These stocks are included at cost in the accompanying
Consolidated  Balance  Sheets under the caption  "Other  investments."  No ready
market exists for these stock  investments and they have no quoted market value.
However,  redemption of these stocks has historically  been at par value.  Stock
held in the FHLB of Atlanta is pledged as collateral  against  advances from the
FHLB.

NOTE 5 - LOANS

         The composition of net loans by major loan category is presented below.

                                                           December 31,
                                                           ------------
                                                    2008                  2007
                                                    ----                  ----

Commercial .............................      $  18,596,972       $  18,753,358
Real estate - construction .............         49,669,669          43,332,737
Real estate - mortgage .................         60,866,234          44,817,279
Consumer ...............................          2,048,818           1,739,958
                                              -------------       -------------

Loans, gross ...........................        131,181,693         108,643,332

Less allowance for loan losses .........         (1,698,563)         (1,293,130)
                                              -------------       -------------

Loans, net .............................      $ 129,483,130       $ 107,350,202
                                              =============       =============

         As of December 31, 2008, approximately $78.8 million or 60.0 % of total
gross loans were variable rate loans.

         The FHLB Atlanta has a blanket lien on certain  types of the  Company's
loans as collateral for FHLB advance borrowings. See Note 9.

         At December 31, 2008 the Bank had  non-accrual  loans of $2.4  million,
which are considered to be impaired.  This amount includes twelve loans,  all of
which are collateral dependent. These loans are secured by real estate, and were
in the process of foreclosure or other  collection  processes as of December 31,
2008.  If  these  loans  had been  current,  the  Company  would  have  recorded
additional  interest  income of $76,238 on these loans in 2008.  All  previously
accrued  but  uncollected  income on these  loans has been  eliminated  from the
accompanying  consolidated income statement.  Included in the allowance for loan
losses is $150,000  related to these loans.  There are no other loans considered
to be impaired as of December 31, 2008.  Average impaired loans in 2008 (average
loans on  nonaccrual  or loans 90 days or more  delinquent  as to  principal  or
interest  payments)  were $1.2  million.  At December  31, 2007 the Company held
nonaccrual loans in the amount of $291,697.
                                                                     (Continued)



                                       37
<PAGE>

NOTE 5 - LOANS, Continued

Activity in the allowance for loan losses for the years ended December 31, 2008,
2007, and 2006 is summarized in the table below.

<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
                                                                                             -----------------------
                                                                                2008                  2007                 2006
                                                                                ----                  ----                 ----
<S>                                                                         <C>                   <C>                   <C>
Allowance for loan losses, beginning of year .....................          $ 1,293,130           $ 1,199,999           $ 1,058,295
Provision for loan losses ........................................              815,000               196,636               445,896
Charge-offs ......................................................             (685,166)             (103,505)             (304,192)
Recoveries .......................................................              275,599                     -                     -
                                                                            -----------           -----------           -----------

Allowance for loan losses, end of year ...........................          $ 1,698,563           $ 1,293,130           $ 1,199,999
                                                                            ===========           ===========           ===========
</TABLE>

NOTE 6 - PROPERTY AND EQUIPMENT

         Components of property and equipment  included in the balance sheet are
as follows:

                                                            December 31,
                                                            ------------
                                                      2008                2007
                                                      ----                ----
Land and improvements ......................      $ 1,468,480       $ 1,468,480
Bank premises ..............................        4,271,773         4,271,773
Furniture, equipment and software ..........        1,527,107         1,510,130
Vehicles ...................................           58,005            88,065
                                                  -----------       -----------
    Property and equipment .................        7,325,365         7,338,448
Accumulated depreciation ...................       (1,774,090)       (1,529,880)
                                                  -----------       -----------
    Property and equipment, net ............      $ 5,551,275       $ 5,808,568
                                                  ===========       ===========

