EXHIBIT 13


















                         COMMUNITY FIRST BANCORPORATION

                            Portions of Registrant's
                              2007 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2007 Form 10-K




<PAGE>

Financial Summary

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                    ------------------------
                                                              2007            2006             2005            2004             2003
                                                              ----            ----             ----            ----             ----
                                                                           (Dollars in thousands, except per share data)
Financial Condition
<S>                                                         <C>             <C>             <C>             <C>             <C>
     Securities ....................................        $104,689        $109,082        $109,821        $101,452        $ 86,023
     Allowance for loan losses .....................           2,574           2,242           2,266           2,240           2,197
     Net loans (1) .................................         241,557         200,724         167,052         155,535         145,453
     Premises and equipment - net ..................           8,622           7,937           6,805           4,413           4,454
     Total assets ..................................         402,148         353,909         320,712         305,348         280,526
     Noninterest bearing deposits ..................          42,289          40,576          38,061          34,903          32,273
     Interest bearing deposits .....................         313,578         267,381         241,932         233,245         224,278
     Total deposits ................................         355,867         307,957         279,993         268,148         256,551
     Total liabilities .............................         364,237         320,694         291,858         279,412         257,989
     Total shareholders' equity ....................          37,911          33,215          28,854          25,936          22,537

Results of Operations
     Interest income ...............................        $ 23,578        $ 19,600        $ 15,923        $ 13,948        $ 12,664
     Interest expense ..............................          13,230          10,385           6,621           5,077           5,089
                                                            --------        --------        --------        --------        --------
     Net interest income ...........................          10,348           9,215           9,302           8,871           7,575
     Provision for loan losses .....................             594              65             250             380             522
                                                            --------        --------        --------        --------        --------
     Net interest income after provision ...........           9,754           9,150           9,052           8,491           7,053
     Other income ..................................           2,206           2,154           2,139           2,054           2,033
     Other expenses ................................           7,132           6,752           5,420           5,151           4,414
                                                            --------        --------        --------        --------        --------
     Income before income taxes ....................           4,828           4,552           5,771           5,394           4,672
     Income tax expense ............................           1,497           1,534           2,041           1,957           1,667
                                                            --------        --------        --------        --------        --------
     Net income ....................................        $  3,331        $  3,018        $  3,730        $  3,437        $  3,005
                                                            ========        ========        ========        ========        ========

Per Share Data (2)
     Net income ....................................        $   1.02        $   0.93        $   1.16        $   1.07        $   0.95
     Net income, assuming dilution .................            0.96            0.87            1.10            1.02            0.91
     Period end book value .........................           11.40           10.21            8.93            8.07            7.15
</TABLE>


-------------------------------------
(1)  Excludes loans held for sale.
(2)  Per share amounts have been  retroactively  adjusted to reflect a 10% stock
     dividend effective December 20, 2007, 5% stock dividends effective December
     18, 2006 and November 30, 2005 and a 10% stock dividend  effective November
     30, 2004.

                                       1
<PAGE>

Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                        2007                                    2006
                                                                        ----                                    ----
                                                        Fourth     Third    Second     First    Fourth     Third    Second     First
                                                        Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter  Quarter
                                                        -------   -------   -------   -------   -------   -------   -------  -------
<S>                                                     <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Interest and dividend income .......................    $6,116    $5,981    $5,820    $5,661    $5,208    $4,942    $4,803    $4,647
Interest expense ...................................     3,453     3,367     3,211     3,199     2,832     2,672     2,551     2,330
                                                        ------    ------    ------    ------    ------    ------    ------    ------
Net interest income ................................     2,663     2,614     2,609     2,462     2,376     2,270     2,252     2,317
Provision for loan losses ..........................       324       150       120         -         -        15        25        25
                                                        ------    ------    ------    ------    ------    ------    ------    ------
Net interest income after provision ................     2,339     2,464     2,489     2,462     2,376     2,255     2,227     2,292
Noninterest income .................................       635       583       502       486       517       559       539       539
Noninterest expense ................................     2,055     1,901     1,642     1,534     2,171     1,469     1,676     1,436
                                                        ------    ------    ------    ------    ------    ------    ------    ------
Income before income taxes .........................       919     1,146     1,349     1,414       722     1,345     1,090     1,395
Provision for income taxes .........................       255       375       410       457       261       441       348       484
                                                        ------    ------    ------    ------    ------    ------    ------    ------
Net income .........................................    $  664    $  771    $  939    $  957    $  461    $  904    $  742    $  911
                                                        ======    ======    ======    ======    ======    ======    ======    ======
Earnings per share *
Basic ..............................................    $ 0.20    $ 0.24    $ 0.29    $ 0.29    $ 0.15    $ 0.27    $ 0.23    $ 0.28
Diluted ............................................      0.20      0.22      0.27      0.27      0.14      0.25      0.22      0.26
--------------------------------------
</TABLE>
* Per share  amounts  have been  retroactively  adjusted  to reflect a 10% stock
dividend effective December 20, 2007.

         Effective  January 1, 2006, the Company  adopted the provisions of SFAS
No. 123(R) and began  including  the costs of stock options  granted in 2005 and
2006 in the  determination  of net income.  In the fourth  quarter of 2006,  the
Company's Board of Directors modified all outstanding options so that they would
be vested in full. Therefore,  all of the applicable  compensation costs for all
affected options granted in 2005 and 2006 were included in the  determination of
net income for 2006. As a result, approximately $394,000 of pre-tax compensation
costs were  recognized in the fourth quarter of 2006 that  otherwise  would have
been recognized in 2007, 2008 and 2009.

                        CAUTIONARY NOTICE WITH RESPECT TO
                           FORWARD LOOKING STATEMENTS

         This report contains "forward-looking statements" within the meaning of
the  securities  laws.  The  Private  Securities  Litigation  Reform Act of 1995
provides a safe harbor for forward-looking  statements.  In order to comply with
the terms of the safe harbor,  the Company notes that a variety of factors could
cause the Company's actual results and experience to differ  materially from the
anticipated   results  or  other   expectations   expressed  in  the   Company's
forwarding-looking statements.

         All statements that are not historical  facts are statements that could
be  "forward-looking   statements."  You  can  identify  these   forward-looking
statements  through the use of words such as "may," "will,"  "should,"  "could,"
"would," "expect,"  "anticipate,"  "assume," indicate,"  "contemplate,"  "seek,"
"plan,"  "predict,"  "target,"  "potential,"  "believe,"  "intend,"  "estimate,"
"project,"  "continue,"  or  other  similar  words.  Forward-looking  statements
include,  but are not limited to,  statements  regarding  the  Company's  future
business  prospects,   revenues,  working  capital,  liquidity,  capital  needs,
interest costs, income, business operations and proposed services.

         These  forward-looking  statements  are based on current  expectations,
estimates and projections about the banking 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  future  financial  and  operating   performance.   These

                                       2
<PAGE>

statements  are not guarantees of future  performance  and are subject to risks,
uncertainties and assumptions that are difficult to predict.  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    lack of sustained growth in the economies of the Company's market
               areas;
          o    government monetary and fiscal policies;
          o    the  effects  of  changes  in  interest   rates  on  the  levels,
               composition and costs of deposits, loan demand, and the values of
               loan collateral,  securities,  and interest  sensitive assets and
               liabilities;
          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    the failure of assumptions  underlying the  establishment  of the
               allowance  for loan  losses and other  estimates,  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 as part of these endeavors and the failure
               to achieve expected gains,  revenue growth and/or expense savings
               from such endeavors;
          o    changes  in laws and  regulations,  including  tax,  banking  and
               securities  laws  and   regulations;
          o    changes in accounting policies, rules and practices;
          o    changes  in  technology  or  products  may be more  difficult  or
               costly, or less effective, than anticipated;
          o    the effects of war or other conflicts, acts of terrorism or other
               catastrophic  events that may affect general economic  conditions
               and economic confidence; and
          o    other factors and information described in this report and in any
               of the  other  reports  that  we file  with  the  Securities  and
               Exchange Commission under the Securities Exchange Act of 1934.

         All  forward-looking   statements  are  expressly  qualified  in  their
entirety by this cautionary notice. The Company has no obligation,  and does not
undertake,  to update,  revise or correct any of the forward-looking  statements
after the date of this  report.  The Company  has  expressed  its  expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However,  there is no assurance that these expectations,  beliefs or projections
will result or be achieved or accomplished.


Market for Common Stock and Dividends

         Trading in the  Company's  common stock is reported on the OTC Bulletin
Board under the ticker symbol  "CFOK.OB."  The following  table  summarizes  the
range of high and low bid prices for the  Company's  common stock as reported on
the OTC Bulletin Board for each quarterly period of 2007 and 2006.  Prices shown
represent  inter-dealer  prices without retail markup,  markdown or commissions,
and may not represent actual transactions. Furthermore, trading in the Company's
stock is very  limited.  Per share  prices in the table  have been  adjusted  to
reflect a 10% stock dividend effective December 20, 2007.

                                   2007                         2006
                                   ----                         ----
    Quarter Ended           High          Low           High           Low
    -------------           ----          ---           ----           ---
         March 31         $ 19.55       $ 17.32       $  19.91      $  15.67
          June 30         $ 17.36       $ 15.68       $  20.35      $  18.23
     September 30         $ 16.36       $ 13.64       $  19.05      $  18.27
      December 31         $ 16.50       $ 12.05       $  18.62      $  16.45

         As of February 28, 2008, there were approximately 779 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         The  Company  has not  declared  or paid any cash  dividends  since the
Company's  inception.  In order to support  the  Company's  continuing  need for
capital to support  anticipated  asset growth and market  expansion,  management
does not expect to declare or pay cash dividends in 2008.

         The Board of Directors declared a 10% stock dividend effective December
20, 2007 and 5% stock  dividends  effective  December  18, 2006 and November 30,
2005.

                                       3
<PAGE>

         The  Company's  ability to declare  and pay cash  dividends  is largely
dependent upon the successful  operation of the subsidiary  bank and its ability
to pay  cash  dividends  to the  Company.  South  Carolina  banking  regulations
restrict the amount of cash dividends that can be paid by the banking subsidiary
to the Company. Any of the Bank's cash dividends to the Company in excess of the
current year's  earnings are subject to the prior approval of the South Carolina
Commissioner of Banking. In addition, dividends paid by the Bank to the Company,
or by the Company to its shareholders, would be prohibited if the effect thereof
would cause the capital of the banking  subsidiary  or the Company to be reduced
below minimum capital requirements.





                                       4
<PAGE>

Management's Discussion and Analysis of Financial Condition
         and Results of Operations

         This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of Community First  Bancorporation
and its wholly-owned  subsidiary,  Community First Bank (the "Bank"),  which are
collectively  referred to as the "Company".  This information should be reviewed
in  conjunction  with the  consolidated  financial  statements and related notes
contained  elsewhere  in this  report.  Per share  net  income  and net  income,
assuming dilution,  have been adjusted to reflect a 10% stock dividend effective
December  20,  2007 and 5%  stock  dividends  effective  December  18,  2006 and
November 30, 2005.


Earnings Performance

2007 Compared with 2006

         For the year ended December 31, 2007,  the Company  recorded net income
of $3,331,000,  an increase of $313,000, or 10.4%, over net income of $3,018,000
for 2006.  Net income per share for 2007 was $1.02  compared with $.93 for 2006.
Per share net income, assuming dilution from outstanding stock options, was $.96
for 2007 and $.87 for 2006.  Return on average assets was .88% for 2007 compared
with .89% for 2006.  Return on average  shareholders'  equity was 9.46% for 2007
compared with 9.87% for 2006.

         Net income for 2007 increased due to increased  amounts of net interest
income and other  income.  Partially  offsetting  those  factors were  increased
expenses  resulting from an increase of $529,000 in the amount provided for loan
losses  during  2007,  expenses  related to the opening and  operation  of a new
banking office in the City of Anderson and the effects of agreements between the
Company  and  its  Chief  Executive  Officer  related  to his  compensation  and
retention.

         Higher  volumes  of  interest   earning  assets  and  interest  bearing
liabilities  resulted  in  increased  interest  income  and  interest  expenses.
Interest  income  increased  $3,978,000 with  approximately  71% of the increase
attributable  to higher  average  amounts  of  interest  earning  assets and 29%
attributable  to  higher  interest  rates  earned.  Interest  expense  increased
$2,845,000.  Approximately 53% of this increase was attributable to higher rates
paid for interest bearing deposit accounts and borrowings.

         Year-end total interest  earning assets  increased  $36,840,000  during
2007.  Total loans  increased  $41,165,000,  but  securities  available-for-sale
decreased $3,461,000 and securities held-to-maturity decreased $932,000. Average
loans for 2007 increased $40,321,000 and average investment securities decreased
$6,882,000 compared with the 2006 average amounts.

         Year-end total deposits grew $47,910,000 during 2007 with more than 96%
of that growth in interest bearing  deposits.  Average interest bearing deposits
during 2007 were $32,080,000 more than in 2006 and average  noninterest  bearing
demand deposits were $1,902,000 more than in 2006.

         A significant  portion of the growth in loans and deposits  during 2007
was attributable to continued growth of the Bank's new office in Seneca.

         The yield on average  earning assets for 2007 was 6.57%, an increase of
56 basis  points  over the 2006  yield,  and the rate paid on  average  interest
bearing  liabilities for 2007 increased by 55 basis points to 4.42% in 2007 from
3.87% in 2006.  The  combination  of these  factors  resulted in a 1 basis point
increase in the interest rate spread. Net yield on earning assets increased by 7
basis points to 2.89%.

         The Bank opened a new full-service  banking office on Highway 81 in the
City of Anderson, SC during the fourth quarter of 2007. The cost of construction
was  approximately  $800,000.  Land  intended to be used for the Bank's  further
expansion in Anderson County has also been obtained near  Powdersville,  SC. The
Company has established  neither a budget nor a schedule for the construction of
that  proposed  office.  During  2007,  the  Company,  the Bank and their  Chief
Executive  Officer  entered  into  agreements  related to his  compensation  and
retention.  The subsidiary Bank purchased life insurance  contracts to partially
fund its obligations under those agreements.  Approximately $386,000 of expenses
related to those  agreements  is included  in  compensation  expenses  for 2007.
Increases in the cash surrender value of the insurance  contracts during 2007 of
approximately $108,000 are included in other income for 2007.

         The provision  for loans losses for 2007 was  $594,000,  an increase of
$529,000  or 813.8%  from the  $65,000  provided  in 2006.  For  2007,  net loan

                                       5
<PAGE>

charge-offs  were  $262,000,  or  $173,000  more  than in  2006.  Year  end 2007
nonperforming  loans  (nonaccrual  loans and accruing loans 90 days or more past
due) increased  $575,000 from the amount at the end of 2006.  Potential  problem
loans decreased $88,000 by the end of 2007 compared with the end of 2006. Of the
2007 year end  potential  problem  loans,  76.1%  were  secured  by real  estate
mortgages compared with 86.4% at the end of 2006.

2006 Compared with 2005

         For the year ended December 31, 2006,  the Company  recorded net income
of $3,018,000,  a decrease of $712,000,  or 19.1%, from net income of $3,730,000
for 2005.  Net income per share for 2006 was $.93  compared with $1.16 for 2005.
Per share net income, assuming dilution from outstanding stock options, was $.87
for 2006 and  $1.10  for  2005.  Return  on  average  assets  was 0.89% for 2006
compared with 1.21% for 2005. Return on average  shareholders'  equity was 9.87%
for 2006 compared with 13.65% for 2005.

         Net  income  for 2006  decreased  due to  several  primary  factors:  a
contraction of net interest income, the adoption of an accounting  standard that
resulted in the initial recognition in 2006 of share-based compensation expenses
associated  with certain stock options  granted to employees and directors,  and
expenses  related to the  opening  of a new  banking  office in  Seneca,  SC and
relocation  of the  corporate  executive  offices.  Partially  offsetting  these
factors,  the  provision  for loan  losses  charged to expense  during  2006 was
$185,000 less than in 2005.

         Rising  interest  rates during the first seven months of 2006,  coupled
with  increasing  volumes  of  interest  earning  assets  and  interest  bearing
liabilities,  resulted in increased  interest  earnings  and  interest  expenses
across all major categories.  Total loans grew $33,648,000 during 2006. Interest
income increased $3,677,000 with approximately half of the increase attributable
to higher average  amounts of interest  earning assets and half  attributable to
higher   interest  rates  earned.   Interest   expense   increased   $3,764,000.
Approximately  83% of this increase was  attributable  to higher  interest rates
paid for interest bearing deposit accounts and borrowings.

         Total deposits grew $27,964,000  during 2006 with more than 90% of that
growth  accounted for in interest  bearing  deposits.  Average  interest bearing
deposits during 2006 were $27,166,000 more than in 2005 and average  noninterest
bearing demand deposits were $3,522,000 more than in 2005.

         The significant  growth in loans and deposits in 2006 was  attributable
primarily to the opening of the Bank's new Seneca office.

         The yield on average  earning assets for 2006 was 6.01%, an increase of
66 basis points over the 2005 yield.  However, the rate paid on average interest
bearing liabilities for 2006 increased by 115 basis points to 3.87% in 2006 from
2.72% in 2005.  Promotional  rates paid for  deposits  in  conjunction  with the
opening of the new Seneca office were a significant factor in this increase. The
combination of these factors  resulted in a decrease in the interest rate spread
of 49 basis points,  and the net yield on earning  assets  decreased by 30 basis
points to 2.82%.

         The Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004),  "Share-Based  Payment," ("SFAS 123(R)") effective on January 1,
2006. Accordingly, compensation expenses related to certain stock options issued
to officers and directors were initially  recognized in 2006.  Also in 2006, the
Company  modified  the terms of all  remaining  affected  non-vested  options to
provide for the vesting of those options in 2006. As a result, all of the future
compensation  costs  associated  with the  Company's  option grants to date were
accelerated  and  recognized  during  2006.  Share-based  compensation  expenses
recognized in 2006 totaled  $593,000.  Of this amount,  $302,000 was included in
salaries and employee benefits and $291,000 was included in other expense.

         During the second quarter of 2006, the Company  completed  construction
of a multi-story office building which houses an additional full service banking
office in Seneca, SC and the Company's  corporate offices.  Certain officers and
other personnel were relocated into the building, as well.

         The  provision  for loans  losses for 2006 was  $65,000,  a decrease of
$185,000  or 74.0%  from the  $250,000  provided  in 2005.  For  2006,  net loan
charge-offs   decreased  by  $135,000  from  the  2005  amount.  Year  end  2006
nonperforming  loans  (nonaccrual  loans and accruing loans 90 days or more past
due) decreased  $855,000 from the amount at the end of 2005.  Potential  problem
loans increased  $1,028,000 by the end of 2006 compared with the end of 2005. Of
the 2006 year end  potential  problem  loans,  86.4% were secured by real estate
mortgages compared with 83.7% at the end of 2005.

                                       6
<PAGE>

Net Interest Income

         Net interest income,  the difference between interest income earned and
interest expense  incurred,  is the principal source of the Company's  earnings.
Net interest  income is affected by changes in the levels of interest  rates and
by changes in the volume and mix of interest earning assets and interest bearing
liabilities.

2007 Compared with 2006

         Net interest  income was  $10,348,000 and $9,215,000 for 2007 and 2006,
respectively.   Interest  income  for  2007  was  $23,578,000,  an  increase  of
$3,978,000,  or 20.3%, over 2006. Interest expense for 2007 was $13,230,000,  an
increase of  $2,845,000,  or 27.4%,  over 2006. The Company  experienced  higher
average volumes of interest earning assets and interest  bearing  liabilities in
2007 as well as higher average yields and rates on those instruments.

         During the first seven months of 2007, the Federal  Reserve  maintained
its interest rate targets at levels set previously. Beginning in September 2007,
however,  a series  of rate cuts  began  which  reduced  the  Federal  Reserve's
Discount Window Primary Credit rate from 6.25% to 4.75% by the end of the year.

         During 2007, the amount of loans outstanding  increased  significantly.
Year-end loans for 2007 were $244,131,000, an increase of $41,165,000, or 20.3%,
over the 2006 year-end amount.  The average amount of loans  outstanding  during
2007  increased by  $40,321,000,  or 21.9%,  over the 2006 average  amount.  The
average  yield  earned on loans in 2007 was 7.84%,  compared  with 7.53%  during
2006.

         Loans secured by real estate  mortgages  increased by  $37,254,000,  or
25.2%,  over the 2006 year-end amount.  Closed-end loans secured by conventional
1-4 family residential  properties  increased by $31,448,000,  or 36.4%,  during
2007. The Company does not originate or hold sub-prime mortgage loans.  Although
residential property values in the Company's market areas have not thus far been
affected negatively by the current mortgage crisis to the same extent as in some
other  areas of the  country,  management  can  make no  assurances  that  local
property  values are immune from such effects.  The Company  generally  requires
that borrowers initially provide,  and maintain throughout the life of the loan,
significant   amounts  of  equity  in  real   properties   used  as  collateral.
Additionally, and partially in response to the uncertainty surrounding potential
future  effects of the  current  national  mortgage  crisis on local real estate
values, the Company increased its provision for loan losses in 2007.

         Consumer  installment loans increased by $4,095,000,  or 14.2%,  during
2007  primarily  due to an increase of  $2,543,000,  or 19.8%,  in the amount of
loans secured by automobiles.

         As of  December  31,  2007  and  2006,  approximately  $70,000,000  and
$54,000,000,  respectively,  or 28.7% and 26.6%, respectively,  of the Company's
loan portfolio was composed of variable rate loans directly indexed to movements
in the prime rate.