         Depreciation  expense for the years ended December 31, 2008,  2007, and
2006, amounted to $282,574, $286,257, and $268,067,  respectively.  Depreciation
is charged to  operations  over the  estimated  useful lives of the assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:

<TABLE>
<CAPTION>
          Type of Asset                                Life in Years                     Depreciation Method
-------------------------------------        ------------------------------------       ----------------------------
<S>                                                         <C>                               <C>
Furniture, equipment and software                           3 to 7                            Straight-line
Improvements                                                5 to 40                           Straight-line
Vehicles                                                    5                                 Straight-line
</TABLE>

                                       38
<PAGE>

NOTE 7 - DEPOSITS

         The following is a detail of the deposit accounts as of:

                                                          December 31,
                                                          ------------
                                                    2008                2007
                                                    ----                ----

Noninterest bearing ......................       $ 10,069,125       $ 13,645,852
Interest bearing:
     NOW accounts ........................         13,013,071         15,082,860
     Money market accounts ...............          7,286,130          8,091,963
     Savings .............................         13,848,956          2,712,141
     Time, less than $100,000 ............         36,554,096         39,425,515
     Time, $100,000 and over .............         41,810,196         31,976,137
                                                 ------------       ------------

          Total deposits .................       $122,581,574       $110,934,468
                                                 ============       ============

         Interest   expense  on  time   deposits   greater  than   $100,000  was
approximately  $1.3 million in 2008,  $1.2 million in 2007,  and $1.1 million in
2006.  Securities issued by government  sponsored  enterprises with an amortized
cost of $2,040,000 and $1,934,723  (fair value of $2,136,495 and  $1,987,183) in
2008 and 2007, respectively, were pledged as collateral for public funds.

         At December  31,  2008 the  scheduled  maturities  of  certificates  of
deposit are as follows:

                   2009                                    $ 66,436,812
                   2010                                       8,597,279
                   2011                                       1,936,714
                   2012                                         585,770
                   2013                                         807,717
                                                           ------------
                                                           $ 78,364,292
                                                           ============


NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS

         Customer repurchase agreements consist of the following:

                                                            December 31,
                                                            ------------
                                                      2008                2007
                                                      ----                ----
Sweep accounts ..............................       $1,432,619        $2,217,935
Retail repurchase agreements ................        3,150,000         3,585,000
                                                    ----------        ----------
                                                    $4,582,619        $5,802,935
                                                    ==========        ==========

         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  The sweep  agreements  generally mature  overnight.  At December 31,
2008, the Bank had five retail repurchase agreements that mature in 2009 and one
that matures in 2010. Securities issued by government sponsored enterprises with
an amortized  cost of $5,644,221  and  $6,607,634  (fair value of $5,905,715 and
$6,753,392)  were pledged as collateral  for the sweep  accounts and  repurchase
agreements, at December 31, 2008 and 2007, respectively.

                                       39
<PAGE>

NOTE 9 -BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

         At December 31, 2008 and 2007,  the Bank had a line of credit to borrow
funds from the FHLB in the amount of 10% of the Bank's  assets.  Funds  borrowed
from the FHLB are  collateralized  by a lien on certain of the Bank's  available
for sale securities and loans. At December 31, the Bank had advances outstanding
as follows:

<TABLE>
<CAPTION>
                          December 31,              Interest Rate     Maturity Date           Terms
                          ------------              -------------     -------------           -----
                      2008           2007
                      ----           ----
<S>               <C>               <C>                  <C>           <C>             <C>
                  $ 3,500,000       $        -            .46%          1/14/2009      Variable rate credit
                    1,500,000                -           2.73           3/16/2010           Fixed rate
                    1,500,000                -           2.84           9/16/2010           Fixed rate
                    1,000,000                -           2.72           1/25/2011           Fixed rate
                      222,222          266,667           4.49          12/01/2013      Fixed rate, amortizing
                      207,408          246,296           4.89           4/14/2014      Fixed rate, amortizing
                      464,375          531,875           4.78           7/27/2015      Fixed rate, amortizing
                    2,000,000                -           3.52           1/16/2018      Fixed rate, convertible
                            -        1,500,000           3.60          10/20/2008           Fixed rate
                            -        1,000,000           4.75           1/25/2008           Fixed rate
                  -----------       ----------

                  $10,394,005       $3,544,838
                  ===========       ==========
</TABLE>

         The Company's  convertible  advance from the FHLB is  convertible  to a
variable rate  instrument at the option of the FHLB on January 16, 2013.  During
2008, the highest  balance as of any month end for borrowings  from the FHLB was
$10.4 million.  The average rate paid on the advances during 2008 was 3.28%. The
average  balance of FHLB  advances for 2008 was $7.0 million.  During 2007,  the
highest  balance  outstanding  at any month end was $3.6  million.  The  average
balance of FHLB  advances for 2007 was $2.8 million.  The average  interest rate
paid on advances in 2007 was 4.13%.

NOTE 10 -BROKER REPURCHASE AGREEMENTS

         Broker  repurchase   agreements  consist  of  two  separate  borrowings
totaling $5.0 million.  These borrowings carry fixed rates of interest with call
features. The agreements mature as follows: $3.0 million maturing on January 15,
2015,  callable by the broker quarterly after January 15, 2012, and $2.0 million
maturing  on January  15,  2013,  callable  by the broker  quarterly,  beginning
January 10, 2010. Securities with fair value of $6,118,531 and amortized cost of
$6,499,137  collateralize the agreements.  During 2008 the highest balance as of
any month end for broker repurchase  agreements was $5.0 million and the average
balance  for 2008 was  $4,836,066.  The average  rate paid on broker  repurchase
agreements during 2008 was 3.53%. There were no broker repurchase  agreements as
of December 31, 2007.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

         The Bank may  become  party to  litigation  and  claims  arising in the
normal  course of business.  As of December 31,  2008,  there was no  litigation
pending other than foreclosure actions initiated by the Bank.

         The Company has less than one year  remaining  on its  contract  with a
data,  item,  and ATM processing  service.  Monthly costs for these services are
currently approximately $19,000.

         The Company has signed change of control  agreements  with three of its
executive  officers.  These  agreements  provide  for  various  payments  to the
executives in the event of a change in control of the Company.

         From time to time the Bank may guarantee  merchant credit card accounts
on behalf of certain customers. At December 31, 2008 the total amount guaranteed
by the Bank related to merchant credit card accounts was immaterial.

         Refer to Note 15  concerning  financial  instruments  with off  balance
sheet risk.

                                       40
<PAGE>

NOTE 12 - LINES OF CREDIT

         At December 31, 2008, the Bank had lines of credit to purchase  federal
funds totaling  $5,300,000 from unrelated banks. $1.8 million was outstanding on
one of these lines at December 31, 2008.  The interest rate varies daily.  These
lines of  credit  are  available  on a one to  fourteen-day  basis  for  general
corporate  purposes of the Bank. The lenders have reserved the right to withdraw
the lines at their option.

NOTE 13 - INCOME TAXES

         The  provision  for income taxes is  reconciled to the amount of income
tax  computed at the federal  statutory  rate on income  before  income taxes as
follows:
<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                                                      -----------------------
                                                                  2008                        2007                    2006
                                                                  ----                        ----                    ----
<S>                                                   <C>                <C>     <C>                 <C>    <C>                 <C>
Tax expense (benefit) at statutory rate ...........   $  70,623           34%    $ 823,815           34%    $ 834,610           34%
Increase (decrease) in taxes resulting from:
     State income taxes, net of federal
          benefit .................................       7,789            4        48,471            2        49,495            2
       Tax-exempt investments .....................     (75,249)         (36)      (31,835)          (1)      (25,462)          (1)
       Increase in cash value of life insurance ...     (24,171)         (12)      (23,277)          (1)      (19,016)          (1)
     Other ........................................       3,408            2        (6,942)          (1)      (44,629)          (2)
                                                      ---------           --     ---------           --     ---------           --
Income tax provision ..............................   $ (17,600)          (8)%   $ 810,232           33%    $ 794,998           32%
                                                      =========           ==     =========           ==     =========           ==
</TABLE>