         Competition for deposits in the Company's  market areas continued to be
strong during 2007. In response,  the Company  offered higher rates and interest
bearing  deposits  increased by $46,197,000,  or 17.3%,  over the prior year-end
amount,  which,  as discussed below under the caption "2006 compared with 2005,"
had  already  been  significantly  increased  over the rates paid in 2005.  Time
deposits issued in amounts of $100,000 or more grew by the largest amount of any
deposit category,  increasing by $28,270,000,  or 41.4%, over the prior year-end
amount.  The average  rate paid for these  deposits in 2007 was 67 basis  points
higher  than the 2006  average  rate.  Growth in other  time  deposits  also was
significant,  with the 2007 year-end amount increasing by $24,355,000, or 21.0%,
over the 2006 year-end amount.  The average rate paid for these deposits in 2007
was 69 basis  points  higher than in 2006.  Savings  deposits at the end of 2007
declined by  $9,198,000,  or 30.0%,  from the end of 2006. The average rate paid
for savings  deposits in 2007 was only 5 basis points  higher than the rate paid
in 2006.  The average  rate paid for all interest  bearing  deposits in 2007 was
4.42%, an increase of 55 basis points over the average rate paid in 2006.

2006 Compared with 2005

         Net interest  income was  $9,215,000  and $9,302,000 for 2006 and 2005,
respectively.   Interest  income  for  2006  was  $19,600,000,  an  increase  of
$3,677,000,  or 23.1%, over 2005. Interest expense for 2006 was $10,385,000,  an
increase of  $3,764,000,  or 56.8%,  over 2005. The Company  experienced  higher
average volumes of interest earning assets and interest  bearing  liabilities in
2006 as well as higher average yields and rates on those instruments.

         Managing  net interest  margin  effectively  during 2006 was  extremely
challenging.  During  the  first  seven  months  of 2006,  the  Federal  Reserve

                                       7
<PAGE>

continued  regular,  quarter-point  increases in the federal funds rate which it
began in June 2004.  For the  remainder of the year,  the central bank adopted a
"wait and see" attitude,  and maintained its interest rate targets at the levels
set  previously.  Interest  rates  applicable to the Company's  deposit and loan
products were mainly in the shorter, more volatile end of the maturity spectrum.

         The average  interest rate spread  (average  yield on interest  earning
assets less the average rate paid on interest bearing  liabilities)  declined by
49 basis points in 2006 compared with 2005, and the net yield on average earning
assets (net interest income divided by average interest earning assets) declined
by only 30 basis  points.  This was the  result of  increasing  higher  yielding
average  loans by a greater  percentage  than  either  the other  categories  of
earning assets or interest bearing liabilities during 2006.

         As of  December  31,  2006  and  2005,  approximately  $54,000,000  and
$47,000,000,  respectively,  or 26.6% and 27.8%,  respectively  of the Company's
loan portfolio was composed of variable rate loans directly indexed to movements
in the prime rate. The average yield earned on loans in 2006 was 7.53%, compared
with 7.00% during 2005.

         Competition for interest  bearing  deposits was strong in 2006, and the
Company responded by increasing the rates paid for those funds. Additionally, in
conjunction  with the  opening  of the new  banking  office in  Seneca,  SC, the
Company offered promotional interest rates that were higher than market rates on
interest bearing  transaction  account products.  As a result, the average rates
paid for those  deposit  accounts in 2006 were 183 basis  points  higher than in
2005.  Overall,  the rates paid for all categories of average  interest  bearing
deposits  increased by 118 basis points for 2006 when  compared  with 2005,  and
interest expense for those funds in 2006 was $3,827,000,  or 60.6%, more than in
2005.  Year-over-year deposit growth was particularly strong in interest bearing
transaction accounts, primarily due to the promotional rates paid.





                                       8
<PAGE>

                  Average Balances, Yields and Rates

<TABLE>
<CAPTION>
                                                                                 Years ended December 31,
                                                                                 ------------------------
                                                               2007                        2006                       2005
                                                               ----                        ----                       ----
                                               Average       Income/  Yields/   Average   Income/ Yields/  Average   Income/ Yields/
                                              Balances(1)    Expense   Rates  Balances(1) Expense  Rates Balances(1) Expense  Rates
                                              -----------    -------   -----  ----------- -------  ----- ----------- -------  -----
                                                                                  (Dollars in thousands)
Assets
<S>                                              <C>        <C>        <C>     <C>      <C>       <C>     <C>       <C>        <C>
Interest bearing deposits due from banks .....   $    157   $      6   3.82%   $     82 $     4   4.88%   $    168  $     5    2.98%
Taxable securities ...........................     89,867      3,890   4.33%     99,922   3,868   3.87%    106,149    3,564    3.36%
Tax-exempt securities (2) ....................     19,630        817   4.16%     16,457     636   3.86%      4,407      150    3.40%
Federal funds sold ...........................     23,730      1,209   5.09%     24,814   1,175   4.74%     21,884      668    3.05%
Federal Home Loan Bank stock .................        888         56   6.31%        972      52   5.35%        999       38    3.80%
Loans (2) (3) (4) ............................    224,353     17,600   7.84%    184,032  13,865   7.53%    164,243   11,498    7.00%
                                                 --------   --------           -------- -------           --------  -------
         Total interest earning assets .......    358,625     23,578   6.57%    326,279  19,600   6.01%    297,850   15,923    5.35%
Cash and due from banks ......................      8,370                         6,573                      4,845
Allowance for loan losses ....................     (1,065)                       (2,263)                    (2,304)
Unrealized securities gains (losses) .........     (2,286)                       (2,341)                    (1,601)
Premises and equipment .......................      8,189                         7,586                      5,240
Other assets .................................      6,227                         3,914                      3,346
                                                 --------                      --------                   --------
         Total assets ........................   $378,060                      $339,748                   $307,376
                                                 ========                      ========                   ========

Liabilities and shareholders' equity
Interest bearing deposits
     Interest bearing transaction accounts ...   $ 57,117   $  1,783   3.12%   $ 46,942 $ 1,358   2.89%   $ 36,111  $   383    1.06%
     Savings .................................     25,042        658   2.63%     28,513     736   2.58%     28,586      381    1.33%
     Time deposits $100M and over ............     85,815      4,054   4.72%     72,936   2,953   4.05%     64,821    2,118    3.27%
     Other time deposits .....................    126,588      6,531   5.16%    114,091   5,100   4.47%    105,798    3,438    3.25%
                                                 --------   --------           -------- -------           --------  -------
         Total interest bearing
           deposits ..........................    294,562     13,026   4.42%    262,482  10,147   3.87%    235,316    6,320    2.69%
Short-term borrowings ........................          -          -   0.00%         56       2   3.57%        736       18    2.45%
Long-term debt ...............................      4,975        204   4.10%      5,955     236   3.96%      7,456      283    3.80%
                                                 --------   --------           -------- -------           --------  -------
         Total interest bearing liabilities ..    299,537     13,230   4.42%    268,493  10,385   3.87%    243,508    6,621    2.72%
Noninterest bearing demand deposits ..........     40,099                        38,197                     34,675
Other liabilities ............................      3,225                         2,489                      1,873
Shareholders' equity .........................     35,199                        30,569                     27,320
                                                 --------                      --------                   --------
         Total liabilities and shareholders'
         equity ..............................   $378,060                      $339,748                   $307,376
                                                 ========                      ========                   ========
Interest rate spread  (5) ....................                         2.15%                      2.14%                        2.63%
Net interest income and net yield
     on earning assets  (6) ..................              $ 10,348   2.89%            $ 9,215   2.82%             $ 9,302    3.12%
Interest free funds supporting earning
     assets  (7) .............................   $ 59,088                      $ 57,786                   $ 54,342

</TABLE>
__________________________
(1)  Average balances are computed on a daily basis.
(2)  Income and yields on tax-exempt securities and loans have not been adjusted
     on a tax equivalent basis.
(3)  Nonaccrual  loans are included in the average  loan  balances and income on
     such loans generally is recognized on a cash basis.
(4)  Includes immaterial amounts of loan fees.
(5)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(6)  Net interest  income divided by total interest  earning  assets.
(7)  Total interest earning assets less total interest bearing liabilities.

                                       9
<PAGE>

The table, "Volume and Rate Variance Analysis", provides a summary of changes in
net interest income resulting from changes in volumes of interest earning assets
and interest bearing liabilities (change in volume times prior period rate), and
the rates earned and paid on such assets and  liabilities  (change in rate times
prior period volume).

<TABLE>
<CAPTION>
                                                                 2007 Compared with 2006              2006 Compared with 2005
                                                                 -----------------------              -----------------------
                                                          Volume (1)    Rate (1)     Total       Volume (1)   Rate (1)      Total
                                                          ----------    --------     -----       ----------   --------      -----
                                                                                  (Dollars in thousands)
<S>                                                        <C>          <C>          <C>          <C>          <C>          <C>
Interest bearing deposits due from banks .............     $     3      $    (1)     $     2      $    (3)     $     2      $    (1)
Taxable securities ...................................        (410)         432           22         (218)         522          304
Tax-exempt securities ................................         129           52          181          463           23          486
Federal funds sold ...................................         (53)          87           34           99          408          507
Federal Home Loan Bank stock .........................          (4)           8            4           (1)          15           14
Loans ................................................       3,143          592        3,735        1,450          917        2,367
                                                           -------      -------      -------      -------      -------      -------
                  Total interest income ..............       2,808        1,170        3,978        1,790        1,887        3,677
                                                           -------      -------      -------      -------      -------      -------
Interest bearing deposits
      Interest bearing transaction accounts ..........         311          114          425          144          831          975
      Savings ........................................         (91)          13          (78)          (1)         356          355
      Time deposits $100M and over ...................         566          535        1,101          287          548          835
      Other time deposits ............................         594          837        1,431          287        1,375        1,662
Short-term borrowings ................................          (2)           -           (2)         (22)           6          (16)
Long-term debt .......................................         (40)           8          (32)         (59)          12          (47)
                                                           -------      -------      -------      -------      -------      -------
                  Total interest expense .............       1,338        1,507        2,845          636        3,128        3,764
                                                           -------      -------      -------      -------      -------      -------
                  Net interest income ................     $ 1,470      $  (337)     $ 1,133      $ 1,154      $(1,241)     $   (87)
                                                           =======      =======      =======      =======      =======      =======
</TABLE>
--------------------------------------------
(1)  The  rate/volume  variance  for  each  category  has  been  allocated  on a
     consistent  basis between rate and volume variances based on the percentage
     of rate or volume variance to the sum of the two absolute  variances except
     in categories having balances in only one period. In such cases, the entire
     variance is attributed to volume variances.

         Management currently is not able to predict with any significant degree
of certainty either the direction or frequency of changes in interest rates that
may occur during 2008.  The  heightened  uncertainty is related to the potential
lingering  effects of the  "liquidity  crunch" that arose in  short-term  credit
markets  late  in the  third  quarter  of 2007  and to the  government-initiated
response to concerns that a significant  number of homeowners across the country
could  face  foreclosure  during  2008  because of  certain  lending  practices,
primarily  in the  sub-prime  segment of the  residential  housing  loan market.
Changes in interest  rates that can  significantly  affect the  Company,  either
positively or negatively, are possible.

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 its
estimate of the related  allowance for loan losses.  Provisions  for loan losses
were $594,000,  $65,000 and $250,000 for the years ended December 31, 2007, 2006
and 2005,  respectively.  The larger  provision  amount for 2007  resulted  from
higher net charge-offs,  a significant  increase in loans outstanding at the end
of the year,  uncertainty  about  whether the  Company's  market  areas would be
susceptible  to the  declines  in real estate  values  that have been  exhibited
elsewhere,  and an increase in the amount of nonaccrual loans. The allowance for
loan  losses  as a  percentage  of total  loans at  year-end  was 1.05% for 2007
compared  with  1.10% for 2006.  Net  charge-offs  for 2007  were  $262,000,  an
increase of $173,000  over the 2006 amount.  See  "Impaired  Loans,"  "Potential
Problem  Loans,"  "Allowance  for Loan Losses" and "The  Application of Critical
Accounting Policies" for further information and a discussion of the methodology
used and factors  considered  by management in its estimate of the allowance for
loan losses.

                                       10
<PAGE>

Other Income

         Noninterest  income for 2007  increased  by $52,000 over the amount for
2006 due to increases in the cash  surrender  value of life  insurance  policies
owned by the  Bank and  higher  amounts  of  income  from  ATM and  other  debit
card-related  services.  There  were no  realized  gains or  losses  on sales of
investment  securities in 2007 or 2006.  Service charges on deposit accounts for
2007 were $42,000  less than in 2006 due to lower  activity  associated  with an
overdraft  protection  product.  Mortgage brokerage income declined to less than
half of its 2006 level as the Company originated more residential mortgage loans
for its own portfolio in 2007.

         Noninterest  income for 2006  increased  by $15,000 over the amount for
2005,  primarily  due to  increased  sales of credit life  insurance  and higher
amounts of income from ATM and other debit card-related services.  There were no
realized  gains or losses  on sales of  investment  securities  in 2006 or 2005.
Mortgage brokerage income for 2006 was $42,000 less than for 2005.


Other Expenses

2007 Compared with 2006

         Noninterest  expense for 2007 increased by $380,000,  or 5.6%, over the
amount for 2006. Salaries and employee benefits increased by $474,000, or 13.0%,
over the amount for 2006  primarily  due to $386,000  in  deferred  compensation
expense recognized under the compensation and retention  agreements entered into
with the Company's Chief Executive  Officer,  which was partially  offset by the
non-recurring  effects of the  adoption of SFAS 123(R) and  acceleration  of the
vesting  schedules of all  affected  options in 2006.  Share-based  compensation
expense  recognized in salaries and employee  benefits in 2006 was approximately
$302,000.  During 2006, the Company  discontinued  granting stock options to its
officers and directors;  therefore, there was no comparable expense in 2007. The
remainder of the increase in salaries  and  benefits is  attributable  to normal
salary increases,  and increases in personnel related to the continued expansion
of the Bank's network of offices.

         Net occupancy and furniture and equipment expense for 2007 increased by
$96,000 over the amounts for 2006 due to higher depreciation,  real estate taxes
and other expenses related to operating the expanded office network.

         Other expenses for 2007 decreased by $190,000 from the 2006 amount. The
non-recurring  effects of  adopting  SFAS  123(R) in 2006  included  $291,000 of
directors'  compensation  that was then  included in other  operating  expenses.
Other expenses decreasing in 2007 including expenses for printing and stationery
(down  $13,000),  advertising  and promotion  (down  $6,000),  other real estate
expenses  (down  $5,000),  and  data  processing  and  software  expenses  (down
$22,000).  Other  notable  increases in other  expenses  were noted in telephone
expense  which  increased  by $9,000 and  professional  services  expense  which
increased by $83,000  primarily for fees paid to a  compensation  consultant for
services related to the CEO's compensation and retention agreements.

         Certain  noninterest  expenses  are expected to continue to increase in
2008,  including  occupancy and furniture  and  equipment  expense.  The Company
continues  to expand the Bank's  network  of  offices  as  evidenced  by the new
Seneca,  SC office  opened in 2006, a new Highway 81  Anderson,  SC office which
opened in the fourth quarter of 2007, and the acquisition of property for future
expansion  near  Powdersville,   SC.  Management  closely  monitors  noninterest
expenses so that profitability objectives may be achieved while promoting growth
in the Company's market share in Oconee and Anderson counties.

2006 Compared with 2005

         Noninterest  expense for 2006 increased by $1,332,000,  or 24.6%,  over
the amount for 2005.  Salaries and employee benefits  increased by $744,000,  or
25.6%,  over the amount for 2005 primarily due to the effects of the adoption of
SFAS 123(R),  the opening of the new Seneca banking office,  and normal periodic
salary  increases.  Occupancy  and  furniture  and  equipment  expenses for 2006
increased by $166,000 or 27.1%.

         Prior to January 1, 2006,  the Company  accounted  for its  stock-based
compensation   plans  under  the  recognition  and  measurement   principles  of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee compensation
cost was previously  reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the  underlying  common

                                       11
<PAGE>

stock on the date of grant. The Company  previously  provided only the pro forma
disclosures  required by Financial Accounting Standards Board ("FASB") Statement
No. 123,  "Accounting  for  Stock-Based  Compensation,"  as  amended.  Effective
January 1, 2006, the Company adopted SFAS 123(R),  "Share-Based Payment." In the
fourth  quarter  of  2006,  the  Company's  Board  of  Directors   modified  all
outstanding options so that they would be vested immediately.  Therefore, all of
the  compensation  costs for all affected  options ever granted were included in
the determination of net income for 2006.

         In the second quarter of 2006, the Company completed  construction of a
new three-story office building in Seneca, SC where it opened a new full-service
banking  office and into which it relocated  several of its officers and related
support  staff.  As a result,  the Walhalla  banking  office and the deposit and
computer  operations  departments  expanded  into  the  floor  space  previously
occupied by those personnel, the older office in Seneca gained additional office
space,  and the Company  realized  increased  efficiency  by having its officers
housed in one location.

Income Taxes

         For 2007,  federal and state income taxes decreased by $37,000 from the
2006 amount. For 2006, federal and state income taxes decreased by $507,000,  or
24.8%, to $1,534,000. The effective income tax rates (income tax expense divided
by income before income  taxes) were 31.0% for 2007,  33.7% for 2006,  and 35.4%
for 2005.  The  Company's  income from  nontaxable  sources,  such as nontaxable
investment securities or loans to local governments,  has recently become a more
significant  factor in the  determination of its effective tax rate.  Nontaxable
securities  income totaled  $817,000 in 2007,  $636,000 in 2006, and $150,000 in
2005. Also, 2007 is the first year in which the Company had income  representing
increases in the cash surrender  value of bank-owned  life  insurance  policies.
Such income, which totaled $108,000, is not subject to federal income taxes.

Securities

         The following table summarizes the carrying value amounts of securities
held by the Company at each of the dates indicated.

                                 Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                      ------------
                                                                                       2007                2006               2005
                                                                                       ----                ----               ----
                                                                                                (Dollars in thousands)
Available-for-sale
<S>                                                                                 <C>                 <C>                 <C>
   Government-sponsored enterprises (GSEs) .............................            $ 56,545            $ 56,204            $ 58,004
   State, county and municipal .........................................              20,288              18,939               9,960
   Mortgage-backed securities issued by GSEs ...........................              22,193              27,344              34,106
                                                                                    --------            --------            --------
       Total available-for-sale ........................................              99,026             102,487             102,070
                                                                                    --------            --------            --------
Held-to-maturity
   Mortgage-backed securities issued by GSEs ...........................               5,663               6,595               7,751
                                                                                    --------            --------            --------
       Total securities ................................................            $104,689            $109,082            $109,821
                                                                                    ========            ========            ========
</TABLE>

                                       12
<PAGE>


         The following table presents  maturities and weighted average yields of
securities  at  December  31,  2007.  Yields on  tax-exempt  state,  county  and
municipal obligations have not been computed on a taxable-equivalent basis.

                   Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                           December 31, 2007
                                                                           -----------------
                                                               After             After
                                                              One Year         Five Years
                                           Within             Through           Through              After
                                          One Year           Five Years        Ten Years           Ten Years           Total
                                          --------           ----------        ---------           ---------           -----
                                       Amount    Yield     Amount   Yield    Amount   Yield     Amount    Yield   Amount     Yield
                                       ------    -----     ------   -----    ------   -----     ------    -----   ------     -----
                                                                        (Dollars in thousands)
<S>                                  <C>         <C>     <C>        <C>     <C>         <C>      <C>       <C>     <C>        <C>
Government-sponsored
     enterprises (GSEs) ..........   $ 14,096    3.58%   $ 17,539   4.66%   $ 20,894    5.45%    $ 4,016   5.83%   $ 56,545   4.77%
State, county and municipal ......          -    0.00%      1,284   3.49%      2,499    3.98%     16,505   4.07%     20,288   4.02%
Mortgage-backed securities
     issued by GSEs ..............      1,247    3.79%      9,521   3.87%      4,097    3.84%     12,991   4.32%     27,856   4.07%
                                     --------            --------           --------            --------          ---------
        Total ....................   $ 15,343    3.60%   $ 28,344   4.34%   $ 27,490    5.08%   $ 33,512   4.38%  $ 104,689   4.44%
                                     ========            ========           ========            ========          =========
</TABLE>
____________________________
(1)  Maturity  categories  based  upon  final  stated  maturity  dates.  Average
     maturity  is  substantially  shorter  because  of  the  monthly  return  of
     principal on certain securities.

         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.   Securities   issued  by  these
enterprises are not obligations of the U.S. Government and are not backed by the
full faith and credit of the U.S. Government or otherwise guaranteed by the U.S.
Government.   Evidencing  the  high-quality  of  the  issuers,   however,  these
securities  generally are eligible to be used as security for public deposits of
the U.S.  Treasury,  government  agencies and  corporations and states and other
political  subdivisions.  The  Company  believes  that its  investment  in these
securities at these levels is prudent, given the excellent credit ratings of the
GSEs. As of December 31, 2007,  securities  with a carrying value of $63,852,000
were pledged to secure public deposits.

         On an ongoing basis,  management  assigns securities upon purchase into
one of three categories (trading,  available-for-sale or held-to-maturity) 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 Company has never held securities for
trading  purposes.  During 2007, 2006 and 2005, the Company realized no gains or
losses on sales of investment securities.  No transfers of available-for-sale or
held-to-maturity  securities to other  categories  were made in any of the years
2005 through 2007.

         The investment  portfolio decreased by $4,393,000 in 2007 from the 2006
year-end amount.  During 2007, the Company's  investment in securities issued by
GSEs increased only minimally,  securities issued by state, county and municipal
governments increased by $1,349,000, or 7.1%, and investments in mortgage-backed
securities  issued by GSEs decreased by $6,083,000,  or 17.9%.  The Company last
purchased  mortgage-backed  securities  issued by GSEs in July 2005. Income from
securities issued by state, county and municipal governments is generally exempt
from federal  income taxes.  Through the interest rate cycle,  the advantages of
holding  different  types of  securities,  and  management's  preferences  among
categories of earning  assets,  change.  Consequently,  the  composition  of the
investment portfolio may change as management  continually seeks to maximize the
yield  realized  from  earning  assets  within  the  constraints  of other  risk
mitigation policies.