         The income tax effects of cumulative temporary  differences at December
31, 2008 and 2007 are as follows:
<TABLE>
<CAPTION>
                                                                                                         2008                2007
                                                                                                         ----                ----
Deferred tax assets:
<S>                                                                                                    <C>                  <C>
        Allowance for loan losses ........................................................             $513,045             $406,520
        Other than temporary Impairment ..................................................              312,210                    -
        Stock based compensation .........................................................               22,627               11,200
        Other ............................................................................               25,921                3,610
                                                                                                       --------             --------
                                                                                                        873,803              421,330
                                                                                                       --------             --------
Deferred tax liabilities:
        Unrealized net gain on securities available for sale .............................               24,577              112,330
        Depreciation .....................................................................               82,658               88,883
        Prepaid expenses .................................................................               32,401               27,479
                                                                                                       --------             --------
                                                                                                        139,636              228,692
                                                                                                       --------             --------
               Net deferred tax asset ....................................................             $734,167             $192,638
                                                                                                       ========             ========
</TABLE>

         The net deferred taxes are included in other assets in the consolidated
balance  sheets.  Deferred  tax  assets  represent  the  future  tax  benefit of
deductible  differences and, if it is more likely than not that a tax asset will
not be  realized,  a valuation  allowance  is  required  to reduce the  recorded
deferred tax assets to net realizable  value.  As of December 31, 2008 and 2007,
no valuation allowance was deemed necessary.

         The following  summary of the  provision for income taxes  includes tax
deferrals  that arise from temporary  differences in the  recognition of certain
items of revenue and expense for tax and financial reporting purposes:
<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                  2008                  2007                 2006
                                                                                  ----                  ----                 ----
<S>                                                                            <C>                   <C>                  <C>
Income taxes currently payable ....................................            $ 436,176             $ 805,724            $ 890,731
Deferred income tax provision (benefit) ...........................             (453,776)                4,508              (95,733)
                                                                               ---------             ---------            ---------
        Income tax provision (benefit) ............................            $ (17,600)            $ 810,232            $ 794,998
                                                                               =========             =========            =========
</TABLE>

         The  Company has  analyzed  the tax  positions  taken or expected to be
taken in its tax returns and concluded it has no liability  related to uncertain
tax positions in accordance with FIN 48.


                                       41
<PAGE>

NOTE 14 - RELATED PARTY TRANSACTIONS

         Certain directors, executive officers and companies with which they are
affiliated,  are  customers of and have loan  transactions  with the Bank in the
ordinary  course of business.  These loans were made on  substantially  the same
terms, including interest rates and collateral,  as those prevailing at the time
for comparable arms-length transactions.

         A  summary  of  loan  transactions  with  directors,   including  their
affiliates, and executive officers is as follows:

<TABLE>
<CAPTION>
                                                                                           Year ended December 31,
                                                                                           -----------------------
                                                                            2008                    2007                    2006
                                                                            ----                    ----                    ----
<S>                                                                     <C>                     <C>                     <C>
Balance, beginning of year .................................            $ 6,443,949             $ 5,835,997             $ 6,269,599
New loans or lines of credit ...............................              1,272,822               4,470,962               4,354,342
Payments on loans or lines of credit .......................             (1,758,108)             (3,863,010)             (4,787,944)
                                                                        -----------             -----------             -----------
Balance, end of year .......................................            $ 5,958,663             $ 6,443,949             $ 5,835,997
                                                                        ===========             ===========             ===========
</TABLE>

         Deposits by directors, executive officers, and their related interests,
at December 31, 2008 and 2007 were $2,911,291 and $3,680,470, respectively.

NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

         In the ordinary course of business,  and to meet the financing needs of
its customers,  the Bank is a party to various  financial  instruments  with off
balance sheet risk. These financial  instruments,  which include  commitments to
extend  credit  and  standby  letters of credit,  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amounts of those instruments  reflect the extent
of involvement the Bank has in particular classes of financial instruments.

         The Bank's  exposure to credit loss in the event of  nonperformance  by
the other party to the financial instrument for commitments to extend credit and
standby  letters of credit is  represented by the  contractual  amounts of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on balance sheet instruments.

         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation  of any  material  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may  require  the  payment of a fee. At December  31, 2008 and 2007,
unfunded  commitments  to extend  credit were $21.9  million and $20.7  million,
respectively,  and  outstanding  letters of credit  were $1.1  million  and $1.0
million,  respectively. At December 31, 2008, the unfunded commitments consisted
of $21.1  million  at  variable  rates and  $805,408  at fixed  rates with $14.4
million  expiring  within one year. The Bank evaluates  each  customer's  credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's  credit
evaluation  of  the  borrower.   Collateral  varies  but  may  include  accounts
receivable,  inventory,  property,  plant  and  equipment,  and  commercial  and
residential real estate.

         Fair values of off balance sheet lending  commitments are based on fees
currently  charged to enter into  similar  agreements,  taking into  account the
remaining terms of the agreements and the counterparties'  credit standing,  and
were immaterial in 2008 and 2007.

         The  Bank  also  offers  an  automatic  overdraft  protection  product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December  31, 2008.  The Bank  expects that much of this  capacity
will not be utilized.  During 2008 the average  balance of total demand  deposit
overdrafts was $25,935.


NOTE 16 - EMPLOYEE BENEFIT PLAN

         The Company  sponsors a Simple IRA Plan for the benefit of all eligible
employees.   The  Bank  contributes  up  to  three  percent  of  the  employee's
compensation.  Employer  contributions  made to the Plan in 2008, 2007, and 2006
amounted to $54,828, $47,934, and $40,499, respectively.

                                       42
<PAGE>

NOTE 17 - STOCK OPTION PLANS

         In 1999,  the Board of  Directors  awarded  options  (the  "Organizers'
Options") to purchase 4,000 shares of the Company's  common stock to each of the
organizing  directors  of the  Company  and the Bank  (an  aggregate  of  40,000
shares).  These  options  had an  exercise  price of $10.00 per share and became
exercisable  in one-third  increments  each year beginning on December 14, 2000.
The  Organizers'  Options  expire ten years from the date of grant,  unless they
terminate sooner as a result of the holder's ceasing to be a director.  Pursuant
to the option  agreements as further  discussed  below, the total number of such
options outstanding and the exercise price have been adjusted as a result of the
stock dividends discussed in Note 18 below. Currently options to purchase 42,514
shares of common stock remain outstanding at an exercise price of $5.64.  During
2008, none of these options were exercised.

         In 2003, the Company's  shareholders  approved the Cornerstone  Bancorp
2003 Stock Option Plan (the "2003 Plan"),  which reserved  125,000 shares of the
Company's  common stock for issuance upon  exercise of options.  Pursuant to the
2003 Plan as further discussed below, the number of shares reserved for issuance
has been  increased  to  183,012  shares as a result of the 10% stock  dividends
declared  from  2004 to 2007 as  discussed  in  Note  18  below.  Employees  and
Directors are eligible to participate  in the 2003 Plan,  which has a term of 10
years. Awards under the 2003 Plan must be made by the Board of Directors or by a
Committee of Directors designated by the Board at an exercise price equal to the
fair market value of the  Company's  common  stock on the date of grant.  During
2008,  options to purchase  8,396 shares were  exercised  at a weighted  average
exercise price of $9.75 per share. See Note 1 for more information.