         The  investment  portfolio  decreased by $739,000 in 2006 from the 2005
year-end amount.  During 2006, the Company's  investment in securities issued by
state,  county and  municipal  governments  increased  by  $8,979,000  while its
investment in mortgage-backed securities issued by GSEs decreased by $7,918,000,
continuing a trend which began in 2005.

         The overall yield on investment securities held as of December 31, 2007
was 4.44%,  compared with 4.10% as of December 31, 2006 and 3.61% as of December
31, 2005.  Short-term market rates of interest were steady for the first half of
2007  before  declining  somewhat  in the latter  half of the year.  Those rates
increased  somewhat  during  2006 and  more  dramatically  in 2005.  Longer-term
interest  rates  have  been  relatively  more  stable.  These  external  factors

                                       13
<PAGE>

determine  the  yields   available  on  investment   securities  and  contribute
significantly  to the  Company's  pricing  structure  for its loan  and  deposit
products.

         All  mortgage-backed  securities  held by the  Company in 2007 and 2006
were issued by the Federal Home Loan Mortgage Corporation,  the Federal National
Mortgage Association or the Government National Mortgage Association.


Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no concentrations of loans in any particular individual,  industry or groups
of  related  individuals  or  industries,  and there are no foreign  loans.  The
Company's loan portfolio is, however,  dependent upon economic and other factors
that affect its local market area.

         The amounts of loans outstanding as of the end of each of the last five
years,  and the  percentage  of each  category to total loans,  are shown in the
following tables according to type of loan:

          Loan Portfolio Composition
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                          ------------
                                                              2007             2006           2005             2004             2003
                                                              ----             ----           ----             ----             ----
                                                                                    (Dollars in thousands)
Commercial, financial and industrial
<S>                                                         <C>             <C>             <C>             <C>             <C>
      Commercial and industrial ....................        $ 22,042        $ 22,268        $ 20,873        $ 21,907        $ 20,592
      Purchasing or carrying securities ............           1,823           2,000           2,136           2,372           2,323
Real estate - construction .........................           2,201           1,982             674             338             436
Real estate - mortgage
      1-4 family residential .......................         131,944          98,708          72,774          65,360          58,762
      Multifamily (5 or more) residential ..........           2,421           1,900           1,229           1,036           2,095
      Nonfarm, nonresidential ......................          50,833          47,337          46,544          43,589          40,834
Consumer installment
      Credit card and checking credit ..............           1,407           1,334           1,148           1,036             998
      Other ........................................          31,460          27,437          23,940          22,137          21,610
                                                            --------        --------        --------        --------        --------
                     Total loans ...................        $244,131        $202,966        $169,318        $157,775        $147,650
                                                            ========        ========        ========        ========        ========
</TABLE>

             Percentage Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                     2007         2006          2005          2004          2003
                                                                     ----         ----          ----          ----          ----
Commercial, financial and industrial
<S>                                                                <C>           <C>           <C>           <C>           <C>
      Commercial and industrial ..............................       9.0%         11.0%         12.3%         13.9%         13.9%
      Purchasing or carrying securities ......................       0.8%          1.0%          1.3%          1.5%          1.6%
Real estate - construction ...................................       0.9%          1.0%          0.4%          0.2%          0.3%
Real estate - mortgage
      1-4 family residential .................................      54.0%         48.6%         43.0%         41.4%         39.8%
      Multifamily (5 or more) residential ....................       1.0%          0.9%          0.7%          0.7%          1.4%
      Nonfarm, nonresidential ................................      20.8%         23.3%         27.5%         27.6%         27.7%
Consumer installment
      Credit card and checking credit ........................       0.6%          0.7%          0.7%          0.7%          0.7%
      Other ..................................................      12.9%         13.5%         14.1%         14.0%         14.6%
                                                                   -----         -----         -----         -----         -----
                     Total loans .............................     100.0%        100.0%        100.0%        100.0%        100.0%
                                                                   =====         =====         =====         =====         =====
</TABLE>

         A certain degree of risk taking is inherent in the extension of credit.
Management has established  loan and credit  policies and practices  designed to
control  both the types and amounts of risks  assumed,  and to minimize  losses.

                                       14
<PAGE>

Such policies and practices include limitations on loan-to-collateral values for
various  types  of  collateral,  requirements  for  appraisals  of  real  estate
collateral,  problem loan management  practices and collection  procedures,  and
nonaccrual and charge-off guidelines.

         Total  loans  grew   $41,165,000  or  20.3%  in  2007,   compared  with
$33,648,000  or 19.9% in 2006. The ratio of total loans to total deposits at the
end of 2007 was 68.6%,  compared with 65.9% at the end of 2006.  The  percentage
composition  of the loan  portfolio as to type of loan trended more toward loans
secured  by 1-4  family  residential  real  estate  and  away  from  commercial,
financial and  industrial  loans during the five year period ended  December 31,
2007.

         Commercial  and  industrial   loans   primarily   represent   loans  to
businesses,  and may be made on either a secured  or an  unsecured  basis.  When
taken,   collateral  usually  consists  of  liens  on  receivables,   equipment,
inventories,  furniture and  fixtures.  Unsecured  business  loans are generally
short-term with emphasis on repayment  strengths and low  debt-to-worth  ratios.
During 2007,  total  commercial  and industrial  loans  decreased by $226,000 or
1.0%, compared with an increase of $1,395,000 or 6.7%, during 2006. Loans mainly
for business and investment  purposes that are secured by real estate  (nonfarm,
nonresidential)  increased  by  $3,496,000  or 7.4% in  2007,  compared  with an
increase of $793,000 or 1.7% in 2006.  Commercial  lending involves  significant
risk  because  repayment  usually  depends  on the  cash  flows  generated  by a
borrower's business, and the debt service capacity of a business can deteriorate
because of downturns in national and local economic conditions. To control risk,
more in-depth  initial and continuing  financial  analysis of a borrower's  cash
flows and other financial information is generally required.

         Real estate  construction  loans  generally  consist of  financing  the
construction  of 1-4 family  dwellings  and some  nonfarm,  nonresidential  real
estate. Usually, loan-to-value ratios are limited to 75% and permanent financing
commitments are usually required prior to the advancement of loan proceeds.

         Loans secured by real estate mortgages comprised  approximately 76% and
73% of the Company's loan  portfolio at the end of 2007 and 2006,  respectively.
Real  estate  mortgage  loans of all types grew  $37,253,000  during 2007 and by
$27,398,000  during 2006.  Residential real estate loans consist mainly of first
and second  mortgages on single family homes,  with some multifamily home loans.
Loan-to-value  ratios  for  these  instruments  are  generally  limited  to 80%.
Nonfarm, nonresidential real estate loans are secured by business and commercial
properties with loan-to-value  ratios generally limited to 70%. The repayment of
both  residential  and business real estate loans is dependent  primarily on the
income  and cash  flows of the  borrowers,  with the real  estate  serving  as a
secondary or  liquidation  source of  repayment.  The Company does not originate
high-risk  mortgage  loans  such as  so-called  option  ARMs,  loans  with  high
loan-to-value ratios (without requiring the purchaser to obtain private mortgage
insurance),  loans with fixed  monthly  payment  amounts  that are less than the
interest  accrued on the loan, or loans with low initial  monthly  payments that
increase to much higher levels at some future time.

         Real  estate  values  in  the  Company's  market  areas,   particularly
residential real properties, have so far remained relatively steady and have not
suffered the  precipitous  decreases seen in some areas,  though there can be no
assurance  that  such  values  will not  suffer  declines  in the  future.  High
foreclosure rates drive down property values, are related to higher crime rates,
displace  families,  and have other  negative  effects on the local and national
economies. National political and industry leaders recently have been working to
encourage  private-sector  programs whereby lenders and mortgage servicers would
be able to work with distressed borrowers to prevent a glut of foreclosures.  By
reworking loan terms,  including  eliminating or reducing to a manageable  level
the payment shock that often results when certain adjustable-rate loans "reset,"
it may be possible for borrowers to continue making monthly  payments and remain
in their homes. In addition, the Federal Reserve recently has initiated a series
of interest  rate cuts to provide  stimulus to the  national  economy and has on
several occasions proactively provided liquidity to the banking system.

Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's  loans,  by type,  as of  December  31,  2007,  as well as the type of
interest requirement on such loans.

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                                         December 31, 2007
                                                                                         -----------------
                                                                        Due in          Due after
                                                                       One Year         One through     Due after
                                                                        or Less        Five Years       Five Years         Total
                                                                        -------        ----------       ----------         -----
                                                                                       (Dollars in thousands)
<S>                                                                      <C>             <C>              <C>             <C>
Commercial, financial and industrial ...............................     $ 10,199        $  12,624        $  1,042        $  23,865
Real estate - construction .........................................          519            1,624              58            2,201
Real estate - mortgage .............................................       68,804           75,154          41,240          185,198
Consumer installment ...............................................        8,747           21,276           2,844           32,867
                                                                         --------        ---------        --------        ---------
                 Total loans .......................................     $ 88,269        $ 110,678        $ 45,184        $ 244,131
                                                                         ========        =========        ========        =========

Predetermined rate, maturity greater than one year .................                     $ 101,348        $ 10,635        $ 111,983
                                                                                         =========        ========        =========

Variable rate or maturity within one year ..........................     $ 88,269        $   9,330        $ 34,549        $ 132,148
                                                                         ========        =========        ========        =========
</TABLE>

Impaired Loans

         Impaired loans are those loans on which,  based on current  information
and  events,  it is  probable  that the  Company  will be unable to collect  all
amounts due  according to the  contractual  terms of the loan  agreement.  Loans
which management has identified as impaired  generally are nonperforming  loans.
Nonperforming loans include nonaccrual loans and loans which are 90 days or more
delinquent  as to  principal  or  interest  payments.  The  Company had no loans
accounted for as troubled debt restructurings in the past five years.  Following
is a summary of the Company's impaired loans:

            Nonaccrual and Past Due Loans
<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                   2007           2006          2005           2004           2003
                                                                   ----           ----          ----           ----           ----
                                                                                        (Dollars in thousands)
<S>                                                              <C>            <C>            <C>            <C>            <C>
Nonaccrual loans ........................................        $  625         $   50         $  900         $1,465         $  997
Accruing loans 90 days or more past due .................             -              -              5              9              -
                                                                 ------         ------         ------         ------         ------
             Total ......................................        $  625         $   50         $  905         $1,474         $  997
                                                                 ======         ======         ======         ======         ======

Percent of total loans ..................................           0.3%           0.0%           0.5%           0.9%           0.7%
</TABLE>

         When an  impaired  loan is 90 days or more past due as to  interest  or
principal or there is serious doubt as to ultimate  collectibility,  the accrual
of interest income is generally  discontinued.  Previously  accrued  interest on
loans placed in a nonaccrual  status is reversed  against  current  income,  and
subsequent interest income is recognized on a cash basis when received. When the
collectibility  of a  significant  amount  of  principal  is in  serious  doubt,
collections  are credited  first to the  remaining  principal  balance on a cost
recovery  basis.  An impaired  nonaccrual loan is not returned to accrual status
unless  principal and interest are current and the borrower has demonstrated the
ability to continue  making  payments as agreed.  The amount of interest  income
that would have been included in income if nonaccrual  loans had been current in
accordance with their terms and the amounts of interest income actually  accrued
and collected were immaterial to the consolidated financial statements for 2007,
2006 and 2005.

         As of December 31, 2007, there were no irrevocable  commitments to lend
additional funds to debtors owing amounts on nonaccrual loans.

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans that are not included in impaired loans (nonaccrual or past due 90 days or
more and still  accruing).  A loan is added to the  potential  problem list when
management  becomes  aware of  information  about  possible  credit  problems of
borrowers  that causes doubts as to the ability of such borrowers to comply with

                                       16
<PAGE>

the current  loan  repayment  terms.  The total amount of loans  outstanding  at
December 31, 2007  determined by  management  to be potential  problem loans was
$3,088,000,  a decrease of $88,000  from the amount of such loans as of December
31,  2006.  This amount does not  represent  management's  estimate of potential
losses  since a large  proportion  of such loans is secured by various  types of
collateral.  The  following  table  presents  information  about  the  types  of
collateral securing potential problem loans.

                                                     December 31, 2007
                                                     -----------------
                                                   Amount                %
                                                   ------              ------
                                                   (Dollars in thousands)

Real estate mortgage .......................      $2,349               76.1%
Vehicles ...................................         131                4.2%
Mobile homes ...............................          16                0.5%
Other ......................................         467               15.1%
Unsecured ..................................         125                4.1%
                                                  ------              -----
           Total ...........................      $3,088              100.0%
                                                  ======              =====

Allowance for Loan Losses

         The table, "Summary of Loan Loss Experience",  summarizes loan balances
at the end of each period  indicated,  averages for each period,  changes in the
allowance  arising  from  charge-offs  and  recoveries  by  loan  category,  and
additions to the allowance which have been charged to expense.

         Management  believes  that  an  aggregate  evaluation  that  emphasizes
individual  loan risk  grades and  specific  problem  loan  allocations  is more
meaningful than an allocation by loan categories. Management is not aware of any
significant  degree of increased  exposure,  risk of collection or other adverse
features in any particular  category of loans.  See "The Application of Critical
Accounting  Policies" for further  discussion of the factors and procedures used
by management in estimating the allowance for loan losses.

                                       17
<PAGE>

                 Summary of Loan Loss Experience
<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,
                                                                                        ------------------------
                                                                          2007        2006         2005        2004          2003
                                                                          ----        ----         ----        ----          ----
                                                                                                  (Dollars in thousands)
<S>                                                                    <C>          <C>          <C>          <C>          <C>
Total loans outstanding at end of period ..........................    $244,131     $202,966     $169,318     $157,775     $147,650
Average amount of loans outstanding ...............................     224,353      184,032      164,243      152,546      142,322

Balance of allowance for loan losses - beginning ..................    $  2,242     $  2,266     $  2,240     $  2,197     $  1,950
                                                                       --------     --------     --------     --------     --------
Loans charged off
     Commercial and industrial ....................................          88           13            -           31          305
     Real estate - mortgage .......................................          13            6           61          104            -
     Consumer installment .........................................         191          115          242          226            -
                                                                       --------     --------     --------     --------     --------
           Total charge-offs ......................................         292          134          303          361          305
                                                                       --------     --------     --------     --------     --------
Recoveries of loans previously charged off
     Commercial and industrial ....................................           -            -            -            6           30
     Real estate - mortgage .......................................           -           31           10            -            -
     Consumer installment .........................................          30           14           69           18            -
                                                                       --------     --------     --------     --------     --------
           Total recoveries .......................................          30           45           79           24           30
                                                                       --------     --------     --------     --------     --------
Net charge-offs ...................................................         262           89          224          337          275
                                                                       --------     --------     --------     --------     --------
Additions to allowance charged to expense .........................         594           65          250          380          522
                                                                       --------     --------     --------     --------     --------
Balance of allowance for loan losses - ending .....................    $  2,574     $  2,242     $  2,266     $  2,240     $  2,197
                                                                       ========     ========     ========     ========     ========

Ratios
     Net charge-offs to average loans .............................        0.12%        0.05%        0.14%        0.22%        0.19%
     Net charge-offs to loans at end of period ....................        0.11%        0.04%        0.13%        0.21%        0.19%
     Allowance for loan losses to average loans ...................        1.15%        1.22%        1.38%        1.47%        1.54%
     Allowance for loan losses to loans at end of period ..........        1.05%        1.10%        1.34%        1.42%        1.49%
     Net charge-offs to allowance for loan losses .................       10.18%        3.97%        9.89%       15.04%       12.52%
     Net charge-offs to provision for loan losses .................       44.11%      136.92%       89.60%       88.68%       52.68%
</TABLE>

Deposits

         The average amounts and percentage  composition of deposits held by the
Company for the years ended  December 31, 2007,  2006 and 2005,  are  summarized
below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                               ------------------------
                                                                   2007                     2006                      2005
                                                         Amount           %         Amount         %          Amount         %
                                                         ------         -----       ------       -----        ------       ------
                                                                                 (Dollars in thousands)
<S>                                                    <C>             <C>        <C>            <C>        <C>           <C>
Noninterest bearing demand .....................       $ 40,099         12.0%     $ 38,197        12.7%     $ 34,675       12.8%
Interest bearing transaction accounts ..........         57,117         17.1%       46,942        15.6%       36,111       13.4%
Savings ........................................         25,042          7.5%       28,513         9.5%       28,586       10.6%
Time deposits $100M and over ...................         85,815         25.6%       72,936        24.3%       64,821       24.0%
Other time deposits ............................        126,588         37.8%      114,091        37.9%      105,798       39.2%
                                                       --------        -----      --------       -----      --------      -----
            Total deposits .....................       $334,661        100.0%     $300,679       100.0%     $269,991      100.0%
                                                       ========        =====      ========       =====      ========      =====
</TABLE>

         As of December 31, 2007,  there were  $96,547,000  in time  deposits of
$100,000  or  more.  Approximately   $25,246,000  mature  within  three  months,

                                       18
<PAGE>

$32,252,000  mature over three through six months,  $34,559,000  mature over six
through twelve months and $4,490,000  mature after one year. This level of large
time deposits,  as well as the growth in other deposits, is attributed to growth
planned by management.  The vast majority of time deposits $100,000 and over are
acquired  within the Company's  market areas in the ordinary  course of business
from customers  with standing  banking  relationships.  As of December 31, 2007,
approximately  $23,345,000  of time  deposits of  $100,000  or more  represented
deposits of local governmental entities. It is a common industry practice not to
consider  time  deposits  of  $100,000  or  more as core  deposits  since  their
retention can be influenced heavily by rates offered.  Therefore,  such deposits
have the  characteristics  of  shorter-term  purchased  funds.  Certificates  of
deposit  $100,000  and over  require  that the Company  achieve and  maintain an
appropriate matching of maturity  distributions and a diversification of sources
to achieve an  appropriate  level of  liquidity.  The Company  does not purchase
brokered deposits.


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  (dividends  declared per share divided by net income per
share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for each period indicated.

                                                Years Ended December 31,
                                                ------------------------
                                           2007            2006           2005
                                           ----            ----           ----

          Return on assets .............   0.88%          0.89%          1.21%
          Return on equity .............   9.46%          9.87%         13.65%
          Dividend payout ratio ........   0.00%          0.00%          0.00%
          Equity to assets ratio .......   9.31%          9.00%          8.89%

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 which are  convertible
immediately  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  Company's  market areas.  Core deposits  (total
deposits less time  deposits of $100,000 and over)  provide a relatively  stable
funding base,  and the average of these  deposits  represented  65.8% of average
total assets during 2007  compared  with 67.0% during 2006.  Deposits of several
local  governmental  entities  comprised  approximately  12%  and  13% of  total
deposits at the end of 2007 and 2006,  respectively.  Because of the potentially
volatile  nature of this funding  source,  the Bank maintains  membership in the
Federal  Home Loan Bank of Atlanta  (the  "FHLB") in order to gain access to its
credit  programs.  During 2004, the banking  subsidiary  obtained  approximately
$10,000,000  of short-term  borrowings  and long-term  debt from the FHLB. As of
December 31, 2007,  $4,500,000 of these borrowings remained  outstanding and the
banking  subsidiary is eligible to borrow up to an additional  $39,779,000  from
the FHLB.  Such borrowings are secured by a lien on its investment in FHLB stock
and  certain  first  mortgage  residential  loans  held.  The amount of eligible
collateral instruments remaining available as of December 31, 2007 to secure any
additional FHLB borrowings totaled approximately  $29,211,000.  In addition, the
banking  subsidiary has available unused  short-term lines of credit to purchase
up to an additional  $10,900,000 of federal funds from  unrelated  correspondent
institutions.  The lines  generally  limit the  period of time that any  related
borrowings  may be  outstanding  and are  cancelable  at any  time  in the  sole
discretion  of the lender.  Asset  liquidity is provided  from several  sources,
including   amounts   due  from  banks  and  federal   funds  sold.   Securities
available-for-sale  and funds  available  from  maturing  loans and  paydowns of
mortgage-backed securities provide secondary sources of liquidity.

         Community First  Bancorporation's  ability to meet its cash obligations
or to pay any  possible  future cash  dividends  to  shareholders  is  dependent
primarily on the successful  operation of the subsidiary bank and its ability to
pay cash dividends to the parent company.  Any of the banking  subsidiary's cash
dividends  in excess  of the  amount of the  subsidiary's  current  year-to-date
earnings  ($3,346,000 at December 31, 2007) are subject to the prior approval of
the South Carolina  Commissioner of Banking. In addition,  dividends paid by the
banking  subsidiary  to the parent  company  would be  prohibited  if the effect
thereof would cause the Bank's  capital to be reduced below  applicable  minimum
regulatory requirements.  In 2007, 2006 and 2005, the parent company received no
cash  dividends  from  its  banking  subsidiary.  Under  Federal  Reserve  Board
regulations, the amounts of loans or advances from the banking subsidiary to the
parent company are also restricted.

                                       19
<PAGE>

         Management  believes  that the  overall  liquidity  sources of both the
Company and its banking subsidiary are adequate to meet their operating needs.


Capital Resources

         Shareholders' equity increased by $4,696,000 and $4,361,000 during 2007
and 2006,  respectively.  During 2007, net income increased shareholders' equity
by $3,331,000  and the exercise of stock options and related income tax benefits
provided increases totaling $566,000.  Other comprehensive income or loss, which
consisted   of  the   change  in   unrealized   holding   gains  and  losses  on
available-for-sale   securities,   net  of  deferred  tax   effects,   increased
shareholders'  equity by $804,000.  Approximately $5,000 was paid in lieu of the
issuance  of  fractional  shares  in  conjunction  with the 10%  stock  dividend
declared in 2007.  During 2006,  net income  increased  shareholders'  equity by
$3,018,000  and the exercise of employee  stock options  provided an increase of
$83,000.  Share-based  compensation  costs included in net income were offset by
increases in additional paid-in capital totaling  $593,000,  as required by SFAS
123(R).  Other  comprehensive  income or loss,  which consisted of the change in
unrealized  holding gains and losses on  available-for-sale  securities,  net of
deferred tax effects, increased shareholders' equity by $673,000.  Approximately
$6,000 was paid in lieu of the issuance of fractional shares in conjunction with
the 5% stock dividend declared in 2006.

         The Company and its banking  subsidiary  are each subject to regulatory
risk-based  capital  adequacy  standards.  Under these  standards,  bank holding
companies and banks 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  Improvement  Act of  1991  ("FDICIA"),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective  actions" upon the deterioration of the capital position of a bank or
bank holding company. If the capital position of an affected institution were to
fall below certain levels,  increasingly stringent regulatory corrective actions
are  mandated.   Unrealized  holding  gains  and  losses  on  available-for-sale
securities are generally excluded for purposes of calculating regulatory capital
ratios.  However,  the extent of any unrealized  appreciation or depreciation on
securities  will continue to be a factor that regulatory  examiners  consider in
their overall assessment of capital adequacy.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy  require both the Company and the Bank to maintain  minimum amounts and
ratios, as set forth in the table below, of Total and Tier 1 Capital, as defined
in the regulation,  to risk weighted assets, as defined,  and of Tier 1 Capital,
as defined, to average assets, as defined.  Management believes,  as of December
31, 2007 and 2006,  that the Company and the Bank exceeded all capital  adequacy
minimum requirements to which they were subject.

         To be  categorized as well  capitalized  as defined in Federal  Deposit
Insurance  Act,  the  Bank  must  maintain  minimum  Total  risk-based,  Tier  1
risk-based,  and Tier 1 leverage ratios as set forth in the table below. Federal
regulators may also categorize the Bank as less than well  capitalized  based on
subjective criteria.  Bank holding companies with higher levels of risk, or that
are experiencing or anticipating significant growth, are expected by the Federal
Reserve to maintain capital well above the minimums.  There are no conditions or
events that management believes would cause the Company's or the Bank's category
to be other than that resulting from meeting the minimum ratio requirements.

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                                          Minimum for               Minimum to be
                                                                 Actual                Capital Adequacy           Well Capitalized
                                                                 ------                ----------------           ----------------
                                                          Amount         Ratio       Amount         Ratio       Amount         Ratio
                                                          ------         -----       ------         -----       ------         -----
December 31, 2007                                                                   (Dollars in thousands)
     The Company
<S>                                                         <C>           <C>        <C>            <C>      <C>              <C>
         Total Capital to risk weighted assets ........     $40,405       17.3%      $18,642        8.0%          NA             NA
         Tier 1 Capital to risk weighted assets .......     $37,831       16.2%      $ 9,321        4.0%          NA             NA
         Tier 1 Capital to average assets (leverage) ..     $37,831        9.7%      $15,594        4.0%          NA             NA
     Community First Bank
         Total Capital to risk weighted assets ........     $38,763       17.3%      $18,642        8.0%     $23,302          10.0%
         Tier 1 Capital to risk weighted assets .......     $36,189       16.2%      $ 9,321        4.0%     $13,981           6.0%
         Tier 1 Capital to average assets (leverage) ..     $36,189        9.7%      $15,594        4.0%     $19,492           5.0%

December 31, 2006
     The Company
         Total Capital to risk weighted assets ........     $35,457       15.7%      $18,063        8.0%          NA             NA
         Tier 1 Capital to risk weighted assets .......     $33,215       14.7%      $ 9,032        4.0%          NA             NA
         Tier 1 Capital to average assets (leverage) ..     $33,215        9.7%      $13,737        4.0%          NA             NA
     Community First Bank
         Total Capital to risk weighted assets ........     $34,997       15.5%      $18,063        8.0%     $22,579          10.0%
         Tier 1 Capital to risk weighted assets .......     $32,755       14.5%      $ 9,032        4.0%     $13,547           6.0%
         Tier 1 Capital to average assets (leverage) ..     $32,755        9.5%      $13,738        4.0%     $17,172           5.0%
</TABLE>

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  having 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 will result in increased operating
expenses.


Off-Balance   Sheet   Arrangements,   Contractual   Obligations  and  Contingent
Liabilities and Commitments

         The  Company  presently  engages  in  only  limited  off-balance  sheet
arrangements.   Such   arrangements   are   defined  as   potentially   material
transactions,  agreements,  or other contractual  arrangements which the Company
has  entered  into that  involve  an entity  that is not  consolidated  into its
financial statements and, under which the Company,  whether or not it is a party
to the arrangement, has, or in the future may have:

     o    any  obligation  under a  direct  or  indirect  guarantee  or  similar
          arrangement;
     o    a  retained  or  contingent  interest  in  assets  transferred  to  an
          unconsolidated entity or similar arrangement;
     o    derivatives,  to the extent  that the fair value  thereof is not fully
          reflected as a liability or asset in the financial statements; or
     o    any  obligation  or  liability,  including a contingent  obligation or
          liability,  to the  extent  that  it is  not  fully  reflected  in the
          financial statements (excluding the footnotes thereto).

         The Company's  off-balance-sheet  arrangements  presently  include only
commitments  to extend credit and standby  letters of credit.  Such  instruments
have  elements of credit risk in excess of the amount  recognized in the balance
sheet. The exposure to credit loss in the event of  nonperformance  by the other
parties to these  instruments is represented  by the  contractual,  or notional,
amount  of those  instruments.  Generally,  the same  credit  policies  used for
on-balance  sheet  instruments,  such  as  loans,  are  used in  extending  loan
commitments and letters of credit.  The following table sets out the contractual
amounts of those arrangements:

                                       21
<PAGE>

                                                           December 31,
                                                           ------------
                                                    2007                  2006
                                                    ----                  ----
                                                      (Dollars in thousands)

              Loan commitments ................   $ 35,954              $ 33,764
              Standby letters of credit .......      1,039                 1,114

         Loan  commitments  involve  agreements to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully  drawn;  therefore,  the total amount of loan  commitments  does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon  extension  of credit is based on  management's  credit  evaluation  of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.

         Standby letters of credit are conditional  commitments to guarantee the
performance of a customer to a third party.  The credit risk involved in issuing
standby  letters  of  credit  is the  same  as  that  involved  in  making  loan
commitments to customers.

         The Bank obtained the required  regulatory approval to purchase land on
which it plans to construct a new banking office building in Powdersville, South
Carolina.  The Bank has not yet  applied  for  regulatory  approval to open that
office and no budgets or timetables for construction have yet been made.

         As described under  "Liquidity,"  management  believes that its various
sources of liquidity  provide the  resources  necessary for the Bank to fund the
loan  commitments  and to perform under standby  letters of credit,  if the need
arises. Neither the Company nor the Bank are involved in other off-balance sheet
contractual  relationships or transactions  that could result in liquidity needs
or other commitments or significantly impact earnings.


Short-Term Borrowings

         The Company did not have any short-term  borrowings  outstanding at any
time during 2007.

The Application of Critical Accounting Policies

         The  consolidated  financial  statements are based on the selection and
application of accounting  principles generally accepted in the United States of
America, which require management to make estimates and assumptions about future
events  that  affect  the  amounts  reported  in the  financial  statements  and
accompanying  notes.  Future events and their effects cannot be determined  with
absolute  certainty.  Therefore,  the  determination  of estimates  requires the
exercise of judgment.  Actual results could differ from those estimates, and any
such  differences  may be  material  to  the  financial  statements.  Management
believes that the provision and allowance for loan losses  discussed  below is a
critical  accounting  policy  that may involve a higher  degree of judgment  and
complexity in its application and represents the critical accounting policy used
in  the  preparation  of  the  Company's  financial  statements.   If  different
assumptions  or  conditions  were to prevail,  the results  could be  materially
different from the reported results.

         Management has discussed the selection,  development  and disclosure of
this critical accounting policy's methodology and assumptions with the Company's
audit committee to enhance that body's  awareness of those factors and to enable
the  committee to assess the  appropriateness  of  management's  procedures  and
conclusions, and its disclosures about this accounting policy.

Provision and Allowance for Loan Losses

         The  Company is required to  estimate  the  collectibility  of its loan
portfolio as of each accounting period end and, based on such estimates, provide
for an allowance for loan losses.  The allowance for loan losses is increased by
the provision for loan losses charged to expense, and any recoveries received on
loans previously charged off. The allowance is decreased by deducting the amount
of uncollectible loans charged off.

         A  considerable  amount of  judgment is required in order to compute an
estimate of the amount of the allowance for loan losses.  Management's judgments

                                       22
<PAGE>
must be applied in  assessing  the  current  creditworthiness  of the  Company's
borrowers and in estimating probable losses incurred in the loan portfolio based
on factors  discussed below and their potential effects based on currently known
facts and  circumstances.  Changes in the  estimated  allowance  for loan losses
arising as new events occur or more information is obtained are accounted for as
changes in accounting  estimates in the accounting period in which such a change
occurs.

         The  allowance  for loan losses is composed  of  specific,  general and
unallocated  amounts.  Specific  allowance  amounts are provided for  individual
loans based on  management's  evaluation of the Company's  loss exposure  taking
into account the current payment status,  underlying  collateral and other known
information about a particular borrower's circumstances.  Typically, these loans
are  identified  as  impaired  or have been  assigned  internal  risk  grades of
management attention,  special mention, substandard or doubtful. General amounts
are provided for all other loans,  excluding  those for which  specific  amounts
were  determined,  by  applying  estimated  loss  percentages  to the  portfolio
categorized  using risk  grades.  These  percentages  are based on  management's
current evaluation with consideration  given to historical loss experience.  The
unallocated  portion  of the  allowance  consists  of an amount  believed  to be
appropriate  to provide for the  elements of  imprecision  and  estimation  risk
inherent  in the  specific  and  general  amounts  and is  determined  based  on
management's  evaluation of various conditions that are not directly measured by
the other components of the allowance. This evaluation includes general national
and local economic and business  conditions  affecting key lending market areas,
credit quality trends, collateral values, loan volumes, portfolio seasoning, and
any identified  credit  concentrations.  The findings of internal credit reviews
and  results  from  external  audits  and  regulatory   examinations   are  also
considered.

         The Company  utilizes its risk grading system for all loans held in the
portfolio.  This system involves the Company's lending officers assigning a risk
grade, on a loan-by-loan  basis,  considering  information  about the borrower's
capacity to repay,  collateral,  payment history, and other known factors.  Risk
grades  assigned  are  updated  monthly for any known  changes in  circumstances
affecting  the borrower or the loan.  The risk grading  system is monitored on a
continuing  basis by  management  and  validated  by the  Company's  independent
external credit review firm.

         The provision for loan losses  charged to expense  increased in 2007 to
$594,000  compared with $65,000 in 2006 and $250,000 for 2005. The allowance for
loan losses at the end of 2007 was $2,574,000,  an increase of $332,000 from the
allowance of  $2,242,000  as of the end of 2006.  As a percentage of total loans
outstanding at year end, the allowance for loan losses was 1.05%,  1.10%, 1.34%,
1.42%, and 1.49% for 2007, 2006, 2005, 2004 and 2003, respectively.

         A significant  increase in the amount of loans outstanding during 2007,
higher amounts of net charge-offs,  heightened  uncertainty  about the degree of
protection available to the Bank from residential properties taken as collateral
due to the  negative  pressure on property  values  stemming  from the  mortgage
lending crisis, higher levels of nonaccrual loans and only a slight reduction in
potential  problem  loans were factors  leading to the increase in the provision
for loan losses in 2007.  Although  the Company uses  conservative  underwriting
standards,  including  adhering to prudent  loan-to-value  ratios, the values of
properties taken as collateral  generally are determined by appraisal  processes
that rely, in part, on other recent local transactions as an indicator of value.
If values in a local market become overstated due to relaxed credit standards of
other lenders or other factors,  appraisals  become less reliable  indicators of
the properties' true values. While management believes that the appraised values
of real estate in the Company's markets have been fairly stated, there remains a
higher-than-normal  possibility  that property  values could decline if economic
conditions deteriorate significantly.

         Higher  levels of loans  collateralized  by  mortgages  on real estate,
lower amounts of  nonperforming  loans,  and a significantly  lower incidence in
loan  charge-offs in 2006  contributed to the decrease in the 2006 provision for
loan losses.  The Company's loan portfolio  increasingly  is  collateralized  by
residential and commercial  real estate.  Such  collateral,  combined with other
conservative   underwriting   standards,   is  believed  to  offer  the  Company
substantial  protection  from  ultimately  incurring  losses in the  event  that
foreclosure and liquidation of the collateral is necessary,  though there can be
no assurances to that effect.

         The $250,000  provision  for loan losses 2005 resulted  primarily  from
increases  in  potential  problem  loans,  the  $11,543,000  growth  of the loan
portfolio,  and was  influenced by lower net  charge-offs  that reflected both a
reduced level of charge-offs and higher recoveries of amounts previously charged
against the allowance.  Net  charge-offs to average loans in 2005 was,  however,
substantially lower than the trailing four-year average of that measure.

         In 2004, the $380,000 provision for loan losses resulted primarily from
higher  levels of  charge-offs,  increased  levels of  nonaccrual  and potential
problem loans,  changes in the economic  characteristics of the Company's market
area,  uncertainty  about  the  effect  of  increasing  interest  rates  on loan
customers' abilities to cope with potentially higher repayment requirements, and
growth of the loan portfolio.


                                       23
<PAGE>

         In 2003, the $522,000 provision for loan losses resulted primarily from
uncertainty  caused  by the  bankruptcy  of the  funding  subsidiary  of a local
mortgage   banking   operation   which  resulted  in  losses  of   approximately
$200,000,000 among local investors. In making its judgments about the percentage
factors applied to loan risk grade categories in 2003, management was relatively
pessimistic about local conditions.  Several key factors influenced management's
development of its loan loss estimates that year,  including  increases in loans
outstanding,  net  loan  charge-offs,   impaired  or  non-performing  loans  and
potential problem loans over the previous three years.

         Management  believes that the local economy remains  relatively healthy
and the effects on the  Company's  borrowers  from the 2003  bankruptcy  are now
better  understood.  Manufacturing  remains  a  significant  sector of the local
economy,  but it  continues  to be  affected  by  industry  pressures  including
increased off-shoring of production,  especially as related to textile products.
Total  year-end  loans  grew  20.3%,  19.9%  and  7.3% in 2007,  2006 and  2005,
respectively.  Net loan charge-offs  increased to $262,000 in 2007 and decreased
to $89,000 in 2006 from $224,000 in 2005. As of the end of 2007,  impaired loans
increased to $625,000  compared with $50,000 one year earlier,  representing  an
increase of $575,000.  Potential  problem loans were $3,088,000 as of the end of
2007 compared with $3,176,000 as of the end of 2006 and $2,148,000 at the end of
2005.  Collateral  values of real estate and vehicles taken on many of the loans
recognized  as impaired and  potential  problem loans in prior years have so far
helped keep  charge-offs  relatively low considering the total credit  exposures
present in those loans.

         Management has established  loan and credit policies and practices that
are designed to control credit risks as a part of the loan underwriting process.
These policies and practices include, for example, requirements for minimum loan
to collateral value ratios,  real estate appraisal  requirements,  and obtaining
credit and  financial  information  on borrowers.  However,  if the capacity for
borrowers to repay and/or collateral values should deteriorate subsequent to the
underwriting  process,  the estimate of the  provision  and  allowance  for loan
losses might increase,  thereby decreasing net income and shareholders'  equity.
The  total  amount  of loans  secured  by real  estate  mortgages  increased  by
$83,507,000,  or 82.1%,  from $101,691,000 at the end of 2003 to $185,198,000 at
the end of 2007. Of this increase, $73,182,000 consisted of loans secured by 1-4
family  residential  real estate  mortgages,  and $9,999,000  consisted of loans
secured by nonfarm,  nonresidential  real estate  mortgages.  A  significant  or
prolonged downturn in national and local economic and business  conditions could
negatively  affect the  borrowers'  capacity to repay these loans as well as the
value  of  the  underlying   collateral.   This  scenario  would  be  likely  to
substantially  increase  the  level of  impaired  or  non-performing  loans  and
non-earning  foreclosed assets and increase overall credit risk by shrinking the
margin of collateral values as compared with loans  outstanding.  Another factor
that could adversely  affect  borrowers'  ability to make payments in accordance
with loan terms is the potential  for  continued  increases in rates charged for
loans. The Company has a significant  amount of variable rate loans outstanding.
In addition, some loans are refinanced at maturity rather than being paid out in
a lump sum. If interest  rates were to increase  sharply in a short time period,
some  loan  customers  might  not be able to afford  payments  on loans  made or
repriced at the higher  resulting  interest rates, nor would they necessarily be
able to obtain more favorable terms elsewhere. This could also cause an increase
in the amounts of impaired or non-performing assets and other credit risks.

Impact of Recent Accounting Changes

Hybrid  Financial  Instruments  -  The  provisions  of  Statement  of  Financial
Accounting  Standards No. 155 ("SFAS No. 155"),  "Accounting  for Certain Hybrid
Financial  Instruments,  an amendment of FASB  Statements No. 133 and 140," were
effective January 1, 2007. The Company has no affected financial instruments and
adoption of the Statement had no effect on the Company's  consolidated financial
statements.

Servicing  of  Financial  Assets - The  provisions  of  Statement  of  Financial
Accounting  Standards  No. 156 ("SFAS No.  156"),  "Accounting  for Servicing of
Financial Assets, an amendment of FASB Statement No. 140" were effective January
1, 2007.  This  Statement  potentially  simplified the accounting for separately
recognized loan servicing  assets and liabilities and any financial  instruments
used to hedge risks  associated  with those assets and  liabilities.  Under SFAS
156,  separately  recognized  servicing assets and liabilities are accounted for
initially at fair value,  if  practicable,  and  subsequently  are accounted for
either at fair value or amortized  over the economic lives of the related loans.
If the fair  value  method of  subsequent  valuation  is  elected,  SFAS No. 156
permits income statement  recognition of the potential offsetting changes in the
fair values of the financial servicing rights and liabilities and the derivative
instruments  used to  hedge  them in the same  accounting  period.  The  Company
currently has no separately recognized loan servicing rights or liabilities, and
adoption of SFAS No. 156 had no effect on the Company's  consolidated  financial
statements.


                                       24
<PAGE>

Fair Value  Measurements - The  provisions of Statement of Financial  Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
fiscal  years  beginning  after  November  15,  2007  (January  1,  2008 for the
Company).  SFAS No. 157  defines  fair value and  establishes  a  framework  for
measuring fair value in GAAP. The Statement  describes fair value as being based
on a  hypothetical  transaction  to sell an asset or transfer a  liability  at a
specific  measurement  date,  as  considered  from the  perspective  of a market
participant   who  holds  the  asset  or  owes  the  liability  (an  exit  price
perspective).  In  addition,  fair  value  should be  viewed  as a  market-based
measurement,  rather than an entity-specific measurement.  Therefore, fair value
should be determined based on the assumptions that market participants would use
in pricing an asset or liability,  including all risks and restrictions that may
be  associated  with that  asset or  liability.  SFAS No. 157 does not amend the
definition of fair value used in conjunction with Share-Based Payments accounted
for under SFAS No. 123(R).  The adoption of SFAS No. 157 in 2008 is not expected
to have a material effect on the Company's consolidated financial statements.

Accounting  for  Uncertainty  in  Income  Taxes - The  provisions  of  Financial
Accounting  Standards Board  Interpretation  No. 48 ("FIN 48"),  "Accounting for
Uncertainty  in Income  Taxes,  an  interpretation  of FASB  Statement No. 109,"
clarify  the  accounting  for  uncertainty  in  income  tax  positions.  FIN  48
prescribes  a two-step  evaluation  process  that  includes  both a  recognition
threshold and a measurement  attribute for tax positions taken or expected to be
taken in a tax return.  The  provisions of FIN 48 were effective for the Company
as of January 1, 2007. The adoption of FIN 48 did not have a material  effect on
the Company's consolidated financial statements.

Fair Value Option -The provisions of Statement of Financial Accounting Standards
No. 159 ("SFAS  No.  159"),  "The Fair  Value  Option for  Financial  Assets and
Financial  Liabilities  Including an amendment of FASB  Statement  No. 115," are
effective as of January 1, 2008.  SFAS No 159 allows  entities to choose whether
or not to measure many  financial  instruments  and certain  other items at fair
value.  However,  the Statement  also  specifies the times at which an entity is
allowed  choose  to elect the fair  value  option  for a  particular  item.  For
eligible  financial  instruments that an entity elects to measure at fair value,
all changes in fair value,  including  both  unrealized  and realized  gains and
losses,  will be recognized in income.  The Company currently does not expect to
value any items using the fair value  option of SFAS No. 159 and adoption of the
Statement,  therefore,  is expected to have no effect on the Company's financial
statements.

Quantitative and Qualitative Disclosures about Market Risk

         Market risk for the Company  consists  primarily of interest rate risk,
particularly   with   respect   to   appropriately    aligning   the   repricing
characteristics  of its earning  assets and interest  bearing  funding  sources.
Management  actively  monitors  and manages  the  Company's  interest  rate risk
exposure.  Other risks,  such as credit  quality and  liquidity  risk,  are also
managed in the normal course of business, but management considers interest rate
risk to be the most significant  market risk facing the Company.  Other types of
market risks, such as foreign currency exchange risk and commodity price risk do
not constitute significant risks to the Company in the conduct of its business.