         A summary of the activity in the plans is presented below:

<TABLE>
<CAPTION>
                                                                           Weighted Average        Aggregate
                                                            Shares         Exercise Price(1)    Intrinsic Value (2)
                                                            ------         -----------------    -------------------
<S>                                                         <C>                      <C>           <C>
Outstanding at December 31, 2005 ......................      94,288                   8.68
Granted (3) ...........................................      29,229                   8.34
Exercised .............................................           -
Forfeited or expired ..................................           -
                                                            -------
Outstanding at December 31, 2006 ......................     123,516                   8.60
                                                            -------
Granted (3) ...........................................      32,383                   9.43
Exercised .............................................     (27,306)                  6.75          $162,323
Forfeited or expired ..................................      (1,320)                 11.15
                                                            -------
Outstanding at December 31, 2007 ......................     127,273                   9.18
                                                            -------
Granted ...............................................      19,200                  12.50
Exercised .............................................      (8,396)                  9.75           $29,386
Forfeited or expired ..................................      (6,265)                 12.81
                                                            -------
Outstanding at December 31, 2008 ......................     131,812                  $9.46           $71,178
                                                            =======

Options exercisable at end of year ....................      92,901                  $7.69          $214,601

Shares available for grant ............................      71,049
</TABLE>

(1)  The weighted  average exercise price has been adjusted to reflect 10% stock
     dividends  declared by the Company's Board of Directors  annually from 2002
     through 2007.
(2)  The  aggregate  intrinsic  value  of a  stock  option  in the  table  above
     represents  the total  pre-tax  intrinsic  value  (the  amount by which the
     current market value of the underlying  stock exceeds the exercise price of
     the  option.) At December  31,  2008 the amount  represents  the value that
     would have been  received  by the  option  holders  had all option  holders
     exercised  their options on that date. This amount changes based on changes
     in the market value of the Company's common stock.
(3)  Granted  options  include  new grants as well as  adjustments  of  previous
     grants as a result of 10% stock  dividends  declared by the Company's Board
     of Directors annually from 2002 through 2007.

         Options granted in 2006,  2007, and 2008 vest over a five-year  period,
according to the option agreements. All options granted prior to 2006 have fully
vested. The weighted average life of options outstanding was 5.03 years and 5.57
years at December  31,  2008 and 2007,  respectively.  Expense  related to stock
based compensation  recorded in the accompanying  consolidated income statements
was  $56,172,  $40,797,  and $19,784 for the years ended 2008,  2007,  and 2006,
respectively.  There were 37,389 non-vested options outstanding  (estimated fair
value of $219,497) at the beginning of 2008.  During 2008, 11,417 options vested
(estimated fair value of $66,674),  6,255 options were forfeited (estimated fair
value  $30,194),  and  19,200  options  were  granted  (estimated  fair value of
$112,297). Total non-vested options outstanding at December 31, 2008 were 38,917
options (estimated fair value of $234,926).

                                       43
<PAGE>

NOTE 18 - DIVIDENDS

         The  Company  paid cash  dividends  of  $597,471  in May 2008.  No cash
dividends  were paid prior to December 31, 2007.  The Company's  payment of cash
dividends is within the  discretion of its Board of Directors,  and is dependent
on the  Company's  receiving  cash  dividends  from the  Bank.  Federal  banking
regulations  restrict  the  amount  of  dividends  that  the Bank can pay to the
Company.  Future dividend policy will depend on the Company's earnings,  capital
requirements,  financial  condition and other factors considered relevant by the
Company's  Board of  Directors.  The  Company's  Board of Directors  declared 10
percent stock  dividends to  shareholders of record on May 8, 2007, May 9, 2006,
May 10, 2005, May 11, 2004, March 17, 2003 and on April 30, 2002.

NOTE 19 - REGULATORY MATTERS

         The  Bank  is  subject  to  various  regulatory  capital   requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  possible   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy  require the Bank to maintain  minimum amounts and ratios (set forth in
the table  below) of total and Tier 1 capital to  risk-weighted  assets,  and of
Tier 1 capital to average assets.  Management believes, as of December 31, 2008,
that the Bank meets all capital adequacy requirements to which it is subject.