         The  Company's  primary  goal  is  to  manage  the  mix  and  repricing
characteristics of its interest earning assets and interest bearing  liabilities
within the context of a dynamic interest rate environment in such a way that net
interest income grows consistently.  To be successful,  the Company must be able
to achieve this result while  simultaneously  maintaining  adequate  capital and
liquidity to meet its other obligations.

         All of the Company's  interest  bearing deposits and its long-term debt
mature or reprice within five years. Accordingly,  the interest rates offered by
the Company to attract such deposits are determined  principally by reference to
(1) the  yield  curve  for U. S.  Treasury  securities  with  similar  remaining
maturities  (adjusted  for credit  quality)  and (2) the rates  offered by other
financial institutions in the Company's local market areas.

         Rates  charged  for loans and  accepted  in return for  investments  in
securities are determined similarly.  Certain loan products, such as residential
mortgage  loans and loans for the purpose of  financing  commercial  real estate
development,  may be relatively long-lived  instruments.  As such, the life-time
funding of these types of loans usually consists of several  short-term  deposit
or other debt instruments  acquired  serially  throughout the life of the asset.
Each of  those  funding  events  is  associated  with  its own  borrowing  cost.
Therefore,  the profitability of the Company's  interest earning assets may vary
as the  funding  sources  for the assets  change  through  time.  In some cases,
longer-term  deposits and  borrowings  may be acquired on a variable rate basis.
The repricing characteristics of those sources do not necessarily match with the
repricing characteristics of the assets that may be purchased with those funds.


                                       25
<PAGE>

         Management  limits the risks inherent in funding  long-term assets with
short-term  sources  primarily by limiting the potential period of "mismatch" in
the  repricing   characteristics  of  affected  assets  and  liabilities  or  by
attempting to limit the amount by which the rates may vary. Generally, all loans
with  original  maturities  in excess of five years are made on a variable  rate
basis  with  frequent  interest  rate  "reset"  dates.  Alternatively,  when the
repayment term of a loan is initially  established in excess of five years,  the
Company  ordinarily  requires  that the loan be reviewed and the  interest  rate
changed to reflect  current  market  conditions  at least as often as every five
years.

         To mitigate other types of risks that are indirectly related to changes
in interest  rate,  such as those risks that could arise for  customers who have
sufficient resources to service their debts as long as interest rates remain low
but  insufficient  resources if interest rates rise, the Company  generally does
not  promote or grant  loans to  borrowers  who  qualify  for credit only if the
associated  initial  interest  rate is unusually  low.  Also,  consumers are not
encouraged to borrow the maximum amount for which they might qualify.

         In addition,  the Company does not offer  interest-only  type loans for
protracted periods,  and discourages loans where there are high loan-to-value or
high  debt-to-income  ratios.  The Company generally does not use credit scoring
techniques in isolation as a basis for extending consumer credit.

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  monitors interest rate risk exposures and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets at the end of 2007 by  $155,857,000,  resulting in a cumulative
gap ratio of .49.  When interest  sensitive  assets  exceed  interest  sensitive
liabilities for a specific repricing  "horizon," a positive interest sensitivity
gap results.  The gap is negative when  interest  sensitive  liabilities  exceed
interest  sensitive  assets,  as was the case at the end of 2007 with respect to
the one-year time  horizon.  For a bank with a negative  gap,  falling  interest
rates would  ordinarily  be expected to have a positive  effect on net  interest
income and rising rates would  ordinarily be expected to have a negative effect.
During  2007,  the Company was able to prolong the  maturities  of certain  time
deposits  beyond the one-year  horizon,  invested in longer-term  securities and
originated more loans with extended maturities or repricing periods.

         The table,  "Interest Sensitivity  Analysis",  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 loans may be repriced
contractually.  Securities  are  reflected  at the earlier of each  instrument's
ultimate  maturity or contractual  repricing date.  Overnight federal funds sold
are  reflected  in  the  earliest  contractual  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.  These
liabilities  are subject to contractual  arrangements  that allow  management to
vary the rates paid on these  deposits  within a thirty-day  or shorter  period.
However,  the Company is not obligated 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.  Variable rate time
deposits,  principally  individual  retirement  accounts,  are  reflected at the
earlier of their next repricing or maturity dates.


                                       26
<PAGE>

                  Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                           December 31, 2007
                                                                                           -----------------
                                                                     Within          4-12      Over 1-5        Over 5
                                                                    3 Months        Months       Years          Years        Total
                                                                    --------        ------       -----          -----        -----
                                                                                       (Dollars in thousands)
Interest earning assets
<S>                                                             <C>             <C>            <C>            <C>          <C>
      Interest bearing deposits due from banks ............     $     165       $      -       $      -       $      -     $     165
      Securities ..........................................         4,442         12,091         32,677         55,479       104,689
      Federal Home Loan Bank stock ........................           840              -              -              -           840
      Federal funds sold ..................................        24,236              -              -              -        24,236
      Loans (1) ...........................................        62,405         45,055        125,250         10,796       243,506
                                                                ---------      ---------      ---------      ---------     ---------
              Total interest earning assets ...............        92,088         57,146        157,927         66,275     $ 373,436
                                                                ---------      ---------      ---------      ---------     =========
Interest bearing liabilities
      Interest bearing deposits
          Interest bearing transaction accounts ...........     $  55,389       $      -       $      -       $      -     $  55,389
          Savings .........................................        21,458              -              -              -        21,458
          Time deposits $100M and over ....................        25,246         66,811          4,317            173        96,547
          Other time deposits .............................        22,609        109,078          8,234            263       140,184
      Long-term debt ......................................         3,500          1,000              -              -         4,500
                                                                ---------      ---------      ---------      ---------     ---------
              Total interest bearing liabilities ..........       128,202        176,889         12,551            436     $ 318,078
                                                                ---------      ---------      ---------      ---------     =========

Interest sensitivity gap ..................................     $ (36,114)     $(119,743)     $ 145,376      $  65,839
Cumulative interest sensitivity gap .......................     $ (36,114)     $(155,857)     $ (10,481)     $  55,358
Gap ratio .................................................          0.72           0.32
Cumulative gap ratio ......................................          0.72           0.49
</TABLE>
-----------------------------------------------------
(1)  Loans are net of nonaccruing loans totaling $625,000.

         The following table shows the Company's financial  instruments that are
sensitive to changes in interest rates. The Company uses certain  assumptions to
estimate fair values and expected  maturities.  For assets,  expected maturities
are based upon  contractual  maturity,  projected  repayments and prepayments of
principal,  and potential and probable calls of investment securities.  For core
deposits without  contractual  maturity (i.e.,  interest  checking,  savings and
money market  accounts),  the table  presents  cash flows based on  management's
estimate  of their most  likely  runoff  pattern.  Actual  cash flows could vary
significantly from the estimated amounts presented.

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                         2007 Year-
                                            End
                                          Average                                                                         Estimated
                                         Yield/Rate    2008     2009      2010       2011      2012   Thereafter Balance  Fair Value
                                         ----------    ----     ----      ----       ----      ----   ---------- -------  ----------
                                                                          (Dollars in thousands)
Interest earning assets
<S>                                          <C>    <C>        <C>       <C>        <C>       <C>      <C>       <C>        <C>
  Interest-bearing deposits
    with other banks ..................      4.00%  $    165   $     -   $     -    $    -    $    -   $     -   $    165   $    165
  Investment securities ...............      4.36%    30,766    22,794    14,337     4,574     3,206    29,012    104,689    104,651
  Federal funds sold ..................      5.09%    24,236         -         -         -         -         -     24,236     24,236
  Loans ...............................      7.84%   128,572    55,685    55,371     1,919     1,098     1,486    244,131    238,670


Interest bearing liabilities
  Savings .............................      2.64%  $ 21,458   $     -   $     -    $    -    $    -   $     -   $ 21,458   $ 21,458
  Interest bearing transaction accounts      3.24%    55,389         -         -         -         -         -     55,389     55,389
  Time deposits .......................      4.98%   224,814    11,258       225       317       117         -    236,731    238,172
                                                    --------   -------   -------    ------    ------   -------   --------   --------
        Total interest bearing deposits      4.49%   301,661    11,258       225       317       117         -    313,578    315,019
  Long-term debt ......................      4.21%     1,000         -         -         -         -     3,500      4,500      4,483
</TABLE>


                                       28
<PAGE>

Management's Report on Internal Control Over Financial Reporting

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate internal control over financial  reporting as defined in Rule 13a-15(f)
of the  Securities  Exchange Act of 1934 as amended (the  "Exchange  Act").  The
Company's  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 accounting  principles  generally accepted in the United States of America.
The Company's internal control over financial  reporting includes those policies
and  procedures  that  (1)  pertain  to the  maintenance  of  records,  that  in
reasonable   detail,   accurately  and  fairly  reflect  the   transactions  and
dispositions  of the Company's  assets;  (2) provide  reasonable  assurance that
transactions  are recorded as necessary to permit the  preparation  of financial
statements in accordance with generally accepted accounting  principles and that
receipts and  expenditures  of the Company are made only in accordance  with the
authorizations  of the  Company's  management  and  directors;  and (3)  provide
reasonable  assurance  regarding  prevention or timely detection of unauthorized
acquisition,  use or  disposition  of the  Company's  assets  that  could have a
material impact on the financial statements.

Under the supervision and with the  participation  of management,  including the
Chief Executive Officer and the Chief Financial  Officer,  the Company conducted
an evaluation of the effectiveness of internal control over financial  reporting
as of December 31, 2007 based on the framework in "Internal Control - Integrated
Framework"  promulgated  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,
management   concluded  that  the  Company's  internal  control  over  financial
reporting was effective as of December 31, 2007.

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.




                                       29
<PAGE>


            Report of Independent Registered Public Accounting Firm




The Shareholders and Board of Directors
    of Community First Bancorporation

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Community First  Bancorporation and subsidiary as of December 31, 2007 and 2006,
and the related  consolidated  statements  of income,  changes in  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 2007.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  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 audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audit included  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. 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  financial  statements  referred to above  present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Community First  Bancorporation and subsidiary as of December 31, 2007 and 2006,
and the  consolidated  results of their operations and their  consolidated  cash
flows for each of the three years in the period  ended  December  31,  2007,  in
conformity with U. S. generally accepted accounting principles.




J. W. Hunt and Company, LLP
Columbia, South Carolina
March 28, 2008




                                       30
<PAGE>

Consolidated Balance Sheets
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                      2007                  2006
                                                                                                      ----                  ----
Assets
<S>                                                                                              <C>                  <C>
      Cash and due from banks (Note B) ...................................................       $  10,272,260        $   6,951,934
      Interest bearing deposits due from banks ...........................................             164,781               66,941
      Federal funds sold .................................................................          24,236,000           24,126,000
                                                                                                 -------------        -------------
           Cash and cash equivalents .....................................................          34,673,041           31,144,875
      Securities available-for-sale (Note C) .............................................          99,026,049          102,487,395
      Securities held-to-maturity (fair value of $5,625,083 for 2007 and
           $6,529,691 for 2006) (Note C) .................................................           5,663,113            6,595,026
      Federal Home Loan Bank stock, at cost ..............................................             839,900              980,200
      Loans (Note D) .....................................................................         244,131,013          202,965,700
           Allowance for loan losses .....................................................          (2,573,758)          (2,241,947)
                                                                                                 -------------        -------------
                Loans - net ..............................................................         241,557,255          200,723,753
      Premises and equipment - net (Note E) ..............................................           8,621,525            7,937,482
      Accrued interest receivable ........................................................           2,529,155            2,181,572
      Bank-owned life insurance ..........................................................           7,107,784                    -
      Other assets .......................................................................           2,130,413            1,859,069
                                                                                                 -------------        -------------

                Total assets .............................................................       $ 402,148,235        $ 353,909,372
                                                                                                 =============        =============

Liabilities
      Deposits (Note F)
           Noninterest bearing ...........................................................       $  42,288,971        $  40,576,371
           Interest bearing ..............................................................         313,577,582          267,380,938
                                                                                                 -------------        -------------
                Total deposits ...........................................................         355,866,553          307,957,309
      Accrued interest payable ...........................................................           3,479,569            2,702,946
      Short-term borrowings (Note G) .....................................................                   -            4,500,000
      Long-term debt (Note H) ............................................................           4,500,000            5,500,000
      Other liabilities ..................................................................             391,125               34,087
                                                                                                 -------------        -------------
                Total liabilities ........................................................         364,237,247          320,694,342
                                                                                                 -------------        -------------

      Commitments and contingent liabilities (Note M)

Shareholders' equity (Note I)
      Common stock - no par  value; 10,000,000 shares authorized; issued and
           outstanding - 3,324,105 for 2007 and
           2,958,558 for 2006 ............................................................          35,008,926           30,061,392
      Additional paid-in capital .........................................................             681,498              593,100
      Retained earnings ..................................................................           2,140,465            3,284,692
      Accumulated other comprehensive income (loss) ......................................              80,099             (724,154)
                                                                                                 -------------        -------------
                Total shareholders' equity ...............................................          37,910,988           33,215,030
                                                                                                 -------------        -------------

                Total liabilities and shareholders' equity ...............................       $ 402,148,235        $ 353,909,372
                                                                                                 =============        =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       31
<PAGE>

Consolidated Statements of Income
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                           ------------------------
                                                                                  2007                2006                   2005
                                                                                  ----                ----                   ----
Interest income
<S>                                                                          <C>                   <C>                   <C>
     Loans, including fees .......................................           $17,600,104           $13,864,479           $11,497,766
     Securities
        Taxable ..................................................             3,890,240             3,868,407             3,564,081
        Tax-exempt ...............................................               816,428               635,967               149,880
     Federal funds sold ..........................................             1,208,738             1,174,768               667,735
     Other .......................................................                55,829                52,121                38,714
     Interest bearing deposits due from banks ....................                 6,277                 4,393                 5,003
                                                                             -----------           -----------           -----------
        Total interest income ....................................            23,577,616            19,600,135            15,923,179
                                                                             -----------           -----------           -----------

Interest expense
     Time deposits $100,000 and over .............................             4,054,315             2,952,983             2,117,851
     Other deposits ..............................................             8,972,052             7,193,745             4,202,097
     Short-term borrowings .......................................                     -                 1,789                17,971
     Long-term debt ..............................................               203,871               236,864               282,893
                                                                             -----------           -----------           -----------
        Total interest expense ...................................            13,230,238            10,385,381             6,620,812
                                                                             -----------           -----------           -----------

Net interest income ..............................................            10,347,378             9,214,754             9,302,367
Provision for loan losses (Note D) ...............................               594,000                65,000               250,000
                                                                             -----------           -----------           -----------
Net interest income after provision ..............................             9,753,378             9,149,754             9,052,367
                                                                             -----------           -----------           -----------

Other income
     Service charges on deposit accounts .........................             1,473,469             1,515,390             1,580,043
     Credit life insurance commissions ...........................                28,587                48,303                32,422
     Mortgage brokerage income ...................................                33,203                68,194               109,890
     Other income ................................................               671,140               521,855               416,244
                                                                             -----------           -----------           -----------
        Total other income .......................................             2,206,399             2,153,742             2,138,599
                                                                             -----------           -----------           -----------

Other expenses (Notes J and L)
     Salaries and employee benefits ..............................             4,120,766             3,647,451             2,902,693
     Net occupancy expense .......................................               432,852               346,610               267,760
     Furniture and equipment expense .............................               441,010               431,078               344,687
     Other expense ...............................................             2,136,968             2,326,626             1,905,008
                                                                             -----------           -----------           -----------
        Total other expenses .....................................             7,131,596             6,751,765             5,420,148
                                                                             -----------           -----------           -----------

Income before income taxes .......................................             4,828,181             4,551,731             5,770,818
Income tax expense (Note K) ......................................             1,497,469             1,533,762             2,040,892
                                                                             -----------           -----------           -----------
Net income .......................................................           $ 3,330,712           $ 3,017,969           $ 3,729,926
                                                                             ===========           ===========           ===========

Per share (Note I)
     Net income, basic ...........................................           $      1.02           $      0.93           $      1.16
     Net income, assuming dilution ...............................                  0.96                  0.87                  1.10
</TABLE>

See accompanying notes to consolidated financial statements.

                                       32
<PAGE>

Consolidated Statements of Changes in Shareholders' Equity
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>

                                                      Common Stock                                       Accumulated
                                                      ------------         Additional                      Other
                                                Number of                    Paid-in       Retained     Comprehensive
                                                 Shares         Amount      Capital        Earnings     Income (Loss)       Total
                                                 ------         ------      -------        --------     -------------       -----
<S>                                            <C>         <C>             <C>         <C>             <C>             <C>
Balance, January 1, 2005 ..................    2,648,230   $ 24,216,002    $       -   $  2,220,083    $   (499,640)   $ 25,936,445

Comprehensive income:
    Net income ............................            -              -            -      3,729,926               -       3,729,926
                                                                                                                       ------------
    Unrealized net holding losses
      on available-for-sale securities
      arising during the period, net of
      income tax effects of $502,764 ......            -              -            -              -        (897,693)       (897,693)
                                                                                                                       ------------
        Total other comprehensive
         income (loss) ....................            -              -            -              -               -        (897,693)
                                                                                                                       ------------
           Total comprehensive income .....            -              -            -              -               -       2,832,233
                                                                                                                       ------------
Issuance of 5% stock dividend,
    including cash payment for
    fractional shares .....................      132,136      2,647,600            -     (2,653,949)              -          (6,349)
Exercise of employee stock options ........       18,043         92,059            -              -               -          92,059
                                               ---------   ------------    ---------   ------------    ------------    ------------
Balance, December 31, 2005 ................    2,798,409     26,955,661            -      3,296,060      (1,397,333)     28,854,388

Comprehensive income:
    Net income ............................            -              -            -      3,017,969               -       3,017,969
                                                                                                                       ------------
    Unrealized net holding gains on
      available-for-sale securities arising
      during the period, net of income tax
      effects of $377,023 .................            -              -            -              -         673,179         673,179
                                                                                                                       ------------
        Total other comprehensive
          income (loss)....................            -              -            -              -               -         673,179
                                                                                                                       ------------
           Total comprehensive income .....            -              -            -              -               -       3,691,148
                                                                                                                       ------------
Issuance of 5% stock dividend,
    including cash payment for
    fractional shares .....................      140,570      3,022,534            -     (3,029,337)              -          (6,803)
Share-based compensation, net
 of tax benefits ..........................            -              -      593,100              -               -         593,100
Exercise of employee stock options ........       19,579         83,197            -              -               -          83,197
                                               ---------   ------------    ---------   ------------    ------------    ------------
Balance, December 31, 2006 ................    2,958,558     30,061,392      593,100      3,284,692        (724,154)     33,215,030

Comprehensive income:
    Net income ............................            -              -            -      3,330,712               -       3,330,712
                                                                                                                       ------------
    Unrealized net holding gains
       on available-for-sale securities
       arising during the period, net of
       income tax effects of $450,431 .....            -              -            -              -         804,253         804,253
                                                                                                                       ------------
        Total other comprehensive
          income (loss) ...................            -              -            -              -               -         804,253
                                                                                                                       ------------
           Total comprehensive income .....            -              -            -              -               -       4,134,965
                                                                                                                       ------------
Income tax benefits from exercises of
    non-qualified stock options in
    excess of amount previously provided ..            -              -       88,398              -               -          88,398
Declaration of 10% stock dividend
    distributed on January 15, 2008 and
    cash payment for fractional shares ....      295,470      4,469,444            -     (4,474,939)              -          (5,495)
Exercise of employee stock options ........       70,077        478,090            -              -               -         478,090
                                               ---------   ------------    ---------   ------------    ------------    ------------
Balance, December 31, 2007 ................    3,324,105   $ 35,008,926    $ 681,498   $  2,140,465    $     80,099    $ 37,910,988
                                               =========   ============    =========   ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       33
<PAGE>

Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiary
<TABLE>
<CAPTION>
                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                           2007              2006            2005
                                                                                           ----              ----             ----
Operating activities
<S>                                                                                    <C>             <C>             <C>
     Net income ....................................................................   $  3,330,712    $  3,017,969    $  3,729,926
     Adjustments to reconcile net income to net
         cash provided by operating activities
            Provision for loan losses ..............................................        594,000          65,000         250,000
            Writedowns of foreclosed assets ........................................              -               -          25,000
            Depreciation ...........................................................        399,456         373,883         298,889
            Deferred income taxes ..................................................       (266,418)       (131,488)        (43,114)
            Amortization of net loan fees and costs ................................       (225,117)       (224,944)        (96,374)
            Securities accretion and premium amortization ..........................         53,843         152,566         275,137
            Accretion of cash surrender value of life insurance ....................       (107,784)              -               -
            Loss on sale or other disposition of fixed assets ......................              -               -           5,000
            (Gain) loss on sale of foreclosed assets ...............................           (354)        (30,621)          9,191
            Increase in interest receivable ........................................       (347,583)       (552,818)       (297,296)
            Increase in interest payable ...........................................        776,623         885,813         595,015
            (Increase) decrease in prepaid expenses ................................       (506,041)       (179,823)        148,738
            Increase (decrease) in other accrued expenses ..........................        357,038         (13,753)          6,991
            Share-based compensation expense .......................................              -         593,100               -
                                                                                       ------------    ------------    ------------
                Net cash provided by operating activities ..........................      4,058,375       3,954,884       4,907,103
                                                                                       ------------    ------------    ------------

Investing activities
     Purchases of available-for-sale securities ....................................    (25,224,140)    (25,209,833)    (58,600,965)
     Maturities, calls and paydowns of available-for-sale securities ...............     29,879,688      25,682,329      46,930,477
     Maturities, calls and paydowns of held-to-maturity securities .................        938,552       1,163,035       1,626,880
     Purchases of other investments ................................................              -         (31,800)       (162,300)
     Proceeds of redemptions of other investments ..................................        140,300               -         225,000
     Net increase in loans made to customers .......................................    (41,202,385)    (33,566,455)    (11,670,099)
     Purchases of premises and equipment ...........................................     (1,083,499)     (1,506,718)     (2,695,756)
     Proceeds from sale of foreclosed assets .......................................         14,589         167,942          57,768
     Proceeds from sale of real estate held for sale ...............................         36,449               -               -
     Purchases of bank-owned life insurance ........................................     (7,000,000)              -               -
                                                                                       ------------    ------------    ------------
                Net cash used by investing activities ..............................    (43,500,446)    (33,301,500)    (24,288,995)
                                                                                       ------------    ------------    ------------

Financing activities
     Net (decrease) increase in demand deposits, interest
         bearing transaction accounts and savings accounts .........................     (4,715,971)     25,163,011      (1,966,994)
     Net increase in certificates of deposit and other
         time deposits .............................................................     52,625,215       2,801,699      13,811,368
     Net (decrease) increase in short-term borrowings ..............................     (4,500,000)      1,000,000       1,000,000
     Repayment of long-term debt ...................................................     (1,000,000)     (1,000,000)     (1,000,000)
     Payment of cash in lieu of fractional shares
         for stock dividend ........................................................         (5,495)         (6,803)         (6,349)
     Exercise of employee stock options ............................................        478,090          83,197          92,059
     Excess tax benefits of exercises of stock options .............................         88,398               -               -
                                                                                       ------------    ------------    ------------
                Net cash provided by financing activities ..........................     42,970,237      28,041,104      11,930,084
                                                                                       ------------    ------------    ------------
Increase (decrease) in cash and cash equivalents ...................................      3,528,166      (1,305,512)     (7,451,808)
Cash and cash equivalents, beginning ...............................................     31,144,875      32,450,387      39,902,195
                                                                                       ------------    ------------    ------------
Cash and cash equivalents, ending ..................................................   $ 34,673,041    $ 31,144,875    $ 32,450,387
                                                                                       ============    ============    ============

Supplemental  Disclosure  of Cash Flow  Information

     Cash paid during the period for:
         Interest (net of amount capitalized) ......................................   $ 12,453,615    $  9,499,568    $  6,025,797
         Income taxes ..............................................................      1,700,000       1,851,154       1,980,856
     Noncash investing and financing activities:
         Transfer of loans to foreclosed assets ....................................              -          54,235               -
         Transfers from retained earnings to common stock
            in connection with stock dividends .....................................      4,469,444       3,022,534       2,647,600
         Other comprehensive income (loss) .........................................        804,253         673,179        (897,693)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       34
<PAGE>

Notes to Consolidated Financial Statements
Community First Bancorporation and Subsidiary

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization - Community First  Bancorporation  (the "Company"),  a bank holding
company, and its wholly-owned  subsidiary,  Community First Bank, are engaged in
providing  domestic  commercial banking services from their offices in Walhalla,
Seneca, Anderson,  Williamston and Westminster, South Carolina. The Company is a
South  Carolina  corporation  and its banking  subsidiary  is a state  chartered
commercial  bank with its  deposits  insured by the  Federal  Deposit  Insurance
Corporation (the "FDIC"). Therefore, the Company and its bank subsidiary operate
under the supervision,  rules and regulations of the Federal Reserve Board, FDIC
and South Carolina State Board of Financial  Institutions.  The holding  company
was  incorporated  on May 23, 1997 and  Community  First Bank was  organized  on
December 1, 1988, and received its charter and commenced operations on March 12,
1990.

Community First Bank is a  community-oriented  institution offering a full range
of  traditional  banking  services,   with  the  exception  of  trust  services.
Substantially all of its loans are made to individuals and businesses within its
markets in Oconee and Anderson counties of South Carolina.  Also,  substantially
all of its deposits  are acquired  within its local market areas and no brokered
deposits are accepted.

Principles  of  Consolidation  and  Basis  of  Presentation  - The  consolidated
financial  statements include the accounts of the parent company and its banking
subsidiary  after  elimination  of all  significant  intercompany  balances  and
transactions.  The  accounting  and  reporting  policies  of the Company and its
subsidiary are in conformity with generally accepted  accounting  principles and
general practices within the banking  industry.  In certain  instances,  amounts
reported  in  prior  years'   consolidated   financial   statements   have  been
reclassified to conform with the current  presentation.  Such  reclassifications
had no effect on previously reported shareholders' equity or net income.

Accounting  Estimates - In preparing  financial  statements in  conformity  with
generally  accepted  accounting  principles,  management  is  required  to  make
estimates  and  assumptions  that affect the  reported  amounts of revenues  and
expenses during the reporting period.  Actual results could differ significantly
from those estimates.  Material  estimates that are particularly  susceptible to
significant change in the near-term relate to the determination of the allowance
for loan losses.  In connection with the determination of the allowance for loan
losses, management has identified specific loans as well as adopting a policy of
providing amounts for loan valuation  purposes which are not identified with any
specific loan but are derived from actual loss  experience  ratios,  loan types,
loan volume,  economic  conditions and industry  standards.  Management believes
that the allowance for loan losses is adequate.  While management uses available
information to recognize losses on loans,  future additions to the allowance may
be necessary based on changes in economic  conditions.  In addition,  regulatory
agencies, as an integral part of their examination process,  periodically review
the banking  subsidiary's  allowance for loan losses.  Such agencies may require
additions to the allowance based on their judgments about information  available
to them at the time of their examination.

Concentrations  of  Credit  Risk  - Most  of  the  Company's,  and  its  banking
subsidiary's,  activities  are with  customers  located  within the local market
areas of Oconee and Anderson  Counties of South  Carolina.  Note C discloses the
types of  securities  invested  in,  and Note D  discusses  the types of lending
engaged  in. The  ability of  borrowers  to comply  with the terms of their loan
contracts  is largely  dependent  upon local real  estate and  general  economic
conditions in the Company's  market areas. The Company and its subsidiary do not
have any  significant  concentrations  to any single  industry or customer.  The
Company  does not engage in  originating,  holding,  guaranteeing,  servicing or
investing  in  loans  where  the  terms  of the  loan  product  give  rise  to a
concentration  of credit  risk as that term is used in  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about Fair  Values of  Financial
Instruments."

Securities - Equity  securities that have readily  determinable  fair values and
all debt securities are classified generally at the time of purchase into one of
three  categories:   held-to-maturity,   trading  or  available-for-sale.   Debt
securities  which the  Company  has the  positive  intent and ability to hold to
ultimate  maturity are  classified  as  held-to-maturity  and  accounted  for at
amortized  cost.  Debt and equity  securities that are bought and held primarily
for sale in the near term are  classified as trading and are accounted for on an
estimated fair value basis,  with unrealized  gains and losses included in other
income. However, the Company has never held any securities for trading purposes.
Securities not classified as either  held-to-maturity  or trading are classified
as available-for-sale and are accounted for at estimated fair value.  Unrealized
holding gains and losses on available-for-sale  securities are excluded from net
income and recorded as other comprehensive  income, net of applicable income tax
effects.  Dividend and interest income, including amortization of any premium or
accretion of discount  arising at acquisition,  are included in earnings for all
three  categories of securities.  Realized gains and losses on all categories of

                                       35
<PAGE>

securities are included in other operating  income,  based on the amortized cost
of the specific security on a trade date basis.

Federal  Home Loan Bank  Stock - Federal  Home Loan Bank  stock is a  restricted
security and is carried at cost.  Management  periodically  evaluates this stock
for impairment,  with any appropriate downward valuation  adjustments being made
when necessary.

Loans and Interest Income - Loans are carried at principal amounts  outstanding,
increased  or reduced by  deferred  net loan costs or fees.  Interest  income on
loans is recognized  using the interest method based upon the principal  amounts
outstanding.  Loan  origination  and  commitment  fees and  certain  direct loan
origination costs (principally  salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.

A loan is considered  to be impaired  when, in  management's  judgment  based on
current  information and events, it is probable that the obligation's  principal
or interest will not be collectible in accordance with the terms of the original
loan  agreement.  Impaired  loans include  non-accrual  loans and loans past due
according to their contractual terms 90 days or more with respect to interest or
principal  payments.  Impaired  loans,  when not  material,  are  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 value of any material impaired
loan is  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. Generally,  the accrual of
interest is discontinued on impaired loans and any previously  accrued  interest
on such loans is reversed against current income. Any subsequent interest income
is  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 is not returned to accrual status unless principal and interest
are current and the borrower  has  demonstrated  the ability to continue  making
payments as agreed.

Allowance  for Loan Losses - An  allowance  for loan losses is  maintained  at a
level deemed  appropriate  by  management  to provide  adequately  for known and
inherent  losses in the loan portfolio.  When management  determines that a loan
will not perform  substantially  as agreed, a review of the loan is initiated to
ascertain whether it is more likely than not that a loss has occurred.  If it is
determined that a loss is probable,  the estimated amount of the loss is charged
off and  deducted  from  the  allowance.  The  provision  for  loan  losses  and
recoveries  on  loans  previously  charged  off  are  added  to  the  allowance.
Determining  the amount and adequacy of the allowance  for loan losses  involves
estimating  probable  losses  incurred  in the loan  portfolio  based on factors
discussed  below and their  potential  effects  based on  judgments  applied  to
currently known facts and circumstances.  Changes in the estimated allowance for
loan losses necessitated as new events occur or more information is obtained are
accounted for as changes in  accounting  estimates in the  accounting  period in
which the change occurs.

The allowance for loan losses is composed of specific,  general and  unallocated
amounts.  Specific  amounts are determined  when  necessary on individual  loans
based  on  management's   evaluation  of  the  Company's  credit  loss  exposure
considering the current payment  status,  underlying  collateral and other known
information  about the particular  borrower's  circumstances.  Typically,  these
loans are  considered  impaired or have been  assigned  internal  risk grades of
management attention,  special mention, substandard or doubtful. General amounts
are provided for all other loans,  excluding  those for which  specific  amounts
were  determined,  by  applying  estimated  loss  percentages  to the  portfolio
categorized  using risk  grades.  These  percentages  are based on  management's
current evaluation with consideration  given to historical loss experience.  The
unallocated portion of the allowance consists of an amount deemed appropriate to
provide for the elements of  imprecision  and  estimation  risk  inherent in the
specific and general amounts and is determined based on management's  evaluation
of various  conditions that are not directly measured by the other components of
the allowance.  This evaluation includes general national and local economic and
business  conditions  affecting key lending market areas, credit quality trends,
collateral values, loan volumes,  portfolio seasoning, and any identified credit
concentrations.  The  findings of  internal  credit  reviews  and  results  from
external audits and regulatory examinations are also considered.

The  Company  utilizes  its  risk  grading  system  for  all  loans  held in the
portfolio. This system involves the Company's lending officers' assigning a risk
grade, on a loan-by-loan  basis,  considering  information  about the borrower's
capacity to repay,  collateral,  payment history, and other known factors.  Risk
grades  assigned  are  updated  monthly for any known  changes in  circumstances
affecting  the borrower or the loan.  The risk grading  system is monitored on a
continuing basis by management and the Company's external credit reviewer who is
independent of the lending function.

Premises  and  Equipment  - Premises  and  equipment  are  stated at cost,  less
accumulated  depreciation.  The provision for depreciation is computed using the

                                       36
<PAGE>

straight-line method. Rates of depreciation are generally based on the following
estimated  useful lives:  buildings - 40 years;  land  improvements  - 15 years;
furniture  and  equipment - 5 to 25 years.  The cost of assets sold or otherwise
disposed of, and the related  allowance for  depreciation is eliminated from the
accounts and the  resulting  gains or losses are  reflected in the  consolidated
income  statement.  Maintenance  and repairs  are charged to current  expense as
incurred and the costs of major renewals and improvements are capitalized.

Foreclosed  Assets  - Assets  (primarily  real  estate  and  vehicles)  acquired
through, or in lieu of, foreclosure are held for sale and are initially recorded
at fair  value,  less  estimated  costs  to sell,  at the  date of  foreclosure,
establishing a new cost basis.  Loan losses arising from the acquisition of such
property as of that date are  charged  against the  allowance  for loan  losses.
Subsequent to foreclosure,  valuations are periodically  performed by management
and the  assets are  carried  at the lower of the new cost basis or fair  value,
less estimated costs to sell.  Revenues and expenses from operations and changes
in any  subsequent  valuation  allowance are included in net  foreclosed  assets
costs and  expenses.  The carrying  value of foreclosed  assets  included in the
balance  sheets was  $40,000  and  $54,235  as of  December  31,  2007 and 2006,
respectively.

Bank-owned  Life Insurance - The Company  accounts for bank-owned life insurance
in accordance  with Emerging  Issues Task Force Issue No. 06-4,  "Accounting for
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance  Arrangements"  which  concludes  that an employer
should not offset the liability to provide postretirement benefits with the cash
surrender value of an endorsement  split-dollar life insurance  arrangement held
to fund the benefit.

Transfers of Financial  Assets - Transfers of financial assets are accounted for
as sales,  when  control  over the assets  has been  surrendered.  Control  over
transferred  assets is deemed to be  surrendered  when (1) the assets  have been
isolated  from the  Company,  (2) the  transferee  obtains  the  right  (free of
conditions  that constrain it from taking  advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the  transferred  assets  through an agreement to  repurchase  them
before their maturity.

Advertising - The Company  expenses  advertising and promotion costs as they are
incurred.

Retirement  Plan - The  Company  has a  salary  reduction  profit  sharing  plan
pursuant to Section 401(k) of the Internal  Revenue Code as more fully described
in  Note  L.  The  Company  does  not  sponsor  any  other   postretirement   or
postemployment benefits,  except with respect to the Chief Executive Officer. In
2007, the Company's Board of Directors  approved  supplemental  benefits for the
Chief Executive Officer as more fully described in Note L.

Deferred  Income  Taxes - The Company uses an asset and  liability  approach for
financial accounting and reporting of deferred income taxes. Deferred tax assets
and  liabilities  are determined  based on the difference  between the financial
statement  and income tax bases of assets and  liabilities  as  measured  by the
currently  enacted  tax rates  which are  assumed  will be in effect  when these
differences reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized,  a valuation  allowance is  recognized.
Deferred  income tax expense or credit is the result of changes in deferred  tax
assets and liabilities.

Stock-Based  Compensation  - As of  December  31,  2007,  the  Company  has  two
stock-based employee  compensation plans, which are described more fully in Note
I.  Effective  January 1, 2006,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  No.  123  (revised  2004)  ("SFAS  123(R)")  "Share-Based
Payment."  Prior to adoption of SFAS  123(R),  the Company  accounted  for those
plans under the recognition and measurement  principles of Accounting Principles
Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
related  interpretations.  Accordingly,  prior to  adoption of SFAS  123(R),  no
stock-based  employee  compensation  cost was  reflected  in net income,  as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the underlying common stock on the date of grant.

The  following  table  illustrates  the  effect on net income and net income per
share if the  Company  had  applied  the fair value  recognition  provisions  of
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based Compensation," to stock-based employee compensation awarded in 2005.
Per share  amounts  have been  adjusted  to reflect  the  effects of a 10% stock
dividend  effective as of December 20, 2007 and a 5% stock dividend effective as
of December 18, 2006.

                                       37
<PAGE>

                                                                   Year Ended
                                                               December 31, 2005
                                                               -----------------

Net income, as reported ...................................       $   3,729,926
Deduct:  Total stock-based employee
      compensation expense determined under
      fair value based method for all awards,
      net of any related tax effects ......................            (237,807)
                                                                  -------------
Pro forma net income ......................................       $   3,492,119
                                                                  =============

Net income per share, basic
      As reported .........................................       $        1.16
      Pro forma ...........................................                1.09
Net income per share, assuming dilution
      As reported .........................................       $        1.10
      Pro forma ...........................................                1.03

The fair values of options  granted  during 2006 and 2005 were $9.90,  and $8.06
per share, respectively. No options were granted in 2007. For 2006 and 2005, the
fair value was  estimated as of the grant date using the  Black-Scholes  options
pricing model and the following assumptions: dividend yield of 0%, expected life
of 10 years,  risk  free  interest  rates of 5.08%  and  4.38%  and stock  price
volatility  of 25.35% and  25.71%,  respectively.  Because of the  limited  time
during  which the  Company's  stock has traded in a public  market,  the Company
estimated stock price volatility  based primarily on the historic  volatility of
another bank holding  company  domiciled in South  Carolina  that was founded at
about the same time as the  Company.  Management  believes  that the other  bank
holding company is sufficiently  similar to the Company in its operating history
to make it a suitable  reference for  estimating the volatility of the Company's
stock price.

Earnings  Per Share - Basic net income per share is  calculated  by dividing net
income by the weighted  average  number of shares of the Company's  common stock
outstanding  during the  period.  Net income per share,  assuming  dilution,  is
calculated by dividing net income by the total of the weighted average number of
shares  outstanding  during the period and the  weighted  average  number of any
dilutive  potential  common  shares  and  stock  options  that  would  have been
outstanding if the dilutive  potential shares and stock options had been issued.
In computing the number of dilutive  potential common shares, it is assumed that
all dilutive  stock options are exercised at the beginning of each year and that
the proceeds are used to purchase  shares of the  Company's  common stock at the
average market price during the year. See Note I.

Comprehensive  Income - Comprehensive  income consists of net income or loss for
the current period and other comprehensive income, defined as income,  expenses,
gains and  losses  that  bypass  the  consolidated  statement  of income and are
reported directly in a separate  component of shareholders'  equity. The Company
classifies and reports items of other  comprehensive  income  according to their
nature, reports total comprehensive income or loss in the consolidated statement
of changes in shareholders' equity and displays the accumulated balance of other
comprehensive  income or loss separately in the shareholders'  equity section of
the consolidated balance sheet. See Note I.

Consolidated  Statement of Cash Flows - The consolidated statement of cash flows
reports  net  cash  provided  or  used by  operating,  investing  and  financing
activities and the net effect of those flows on cash and cash equivalents.  Cash
equivalents  include  amounts due from banks,  federal funds sold and securities
purchased under agreements to resell.

NOTE B - CASH AND DUE FROM BANKS

Banks are  generally  required by regulation to maintain an average cash reserve
balance  based on a  percentage  of  deposits.  The average  amounts of the cash
reserve balances at December 31, 2007 and 2006 were approximately $1,847,000 and
$2,403,000, respectively.

NOTE C - SECURITIES

The aggregate amortized cost and estimated fair values of securities, as well as
gross unrealized gains and losses of securities were as follows:

                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                          ------------
                                                   2007                                                2006
                                                   ----                                                ----
                                             Gross       Gross                                 Gross         Gross
                                           Unrealized  Unrealized  Estimated                 Unrealized    Unrealized    Estimated
                             Amortized      Holding     Holding      Fair      Amortized       Holding       Holding         Fair
                                Cost         Gains       Losses      Value        Cost          Gains         Losses        Value
                                ----         -----       ------      -----        ----          -----         ------        -----
<S>                          <C>           <C>        <C>        <C>           <C>            <C>         <C>           <C>
Available-for-sale
Government sponsored
  enterprises (GSEs) .....   $ 56,098,415  $ 511,039  $  64,423  $ 56,545,031  $ 56,616,368   $ 125,758   $   537,843   $ 56,204,283
Mortgage-backed securities
  issued by GSEs .........     22,471,385     48,925    327,297    22,193,013    28,135,834       3,299       795,252     27,343,881
State, county and
  municipal ..............     20,331,290     92,261    135,546    20,288,005    18,864,918     122,074        47,761     18,939,231
                             ------------  ---------  ---------  ------------  ------------   ---------   -----------   ------------
               Total .....   $ 98,901,090  $ 652,225  $ 527,266  $ 99,026,049  $103,617,120   $ 251,131   $ 1,380,856   $102,487,395
                             ============  =========  =========  ============  ============   =========   ===========   ============
Held-to-maturity
Government sponsored
  enterprises ............   $          -  $       -  $       -  $          -  $          -   $       -   $         -   $          -
Mortgage-backed securities
  issued by GSEs .........      5,663,113        967     38,997     5,625,083     6,595,026           -        65,335      6,529,691
State, county and
  municipal ..............              -          -          -             -             -           -             -              -
                             ------------  ---------  ---------  ------------  ------------   ---------   -----------   ------------
               Total .....   $  5,663,113  $     967  $  38,997  $  5,625,083  $  6,595,026   $       -   $    65,335   $  6,529,691
                             ============  =========  =========  ============  ============   =========   ===========   ============
</TABLE>

The  amortized  cost and  estimated  fair  value of  securities  by  contractual
maturity are shown below:

<TABLE>
<CAPTION>
                                                                                     December 31, 2007
                                                                                     -----------------
                                                                   Available-for-sale                 Held-to-maturity
                                                                   ------------------                 ----------------
                                                              Amortized           Estimated           Amortized          Estimated
                                                                 Cost             Fair Value             Cost            Fair Value
                                                                 ----             ----------             ----            ----------
<S>                                                          <C>                 <C>                 <C>                 <C>
Due within one year ................................         $14,137,093         $14,096,156         $         -         $         -
Due after one through five years ...................          18,619,977          18,822,524                   -                   -
Due after five through ten years ...................          23,146,709          23,392,611                   -                   -
Due after ten years ................................          20,525,926          20,521,745                   -                   -
                                                             -----------         -----------         -----------         -----------
                                                              76,429,705          76,833,036                   -                   -
Mortgage-backed securities
  issued by government-
  sponsored enterprises ............................          22,471,385          22,193,013           5,663,113           5,625,083
                                                             -----------         -----------         -----------         -----------
     Total .........................................         $98,901,090         $99,026,049         $ 5,663,113         $ 5,625,083
                                                             ===========         ===========         ===========         ===========
</TABLE>

The estimated  fair values and gross  unrealized  losses of all of the Company's
investment  securities whose estimated fair values were less than amortized cost
as  of  December  31,  2007  and  2006  which  had  not  been  determined  to be
other-than-temporarily  impaired,  are presented below. The securities have been
aggregated  by  investment  category  and the  length  of time  that  individual
securities have been in a continuous unrealized loss position.