         As of December 31, 2008,  the most recent  notification  of the banking
regulators  categorized  the  Bank  as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  have  changed the  institution's
category.  The Bank's actual capital  amounts and ratios and minimum  regulatory
amounts and ratios are presented as follows:

<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                         For capital         under prompt corrective
                                                                                      adequacy purposes         action provisions
                                                                                      -----------------         -----------------
                                                                    Actual                  Minimum                   Minimum
                                                                    ------                  -------                   -------
                                                             Amount        Ratio     Amount         Ratio      Amount         Ratio
                                                             ------        -----     ------         -----      ------         -----
                                                                                     (Dollars in thousands)

As of December 31, 2008
<S>                                                        <C>             <C>       <C>             <C>      <C>             <C>
Total Capital (to risk weighted assets) ...............    $20,366         14.4%     $11,314         8.0%     $14,144         10.0%
Tier 1 Capital (to risk weighted assets) ..............     18,667         13.2        5,657         4.0        8,486          6.0
Tier 1 Capital  (to average assets) ...................     18,667         12.1        6,161         4.0        7,702          5.0

As of December 31, 2007
Total Capital (to risk weighted assets) ...............    $19,737         16.3%     $ 9,664         8.0%     $12,079         10.0%
Tier 1 Capital (to risk weighted assets) ..............     18,444         15.3        4,832         4.0        7,248          6.0
Tier 1 Capital  (to average assets) ...................     18,444         13.4        5,489         4.0        6,861          5.0
</TABLE>



The Company is also subject to capital  adequacy  guidelines  established by the
Reserve Bank,  which  establish the minimum ratios for capital  adequacy as they
apply to the Bank. For 2008 and 2007, the Company's  capital  amounts and ratios
were at least as great as shown above for the Bank.



                                       44
<PAGE>

NOTE 20 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair values of the Company's  financial  instruments were
as follows:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                                 2008                              2007
                                                                                 ----                              ----
                                                                     Carrying             Fair           Carrying           Fair
                                                                      Amount             Value            Amount            Value
                                                                      ------             -----            ------            -----
Financial Assets
<S>                                                               <C>               <C>               <C>               <C>
      Cash and due from banks ..............................      $  3,820,227      $  3,820,227      $  4,266,777      $  4,266,777
      Federal funds sold ...................................           140,000           140,000           967,000           967,000
      Investment securities ................................        20,790,754        20,790,754        18,870,909        18,870,909
      Loans, gross .........................................       131,181,693       132,967,973       108,643,332       108,575,051
     Cash surrender value of life insurance policies .......         1,768,520         1,768,520         1,697,429         1,697,429

Financial Liabilities
      Deposits .............................................       122,581,574       122,334,482       110,934,468       108,395,653
      Fed Funds purchased and customer overnight
           repurchase agreements ...........................         3,242,619         3,242,619         2,217,935         2,217,935
      Customer repurchase agreements .......................         3,150,000         3,235,288         3,585,000         3,588,023
      Borrowings from FHLB .................................        10,394,005        10,581,424         3,544,838         3,535,508
      Broker repurchase agreements .........................         5,000,000         5,135,404                 -                 -
</TABLE>

The  Company  adopted  SFAS 157 on  January  1,  2008.  Refer to Note 1 for more
information regarding SFAS 157 and the levels of inputs used in determining fair
value of the Company's  available for sale securities.  The table below presents
the  balances of assets  measured  at fair value on a  recurring  basis by level
within the hierarchy of inputs that may be used to measure fair value.