                                       39
<PAGE>

<TABLE>
<CAPTION>
                                                                                December 31, 2007
                                                                                -----------------
                                                            Continuously in Unrealized Loss Position for a Period of
                                                            --------------------------------------------------------
                                                   Less than 12 Months           12 Months or more                  Total
                                                   -------------------           -----------------                  -----
Available-for-sale                             Estimated      Unrealized      Estimated      Unrealized     Estimated     Unrealized
                                              Fair Value         Loss        Fair Value         Loss        Fair Value       Loss
                                              ----------         ----        ----------         ----        ----------       ----
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Government-sponsored
  enterprises (GSEs) .....................    $ 3,993,971    $     4,322    $16,072,715    $    60,101    $20,066,686    $    64,423
Mortgage-backed securities
  issued by GSEs .........................        293,088          1,269     18,403,894        326,028     18,696,982        327,297
State, county and
  municipal securities ...................      7,681,060         78,781      3,201,751         56,765     10,882,811        135,546
                                              -----------    -----------    -----------    -----------    -----------    -----------
                        Total ............    $11,968,119    $    84,372    $37,678,360    $   442,894    $49,646,479    $   527,266
                                              ===========    ===========    ===========    ===========    ===========    ===========
Held-to-maturity
  Government-sponsored enterprises .......    $         -    $         -    $ 4,719,740    $    38,997    $ 4,719,740    $    38,997
                                              -----------    -----------    -----------    -----------    -----------    -----------
                        Total ............    $         -    $         -    $ 4,719,740    $    38,997    $ 4,719,740    $    38,997
                                              ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                December 31, 2006
                                                                                -----------------
                                                            Continuously in Unrealized Loss Position for a Period of
                                                            --------------------------------------------------------
                                                   Less than 12 Months           12 Months or more                  Total
                                                   -------------------           -----------------                  -----
Available-for-sale                             Estimated      Unrealized      Estimated      Unrealized     Estimated     Unrealized
                                              Fair Value         Loss        Fair Value         Loss        Fair Value       Loss
                                              ----------         ----        ----------         ----        ----------       ----
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Government-sponsored
  enterprises ............................    $ 7,977,500    $    18,329    $34,233,795    $   519,514    $42,211,295    $   537,843
Mortgage-backed securities
  issued by GSEs .........................        617,351         20,299     26,253,632        774,953     26,870,983        795,252
State, county and
  municipal securities ...................      4,783,660         30,100      2,422,828         17,661      7,206,488         47,761
                                              -----------    -----------    -----------    -----------    -----------    -----------
                        Total ............    $13,378,511    $    68,728    $62,910,255    $ 1,312,128    $76,288,766    $ 1,380,856
                                              ===========    ===========    ===========    ===========    ===========    ===========
Held-to-maturity
  Government-sponsored enterprises .......    $ 2,463,645    $    19,498    $ 4,066,046    $    45,837    $ 6,529,691    $    65,335
                                              -----------    -----------    -----------    -----------    -----------    -----------
                                              $ 2,463,645    $    19,498    $ 4,066,046    $    45,837    $ 6,529,691    $    65,335
                                              ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

At December 31, 2007, 29 securities had been  continuously in an unrealized loss
position for less than 12 months and 72 securities had been  continuously  in an
unrealized  loss  position for 12 months or more.  The Company does not consider
these investments to be  other-than-temporarily  impaired because the unrealized
losses resulted  primarily from higher interest rates and the securities consist
primarily of issuances of  government-sponsored  enterprises such as the Federal
Home Loan Banks,  Federal  National  Mortgage  Association and Federal Home Loan
Mortgage   Corporation.   The   contractual   terms  of  securities   issued  by
government-sponsored  enterprises  do  not  permit  the  issuer  to  settle  the
securities at a price less than the face amount of the securities. The principal
and    interest    payments   of    mortgage-backed    securities    issued   by
government-sponsored  enterprises  are  guaranteed by that  enterprise and it is
expected  that  those  securities  would not be settled at a price less than the
face amount of the securities. Although the Company classifies a majority of its
investment securities as available-for-sale,  management has not determined that
any specific  securities will be disposed of prior to maturity and believes that
the Company has both the ability and the intent to hold those  investments until
a recovery of fair value,  including  until maturity.  Also,  there have been no
significant adverse changes in the credit ratings of any of the security issuers
that would indicate that the Company will be unable to collect all principal and
interest  amounts  according  to  contractual  terms.  Substantially  all of the
issuers  of state,  county  and  municipal  securities  held were rated at least
"investment grade" as of December 31, 2007 and 2006.

The  Company's  subsidiary  bank is a member  of the  Federal  Home Loan Bank of
Atlanta ("FHLB") and,  accordingly,  is required to own restricted stock in that
institution  in  amounts  that  may  vary  from  time to  time.  Because  of the

                                       40
<PAGE>

restrictions  imposed,  the  stock  may  not be sold to  other  parties,  but is
redeemable by the FHLB at the same price as that at which it was acquired by the
Company's  subsidiary.  The Company evaluates this security for impairment based
on  the  probability  of  ultimate  recoverability  of  the  par  value  of  the
investment. No impairment has been recognized based on this evaluation.

The Company did not sell any available-for-sale  securities during 2007, 2006 or
2005.  There  were  no  transfers  of  available-for-sale  securities  to  other
categories in 2007, 2006 or 2005.

At December 31, 2007 and 2006,  securities  with a carrying value of $63,853,671
and  $72,203,027,  respectively,  were pledged as  collateral  to secure  public
deposits.


NOTE D - LOANS

Loans consisted of the following:


                                                          December 31,
                                                          ------------
                                                     2007              2006
                                                     ----              ----
Commercial, financial and industrial ........   $  23,865,216     $  24,268,227
Real estate- construction ...................       2,201,343         1,982,035
Real estate - mortgage ......................     185,198,250       147,944,221
Consumer installment ........................      32,866,204        28,771,217
                                                -------------     -------------
      Total .................................     244,131,013       202,965,700
Allowance for loan losses ...................      (2,573,758)       (2,241,947)
                                                -------------     -------------
      Loans - net ...........................   $ 241,557,255     $ 200,723,753
                                                =============     =============
--------------------------
Net deferred  loan fees of $382,235 and $308,944  were  allocated to the various
loan categories as of December 31, 2007 and 2006, respectively.

Loans which  management has identified as impaired  generally are  nonperforming
loans.  Nonperforming  loans include nonaccrual loans or loans which are 90 days
or more delinquent as to principal or interest payments.  Following is a summary
of activity regarding the Company's impaired loans:

<TABLE>
<CAPTION>
                                                                                                                  December 31,
                                                                                                                  ------------
                                                                                                            2007               2006
                                                                                                            ----               ----
Investment in impaired loans
<S>                                                                                                        <C>              <C>
     Nonaccrual ..................................................................................         $625,017         $ 50,384
     Accruing 90 days and over past due ..........................................................                -                -
                                                                                                           --------         --------
         Total ...................................................................................         $625,017         $ 50,384
                                                                                                           ========         ========

Average total investment in impaired loans during the year .......................................         $413,500         $399,000
Amount of impaired loans for which an allowance for loan losses is established ...................          625,017           50,384
Allowance for loan losses on impaired loans at year end ..........................................          145,038           19,976
</TABLE>

The  amount of  interest  income  that  would  have been  included  in income if
nonaccrual loans had been current in accordance with their terms and the amounts
of  interest  income  actually  accrued and  collected  were  immaterial  to the
consolidated  financial  statements  for 2007,  2006 and 2005. The average total
investment  in  impaired  loans  during  2005  was  $1,052,000.  There  were  no
irrevocable  commitments  to lend  additional  funds to debtors owing amounts on
impaired loans at December 31, 2007.

As of December 31, 2007 and 2006,  there were no significant  concentrations  of
credit risk in any single  borrower or groups of borrowers.  The Company's  loan
portfolio   consists  primarily  of  extensions  of  credit  to  businesses  and
individuals in its Oconee and Anderson County,  South Carolina market areas. The
economy of these areas is diversified and does not depend on any one industry or
group of related  industries.  Management  has  established  loan  policies  and
practices that include set limitations on loan-to-collateral value for different
types of collateral,  requirements  for  appraisals,  obtaining and  maintaining
current credit and financial information on borrowers, and credit approvals.

                                       41
<PAGE>

Transactions in the allowance for loan losses are summarized below:


                                               Years Ended December 31,
                                               ------------------------
                                         2007           2006             2005
                                         ----           ----             ----

Balance at January 1 ..............   $ 2,241,947    $ 2,266,086    $ 2,239,873
Provision charged to expense ......       594,000         65,000        250,000
Recoveries ........................        30,098         44,981         79,374
Charge-offs .......................      (292,287)      (134,120)      (303,161)
                                      -----------    -----------    -----------
Balance at December 31 ............   $ 2,573,758    $ 2,241,947    $ 2,266,086
                                      ===========    ===========    ===========

Certain  officers  and  directors  of the  Company  and  its  subsidiary,  their
immediate  families and business interests were loan customers of, and had other
transactions  with,  the banking  subsidiary  in the normal  course of business.
Related party loans are made on substantially the same terms, including interest
rates  and   collateral,   and  do  not   involve   more  than  normal  risk  of
collectibility.  The aggregate  dollar amount of these loans was  $5,356,855 and
$6,238,430 at December 31, 2007 and 2006, respectively. During 2007, $691,347 of
new loans were made and repayments totaled $1,572,922.

NOTE E - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                                            December 31,
                                                            ------------
                                                       2007              2006
                                                       ----              ----

Land .......................................       $ 2,916,997       $ 2,916,997
Buildings and land improvements ............         5,400,702         4,569,189
Furniture and equipment ....................         3,279,919         3,027,933
                                                   -----------       -----------
     Total .................................        11,597,618        10,514,119
Accumulated depreciation ...................         2,976,093         2,576,637
                                                   -----------       -----------
     Premises and equipment - net ..........       $ 8,621,525       $ 7,937,482
                                                   ===========       ===========

Depreciation  expense for the years ended  December 31, 2007,  2006 and 2005 was
$399,456,  $373,883,  and  $298,889,  respectively.  During  2006,  the  Company
capitalized interest of $18,218 to construction in progress.

NOTE F - DEPOSITS

A summary of deposits follows:

                                                             December 31,
                                                             ------------
                                                       2007             2006
                                                       ----             ----
Noninterest bearing demand ...................     $ 42,288,971     $ 40,576,371
Interest bearing transaction accounts ........       55,389,292       52,619,354
Savings ......................................       21,457,667       30,656,176
Time deposits $100,000 and over ..............       96,547,178       68,276,913
Other time deposits ..........................      140,183,445      115,828,495
                                                   ------------     ------------
     Total deposits ..........................     $355,866,553     $307,957,309
                                                   ============     ============

As of  December  31,  2007  and  2006,  local  governmental  deposits  comprised
approximately  12% and 13% of total deposits,  respectively.  As of December 31,
2007 and 2006, $153,964 and $141,405,  respectively, of overdrawn demand deposit
balances  have been  reclassified  as loans.  As of December  31, 2007 and 2006,
deposits of directors,  officers and their related  business  interests  totaled
approximately $7,817,000 and $12,039,000, respectively.

                                       42
<PAGE>

At December 31, 2007, the scheduled maturities of time deposits are as follows:

                       Year                               Amount
                       ----                               ------

                       2008                           $ 223,939,600
                       2009                              12,130,147
                       2010                                 225,690
                       2011                                 317,871
                       2012                                 117,315
                 Thereafter                                       -

NOTE G - SHORT-TERM BORROWINGS

Short-term borrowings consisted of:

                                                            December 31,
                                                            ------------
                                                       2007              2006
                                                       ----              ----

Federal funds purchased ....................           $  -           $4,500,000
                                                       ====           ==========

As of December 31, 2006,  federal funds were purchased from a correspondent bank
at a rate of 5.63% and were repayable on January 3, 2007.

As of December 31, 2007,  the banking  subsidiary had unused  short-term  credit
accommodations available from unrelated banks which allow the banking subsidiary
to purchase up to  $10,900,000 of federal funds.  The  accommodations  limit the
Bank's ability to obtain funds to, in one case, seven  consecutive  days, or, in
the other case,  fourteen days in any calendar month. The counterparties may, in
their sole discretion,  allow the banking  subsidiary to borrow for time periods
longer  than  indicated  above,  but  higher  rates  would be  charged  for such
borrowings, if any are allowed.

NOTE H - LONG-TERM DEBT

Long-term debt consisted of:

                                                             December 31,
                                                             ------------
                                                        2007             2006
                                                        ----             ----


Fixed rate notes due to FHLB due in
   annual installments of $1,000,000
   beginning in 2007 .........................       $1,000,000       $2,000,000
Variable rate note due to FHLB
   due June 18, 2014 .........................        3,500,000        3,500,000
                                                     ----------       ----------
                                                     $4,500,000       $5,500,000
                                                     ==========       ==========

Long-term debt represents  amounts borrowed from the FHLB under the FHLB's Fixed
Rate Advance Credit and Convertible Advance programs.  Borrowings obtained under
the Fixed Rate Credit  program were  $1,000,000 at a rate of 4.40%,  maturing on
June 18, 2008. The remaining  $3,500,000 is an FHLB Convertible  Advance bearing
interest  initially at 3.92% and maturing  June 18, 2014.  The interest  rate on
this Convertible Advance has remained at its initial value subject to the FHLB's
option to convert the advance to a variable  rate  instrument  on any  quarterly
interest  payment  date on or after June 18, 2005 if the  3-month  LIBOR rate is
7.00% or greater. In the event of such conversion, this advance would thereafter
be subject to a variable interest rate until maturity.  As of December 31, 2007,
the  3-month  LIBOR  rate was  4.70%.  Each of the  Fixed  Rate and  Convertible
Advances may be prepaid on any quarterly  interest payment date at the Company's
option.  With limited  exceptions,  any such  prepayments  would be subject to a
prepayment penalty.

                                       43
<PAGE>

The contractual maturities of long-term debt are as follows:

                                                  December 31, 2007
                                                  -----------------
                                      Fixed Rate     Variable Rate        Total
                                      ----------     -------------        -----

Due in 2008 ....................      $1,000,000      $        -      $1,000,000
Due in 2014 ....................               -       3,500,000       3,500,000
                                      ----------      ----------      ----------
     Total long-term debt ......      $1,000,000      $3,500,000      $4,500,000
                                      ==========      ==========      ==========

The  Company  has  pledged  certain  of its  first  mortgage  loans  secured  by
one-to-four  family  residential  properties  and its  holdings  of FHLB  stock,
included in the balance sheet in other investments,  (collectively,  "qualifying
collateral instruments") to secure its debt due to the FHLB under a blanket lien
agreement.  The amount of qualifying  collateral  instruments as of December 31,
2007  was  approximately  $35,466,000.  The  qualifying  collateral  instruments
required to secure the Company's short-term  borrowings and long-term debt as of
December 31, 2007 was approximately $5,415,000.

The banking  subsidiary had unused credit  availability under the FHLB's blanket
lien  agreement  of up to an  additional  $24,041,000  under the FHLB's  various
credit  programs,  subject to  pledging  and other  requirements.  The amount of
eligible collateral  instruments  remaining available as of December 31, 2007 to
secure any additional FHLB borrowings totaled approximately $29,211,000.

NOTE I - SHAREHOLDERS' EQUITY

Restrictions on Subsidiary Dividends, Loans or Advances - South Carolina banking
regulations restrict the amount of dividends that banks can pay to shareholders.
Any of the banking subsidiary's  dividends to the parent company which exceed in
amount the subsidiary's  current  year-to-date  earnings ($3,346,110 at December
31, 2007) are subject to the prior approval of the South  Carolina  Commissioner
of Banking. In addition,  dividends paid by the banking subsidiary to the parent
company would be prohibited if the effect thereof would cause the Bank's capital
to be reduced  below  applicable  minimum  capital  requirements.  Under Federal
Reserve  Board  regulations,  the amounts of loans or advances  from the banking
subsidiary  to the parent  company  are  generally  limited to 10% of the Bank's
capital stock and surplus on a secured basis.

Stock Dividends - For stockholders of record on December 20, 2007,  December 18,
2006 and  November 30, 2005 the  Company's  Board of  Directors  declared  stock
dividends of 10%, 5% and 5%,  respectively.  All per share  information has been
retroactively adjusted to give effect to the stock dividends.

Accumulated  Other  Comprehensive  Income  (Loss) - As of December  31, 2007 and
2006,  accumulated other comprehensive  income (loss) included as a component of
shareholders'  equity in the accompanying  consolidated balance sheets consisted
of  accumulated  changes  in  the  unrealized  holding  gains  and  (losses)  on
available-for-sale  securities,  net of income tax effects, amounting to $80,099
and $(724,154) respectively.

Earnings  per Share - Net income  per share and net  income per share,  assuming
dilution, were computed as follows:

                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                       2007               2006               2005
                                                                                       ----               ----               ----
Net income per share, basic
<S>                                                                                 <C>                <C>                <C>
  Numerator - net income ..................................................         $3,330,712         $3,017,969         $3,729,926
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          3,269,042          3,242,502          3,214,643
                                                                                    ==========         ==========         ==========
                Net income per share, basic ...............................         $     1.02         $      .93         $     1.16
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution
  Numerator - net income ..................................................         $3,330,712         $3,017,969         $3,729,926
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          3,269,042          3,242,502          3,214,643
    Effect of dilutive stock options ......................................            209,068            215,339            186,040
                                                                                    ----------         ----------         ----------
                Total shares ..............................................          3,478,110          3,457,841          3,400,683
                                                                                    ==========         ==========         ==========
                Net income per share, assuming dilution ...................         $      .96         $      .87         $     1.10
                                                                                    ==========         ==========         ==========
</TABLE>

Regulatory Capital - All bank holding companies and banks are subject to various
regulatory  capital  requirements  administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly  additional  discretionary,  actions by regulators that, if undertaken,
could have a direct  material  effect on the  Company's  consolidated  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt  corrective  action,  bank holding companies and banks must meet specific
capital  guidelines  that  involve   quantitative   measures  of  their  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  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 Company and its banking  subsidiary to maintain  minimum amounts and
ratios set forth in the table  below of Total and Tier 1 Capital,  as defined in
the regulations,  to risk weighted assets, as defined, and of Tier 1 Capital, as
defined, to average assets, as defined.  Management believes, as of December 31,
2007 and 2006,  that the Company and its  subsidiary  bank  exceeded all capital
adequacy minimum requirements.

As of December 31, 2007, the most recent  notification from the FDIC categorized
Community  First Bank as well  capitalized  under the  regulatory  framework for
prompt  corrective  action.  To be categorized as well capitalized as defined in
the Federal Deposit  Insurance Act,  Community First Bank must maintain  minimum
total risk-based,  Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the  table.  There are no  conditions  or events  since that  notification  that
management  believes have changed Community First Bank's category.  Bank holding
companies with higher levels of risk, or that are  experiencing  or anticipating
significant growth, are expected by the Federal Reserve to maintain capital well
above the minimums.  The Company's  and  Community  First Bank's actual  capital
amounts and ratios are also presented in the table.

                                       45
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Minimum for               Minimum to be
                                                                  Actual              Capital Adequacy           Well Capitalized
                                                                  ------              ----------------           ----------------
                                                           Amount        Ratio     Amount         Ratio       Amount         Ratio
                                                           ------        -----     ------         -----       ------         -----
December 31, 2007                                                                 (Dollars in thousands)
     The Company
<S>                                                        <C>           <C>      <C>              <C>      <C>               <C>
         Total Capital to risk weighted assets ........    $40,405       17.3%    $18,642          8.0%           NA             NA
         Tier 1 Capital to risk weighted assets .......    $37,831       16.2%    $ 9,321          4.0%           NA             NA
         Tier 1 Capital to average assets (leverage) ..    $37,831        9.7%    $15,594          4.0%           NA             NA
     Community First Bank
         Total Capital to risk weighted assets ........    $38,763       17.3%    $18,642          8.0%      $23,302          10.0%
         Tier 1 Capital to risk weighted assets .......    $36,189       16.2%    $ 9,321          4.0%      $13,981           6.0%
         Tier 1 Capital to average assets (leverage) ..    $36,189        9.7%    $15,594          4.0%      $19,492           5.0%

December 31, 2006
     The Company
         Total Capital to risk weighted assets ........    $35,457       15.7%    $18,063          8.0%           NA             NA
         Tier 1 Capital to risk weighted assets .......    $33,215       14.7%    $ 9,032          4.0%           NA             NA
         Tier 1 Capital to average assets (leverage) ..    $33,215        9.7%    $13,737          4.0%           NA             NA
     Community First Bank
         Total Capital to risk weighted assets ........    $34,997       15.5%    $18,063          8.0%      $22,579          10.0%
         Tier 1 Capital to risk weighted assets .......    $32,755       14.5%    $ 9,032          4.0%      $13,547           6.0%
         Tier 1 Capital to average assets (leverage) ..    $32,755        9.5%    $13,738          4.0%      $17,172           5.0%
</TABLE>

Stock  Options - In 1998,  the  Company's  shareholders  approved the 1998 Stock
Option Plan under which an aggregate of 713,467 shares  (adjusted for subsequent
stock  dividends  and a stock split) of the  Company's  authorized  but unissued
common  stock was reserved  for  possible  issuance  pursuant to the exercise of
stock  options.  Generally,  options may be granted to  directors,  officers and
employees under terms and conditions, including expiration date, exercise price,
and vesting as determined by the Board of Directors.  In 1990, the  shareholders
approved the 1989  Incentive  Stock Option Plan.  The 1989 plan provided for the
granting of options to certain  eligible  employees and reserved  498,654 shares
(adjusted  for stock  dividends  and  splits)  of  authorized  common  stock for
issuance upon the exercise of such options.  Although some options granted under
the 1989 Plan can still be  exercised,  no further  options may be granted under
the 1989 Plan.  For all stock  options  ever  granted  under the two plans,  the
exercise  price was the fair market value of the  Company's  common stock on the
date the option was granted as  determined  by the Board of  Directors.  Options
terminate  according to the conditions of the grant, not to exceed 10 years from
the date of grant. The expiration of the options accelerates upon the optionee's
termination  of  employment  with the  Company or death,  and vesting of options
accelerates  upon a change in control of the  Company,  in  accordance  with the
provisions  of the two plans.  During  2006,  the  Company's  Board of Directors
accelerated the vesting of all other previously awarded and outstanding  options
such that all options were vested by December 31, 2006. The  acceleration of the
options' vesting  resulted in pre-tax  expenses of approximately  $394,000 being
recognized in 2006 that would  otherwise have been  recognized in 2007, 2008 and
2009.