<TABLE>
<CAPTION>
                                                                           December 31,2008
                                                                           ----------------
                                                        Total           Level 1         Level 2         Level 3
                                                        -----           -------         -------         -------
<S>                                                  <C>              <C>              <C>             <C>
Investment securities ............................   $20,790,754      $13,604,839      $6,071,765      $1,114,150
                                                      ==========       ==========       =========       =========
</TABLE>


NOTE 21 - PARENT COMPANY INFORMATION

         Following is condensed  financial  information of  Cornerstone  Bancorp
(parent company only):

Condensed Balance Sheets
<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                    2008                    2007
                                                                                                    ----                    ----
Assets
<S>                                                                                             <C>                      <C>
      Cash and interest bearing deposits .........................................              $   371,668              $   923,907
      Investment in subsidiary ...................................................               18,770,624               18,661,923
      Other assets ...............................................................                    9,005                    9,007
                                                                                                -----------              -----------
          Total Assets ...........................................................              $19,151,297              $19,594,837
                                                                                                ===========              ===========

Liabilities And Shareholders' Equity
      Accrued expenses ...........................................................              $    14,350              $    14,007
      Shareholders' equity .......................................................               19,136,947               19,580,830
                                                                                                -----------              -----------
          Total Liabilities and Shareholders' Equity .............................              $19,151,297              $19,594,837
                                                                                                ===========              ===========
</TABLE>

                                                                     (Continued)

                                       45
<PAGE>

NOTE 21 - PARENT COMPANY INFORMATION, Continued

Condensed Statements Of Income

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                            -----------------------
                                                                                  2008                 2007                 2006
                                                                                  ----                 ----                 ----
Income
<S>                                                                           <C>                  <C>                  <C>
     Interest .......................................................         $    19,117          $    35,893          $    25,658

Expenses
     Sundry .........................................................              56,063               55,164               32,400
                                                                              -----------          -----------          -----------
          Loss before equity in undistributed net
               income of bank subsidiary ............................             (36,946)             (19,271)              (6,742)

          Equity in undistributed net income of
               subsidiary ...........................................             262,262            1,632,024            1,666,478
                                                                              -----------          -----------          -----------
       Net income ...................................................         $   225,316          $ 1,612,753          $ 1,659,736
                                                                              ===========          ===========          ===========
</TABLE>


Condensed Statements Of Cash Flows

<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                  2008                  2007                2006
                                                                                  ----                  ----                ----
Operating Activities
<S>                                                                             <C>                 <C>                 <C>
    Net income .........................................................        $   225,316         $ 1,612,753         $ 1,659,736
         Adjustments to reconcile net income to net cash
             provided by (used for) operating activities
         Equity in undistributed net income of subsidiary ..............           (262,262)         (1,632,024)         (1,666,478)
         Decrease (increase) in other assets ...........................                  2              62,476             (31,483)
         Increase (decrease) in accrued expenses .......................                343              (7,697)              6,588
                                                                                -----------         -----------         -----------
              Net cash used for operating activities ...................            (36,601)             35,508             (31,637)
                                                                                -----------         -----------         -----------

Investing Activities
    Investment in bank subsidiary ......................................                  -             (70,000)         (3,936,000)
                                                                                -----------         -----------         -----------

Financing Activities
       Proceeds from sale of common stock, net .........................                  -                   -           1,886,524
       Cash dividend paid ..............................................           (597,471)                  -                   -
       Cash paid in lieu of fractional shares ..........................                  -              (2,231)             (3,036)
       Exercise of stock options, net of tax ...........................             81,833             184,439                   -
                                                                                -----------         -----------         -----------
              Net cash provided (used) by financing
                      activities .......................................           (515,638)            182,209           1,883,488
                                                                                -----------         -----------         -----------

           Net increase (decrease) in cash .............................           (552,239)            147,716          (2,084,149)

Cash, beginning of year ................................................            923,907             776,191           2,860,340
                                                                                -----------         -----------         -----------

Cash, end of year ......................................................        $   371,668         $   923,907         $   776,191
                                                                                ===========         ===========         ===========
</TABLE>


                                       46