                                       46
<PAGE>

Transactions under the plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                          ------------------------
                                                   2007                              2006                             2005
                                                   ----                              ----                             ----

                                                                  Average                           Average
                                                      Wtd. Avg.  Intrinsic              Wtd. Avg.  Intrinsic             Wtd. Avg.
                                                      Exercise     Value                Exercise     Value               Exercise
                                            Shares      Price      (000s)     Shares      Price      (000s)    Shares      Price
                                            ------      -----      ------     ------      -----      ------    ------      -----
<S>                                        <C>         <C>        <C>        <C>         <C>        <C>       <C>          <C>
Outstanding at beginning of year .......   520,212     $ 10.95               494,664     $ 9.90               476,687      $ 9.17
Granted ................................         -           -                48,164      18.40                40,142       15.67
Exercised ..............................   (70,077)       6.82               (22,614)      3.68               (20,839)       4.39
Forfeited or expired ...................       (13)       5.55                    (2)      3.90                (1,326)      12.71
                                           -------                           -------                          -------
Outstanding at end of year .............   450,122       11.59    $ 2,435    520,212       10.95    $ 3,970   494,664        9.90
                                           =======                           =======                          =======

Options exercisable at year-end ........   450,122     $ 11.59    $ 2,435    520,212     $ 10.95    $ 3,970   403,893      $ 9.08
                                           =======                           =======                          =======
</TABLE>
-------------------
Numbers of shares and exercise  prices have been adjusted in the table above for
a 10%  stock  dividend  effective  December  20,  2007  and 5%  stock  dividends
effective December 18, 2006 and November 30, 2005.

The aggregate  intrinsic  value of a stock option in the table above  represents
the pre-tax intrinsic value (the amount by which the current market value of the
underlying  stock exceeds the exercise price of the option) that would have been
received by the option holder had all option holders  exercised their options on
December 31, 2007.  This amount  changes based on changes in the market value of
the Company's stock.

Information pertaining to the fair values of stock options issued in each of the
past three years and the methods and  assumptions  used to compute  those values
are included in Note A.

The following table summarizes information about the options outstanding:

<TABLE>
<CAPTION>
                                                                             December 31, 2007
                                                                             -----------------
                                                   Options Outstanding                               Options Exercisable
                                                   -------------------                               -------------------
                                                        Weighted
                                                        Average
                                                       Remaining          Weighted                                     Weighted
                                    Number             Contractual         Average                Number                Average
Range of Exercise Prices          Outstanding          Life (Years)      Exercise Price         Outstanding           Exercise Price
------------------------          -----------          ------------      --------------         -----------           --------------
<C>                                 <C>                    <C>               <C>                  <C>                   <C>
$ 2.84  to  $ 5.19                   70,779                0.31              $ 5.16                 70,779              $  5.16
 10.65  to   12.74                  291,200                3.88               11.47                291,200                11.47
 15.67  to   18.61                   88,143                7.86               17.16                 88,143                17.16
                                    -------                                                        -------

                                    450,122                4.10              $11.59                450,122              $ 11.59
                                    =======                                                        =======
</TABLE>

Of the 1,212,121  shares of the  Company's  authorized  common stock  originally
reserved for  issuance  upon the  exercise of options  under the plans,  175,814
shares authorized under the 1998 plan remained available for future grants as of
December 31, 2007.  However,  the 1998 plan terminated on March 19, 2008, and no
further  options may be granted under the plan after that date.  The Company has
no current  plans to adopt a new stock option plan,  though the Board may decide
to do so in the future.

                                       47
<PAGE>

NOTE J - OTHER EXPENSES

Other expenses are summarized below:

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                    2007                2006                 2005
                                                                                    ----                ----                 ----
<S>                                                                             <C>                  <C>                  <C>
Salaries and employee benefits ......................................           $4,120,766           $3,647,451           $2,902,693
Net occupancy expense ...............................................              432,852              346,610              267,760
Furniture and equipment expense .....................................              441,010              431,078              344,687
Other expense
      Stationery, printing and postage ..............................              286,382              299,042              247,126
      Telephone .....................................................              152,656              143,422              102,249
      Advertising and promotion .....................................              118,565              124,968               97,258
      Professional services .........................................              284,907              202,278              169,465
      Insurance .....................................................               73,991               75,507               67,374
      FDIC insurance assessment .....................................               37,168               35,654               35,785
      Directors' compensation .......................................               94,400              392,471              100,800
      Foreclosed assets costs and expenses, net .....................                3,142                8,154               42,933
      Data processing expenses ......................................              250,728              272,867              236,445
      Other .........................................................              835,029              772,263              805,573
                                                                                ----------           ----------           ----------
          Total .....................................................           $7,131,596           $6,751,765           $5,420,148
                                                                                ==========           ==========           ==========
</TABLE>

NOTE K - INCOME TAXES

Income tax expense consisted of:


                                              Years Ended December 31,
                                              ------------------------
                                          2007           2006           2005
                                          ----           ----           ----
Current
    Federal ........................  $ 1,613,312    $ 1,528,379    $ 1,915,653
    State ..........................      150,575        136,871        168,353
                                      -----------    -----------    -----------
        Total current ..............    1,763,887      1,665,250      2,084,006
Deferred
    Federal ........................     (266,418)      (131,488)       (43,114)
                                      -----------    -----------    -----------
        Total income tax expense ...  $ 1,497,469    $ 1,533,762    $ 2,040,892
                                      ===========    ===========    ===========

The  principal  components  of the  deferred  portion of income  tax  expense or
(credit) were:

                                                 Years Ended December 31,
                                                 ------------------------
                                            2007           2006           2005
                                            ----           ----           ----

Provision for loan losses ............    $(109,564)    $   7,971     $  (8,656)
Accelerated depreciation .............       (5,049)      (18,701)      (29,869)
Deferred net loan costs and fees .....      (24,201)      (34,576)       (4,589)
Writedowns of other real estate ......            -         9,906             -
Non-qualified stock options ..........            -       (96,088)            -
Deferred compensation expense ........     (127,604)            -             -
                                          ---------     ---------     ---------
            Total ....................    $(266,418)    $(131,488)    $ (43,114)
                                          =========     =========     =========

Income before income taxes  presented in the  consolidated  statements of income
for the years  ended  December  31,  2007,  2006 and 2005  included  no  foreign
component.  A  reconciliation  between  the  income tax  expense  and the amount
computed by applying the federal  statutory  rate of 34% to income before income
taxes follows:

                                       48
<PAGE>

                                                Years Ended December 31,
                                                ------------------------
                                          2007           2006           2005
                                          ----           ----           ----

Tax expense at statutory rate .....   $ 1,641,582    $ 1,547,589    $ 1,962,078
State income tax, net of federal
    income tax benefit ............        99,380         90,335        111,403
Tax-exempt interest income ........      (276,416)      (220,098)       (60,143)
Non-deductible interest expense to
    carry tax-exempt instruments ..        46,616         34,608          7,209
Other, net ........................       (13,693)        81,328         20,345
                                      -----------    -----------    -----------
            Total .................   $ 1,497,469    $ 1,533,762    $ 2,040,892
                                      ===========    ===========    ===========

Deferred tax assets and liabilities  included in the consolidated  balance sheet
consisted of the following:

                                                               December 31,
                                                               ------------
                                                           2007           2006
                                                           ----           ----
Deferred tax assets
    Allowance for loan losses ....................     $  702,622     $  593,058
    Deferred net loan fees .......................        126,214        102,013
    Non-qualified stock options ..................         96,088         96,088
    Deferred compensation ........................        127,604              -
    Unrealized net holding losses on
      available-for-sale securities ..............              -        405,571
                                                       ----------     ----------
            Gross deferred tax assets ............      1,052,528      1,196,730
    Valuation allowance ..........................              -              -
                                                       ----------     ----------
            Total ................................      1,052,528      1,196,730
                                                       ----------     ----------

Deferred tax liabilities
    Accelerated depreciation .....................        195,411        200,460
    Unrealized net holding gains on
      available-for-sale securities ..............         44,860              -
                                                       ----------     ----------
            Gross deferred tax liabilities .......        240,271        200,460
                                                       ----------     ----------
Net deferred income tax assets ...................     $  812,257     $  996,270
                                                       ==========     ==========

The portion of the change in net  deferred  tax assets or  liabilities  which is
related to unrealized holding gains and losses on available-for-sale  securities
is charged or  credited  directly  to other  comprehensive  income or loss.  The
balance of the change in net  deferred  tax  assets is  charged or  credited  to
income tax expense. In 2007, 2006 and 2005,  $450,431 was charged,  $377,023 was
charged,  and  $502,764  was  credited  to other  comprehensive  income or loss,
respectively.  In 2007,  $266,418 was  credited to income tax expense;  in 2006,
$131,488 was credited to income tax expense;  and, in 2005, $43,114 was credited
to income tax expense.

Management  believes that the Company will fully realize the deferred tax assets
as of December 31, 2007 and 2006 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.

NOTE L - RETIREMENT PLAN

The Company  sponsors the Community  First Bank 401(k) Plan (the "401(k)  Plan")
for the exclusive  benefit of all eligible  employees  and their  beneficiaries.
Employees  are  eligible to  participate  in the 401(k) Plan with no minimum age
requirement after completing twelve months of service in which they are credited
with at  least  501  hours of  service.  Employees  are  allowed  to  defer  and
contribute  up to 15% of their  salary each year.  The Company  matches $.50 for

                                       49
<PAGE>

each dollar deferred up to 10% of total salary.  The Board of Directors can also
elect to make  discretionary  contributions.  Employees are fully vested in both
the matching and any  discretionary  contributions  after five years of service.
The employer  contributions to the plan for 2007, 2006 and 2005 totaled $84,941,
$66,764, and $58,983, respectively.

In 2007, the Company's Board of Directors approved certain supplemental benefits
for the Chief  Executive  Officer.  These  benefits are not qualified  under the
Internal Revenue Code and they are not funded. However, life insurance contracts
owned by the Bank provide  informal,  indirect  funding for those benefits.  The
Company  recorded  deferred  compensation  expense  related to these benefits of
$386,446 in 2007.

NOTE M - COMMITMENTS AND CONTINGENCIES

Commitments  to Extend  Credit - In the normal  course of business,  the banking
subsidiary is party to financial instruments with off-balance-sheet  risk. These
financial  instruments  include commitments to extend credit and standby letters
of credit,  and have elements of credit risk in excess of the amount  recognized
in the balance sheet. The exposure to credit loss in the event of nonperformance
by the other  parties to the financial  instruments  for  commitments  to extend
credit and  standby  letters of credit is  represented  by the  contractual,  or
notional, amount of those instruments.  Generally, the same credit policies used
for  on-balance-sheet  instruments,  such as loans,  are used in extending  loan
commitments and standby letters of credit.

Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:

                                                             December 31,
                                                             ------------
                                                         2007            2006
                                                         ----            ----

                Loan commitments ...............     $35,953,550     $33,764,489
                Standby letters of credit ......       1,038,600       1,113,600

Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition  established in the contract.  Commitments  generally
have  fixed  expiration  dates or other  termination  clauses  and some  involve
payment of a fee. Many of the  commitments  are expected to expire without being
fully  drawn;  therefore,   the  total  amount  of  loan  commitments  does  not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon  extension  of credit is based on  management's  credit  evaluation  of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.

Standby  letters  of  credit  are  conditional   commitments  to  guarantee  the
performance of a customer to a third party.  The credit risk involved in issuing
standby  letters  of  credit  is the  same  as  that  involved  in  making  loan
commitments to customers.

Litigation - The Company and its  subsidiary  were not involved as defendants in
any  litigation at December 31, 2007.  Management is not aware of any pending or
threatened litigation,  or unasserted claims or assessments that are expected to
result in losses,  if any, that would be material to the consolidated  financial
statements.

New Offices - Land intended to be used for the Bank's future  expansion has been
obtained near Powdersville, SC. The Company has established neither a budget nor
a schedule for the construction of that proposed office.

Other - The  Company  and its  banking  subsidiary  are not  involved  in  other
off-balance-sheet contractual relationships or transactions that could result in
liquidity needs or other commitments or significantly impact earnings.

NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107,  "Disclosures  about Fair  Values of  Financial  Instruments,"  as
amended, requires disclosure of the estimated fair value of on-balance sheet and
off-balance sheet financial  instruments.  A financial  instrument is defined by
SFAS No.  107 as cash,  evidence  of an  ownership  interest  in an  entity or a
contract  that creates a  contractual  obligation or right to deliver or receive
cash or  another  financial  instrument  from a  second  entity  on  potentially
favorable or unfavorable terms.

Fair  value  estimates  are made at a specific  point in time based on  relevant
market  information  about the  financial  instrument.  These  estimates  do not
reflect any premium or discount  that could result from offering for sale at one
time the Company's  entire  holdings of a particular  financial  instrument.  No
active  trading  market  exists  for a  significant  portion  of  the  Company's
financial  instruments.  Fair value estimates for these instruments are based on
management's  judgments  regarding  future  expected  loss  experience,  current
economic conditions, risk characteristics of various financial instruments,  and
other   factors.   These   estimates  are   subjective  in  nature  and  involve

                                       50
<PAGE>

uncertainties  and  matters of  significant  judgment  and  therefore  cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.

Fair value  estimates are based on existing  on-and-off  balance sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial   instruments.   Significant  assets  and  liabilities  that  are  not
considered  financial assets or liabilities  include net deferred tax assets and
premises and equipment. In addition, the income tax ramifications related to the
realization of the unrealized gains and losses can have a significant  effect on
fair value estimates and have not been considered in the estimates.

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

For cash and due from  banks,  interest  bearing  deposits  due from  banks  and
federal funds sold, the carrying  amount  approximates  fair value because these
instruments generally mature in 90 days or less. The carrying amounts of accrued
interest receivable or payable approximate fair values.

The fair value of debt securities issued by Government sponsored  enterprises is
estimated based on published closing quotations. The fair value of state, county
and municipal  securities is generally not available from published  quotations;
consequently,  their fair values estimates are based on matrix pricing or quoted
market prices of similar  instruments  adjusted for credit  quality  differences
between the quoted  instruments and the securities being valued.  Fair value for
mortgage-backed securities is estimated primarily using dealers' quotes.

The fair value of FHLB stock approximates the carrying amount.

Fair values are estimated for loans using  discounted cash flow analyses,  using
interest  rates  currently  offered  for loans  with  similar  terms and  credit
quality.  The Company  does not engage in  originating,  holding,  guaranteeing,
servicing or investing in loans where the terms of the loan product give rise to
a concentration of credit risk.

The fair value of deposits with no stated maturity  (noninterest bearing demand,
interest  bearing  transaction  accounts and savings) is estimated as the amount
payable on demand,  or  carrying  amount.  The fair  value of time  deposits  is
estimated using a discounted cash flow  calculation that applies rates currently
offered to aggregate expected maturities.

The  fair  values  of the  Company's  short-term  borrowings  approximate  their
carrying amounts.

The fair values of fixed rate long-term  debt  instruments  are estimated  using
discounted cash flow analyses,  based on the borrowing rates currently in effect
for  similar  borrowings.  The fair  values  of  variable  rate  long-term  debt
instruments are estimated at the carrying amount.

The estimated fair values of  off-balance-sheet  financial  instruments  such as
loan  commitments  and standby  letters of credit are generally  based upon fees
charged to enter into  similar  agreements,  taking into  account the  remaining
terms  of the  agreements  and the  counterparties'  creditworthiness.  The vast
majority  of the  banking  subsidiary's  loan  commitments  do not  involve  the
charging of a fee,  and fees  associated  with  outstanding  standby  letters of
credit are not material. For loan commitments and standby letters of credit, the
committed  interest rates are either  variable or approximate  current  interest
rates offered for similar commitments.  Therefore,  the estimated fair values of
these off-balance-sheet financial instruments are nominal.

                                       51
<PAGE>

The following is a summary of the carrying  amounts and estimated fair values of
the Company's financial assets and liabilities:

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                              2007                               2006
                                                                              ----                               ----
                                                                  Carrying           Estimated         Carrying          Estimated
                                                                   Amount           Fair Value         Amount            Fair Value
                                                                   ------           ----------         ------            ----------
Financial assets
<S>                                                            <C>                <C>                <C>                <C>
   Cash and due from banks .............................       $ 10,272,260       $ 10,272,260       $  6,951,934       $  6,951,934
   Interest bearing deposits due from banks ............            164,781            164,781             66,941             66,941
   Federal funds sold ..................................         24,236,000         24,236,000         24,126,000         24,126,000
   Securities available-for-sale .......................         99,026,049         99,026,049        102,487,395        102,487,395
   Securities held-to-maturity .........................          5,663,113          5,625,083          6,595,026          6,529,691
   Federal Home Loan Bank stock ........................            839,900            839,900            980,200            980,200
   Loans ...............................................        241,557,255        238,670,000        200,723,753        200,447,000
   Accrued interest receivable .........................          2,529,155          2,529,155          2,181,572          2,181,572
Financial liabilities
   Deposits ............................................        355,866,553        357,308,000        307,957,309        307,326,000
   Accrued interest payable ............................          3,479,569          3,479,569          2,702,946          2,702,946
   Short-term borrowings ...............................                  -                  -          4,500,000          4,500,000
   Long-term debt ......................................          4,500,000          4,483,000          5,500,000          5,497,000
</TABLE>

The following is a summary of the notional or contractual  amounts and estimated
fair values of the Company's off-balance sheet financial instruments:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                          ------------
                                                                             2007                                   2006
                                                                             ----                                   ----
                                                                Notional/          Estimated          Notional/          Estimated
                                                                Contract             Fair              Contract             Fair
                                                                 Amount              Value             Amount              Value
                                                                 ------              -----             ------              -----
Off-balance sheet commitments
<S>                                                          <C>                    <C>            <C>                    <C>
  Loan commitments .....................................     $35,953,550            $ -            $33,764,489            $ -
  Standby letters of credit ............................       1,038,600              -              1,113,600              -
</TABLE>

NOTE O - ACCOUNTING CHANGES

Hybrid  Financial  Instruments  -  The  provisions  of  Statement  of  Financial
Accounting  Standards No. 155 ("SFAS No. 155"),  "Accounting  for Certain Hybrid
Financial  Instruments,  an amendment of FASB  Statements No. 133 and 140," were
effective January 1, 2007. The Company has no affected financial instruments and
adoption of the Statement had no effect on the Company's  consolidated financial
statements.

Servicing  of  Financial  Assets - The  provisions  of  Statement  of  Financial
Accounting  Standards  No. 156 ("SFAS No.  156"),  "Accounting  for Servicing of
Financial Assets, an amendment of FASB Statement No. 140" were effective January
1, 2007.  This  Statement  potentially  simplified the accounting for separately
recognized loan servicing  assets and liabilities and any financial  instruments
used to hedge risks  associated  with those assets and  liabilities.  Under SFAS
156,  separately  recognized  servicing assets and liabilities are accounted for
initially at fair value,  if  practicable,  and  subsequently  are accounted for
either at fair value or amortized  over the economic lives of the related loans.
If the fair  value  method of  subsequent  valuation  is  elected,  SFAS No. 156
permits income statement  recognition of the potential offsetting changes in the
fair values of the financial servicing rights and liabilities and the derivative
instruments  used to  hedge  them in the same  accounting  period.  The  Company
currently has no separately recognized loan servicing rights or liabilities, and
adoption of SFAS No. 156 had no effect on the Company's  consolidated  financial
statements.

Fair Value  Measurements - The  provisions of Statement of Financial  Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for

                                       52
<PAGE>

fiscal  years  beginning  after  November  15,  2007  (January  1,  2008 for the
Company).  SFAS No. 157  defines  fair value and  establishes  a  framework  for
measuring fair value in GAAP. The Statement  describes fair value as being based
on a  hypothetical  transaction  to sell an asset or transfer a  liability  at a
specific  measurement  date,  as  considered  from the  perspective  of a market
participant   who  holds  the  asset  or  owes  the  liability  (an  exit  price
perspective).  In  addition,  fair  value  should be  viewed  as a  market-based
measurement,  rather than an entity-specific measurement.  Therefore, fair value
should be determined based on the assumptions that market participants would use
in pricing an asset or liability,  including all risks and restrictions that may
be  associated  with that  asset or  liability.  SFAS No. 157 does not amend the
definition of fair value used in conjunction with Share-Based Payments accounted
for under SFAS No. 123(R).  The adoption of SFAS No. 157 in 2008 is not expected
to have a material effect on the Company's consolidated financial statements.

Accounting  for  Uncertainty  in  Income  Taxes - The  provisions  of  Financial
Accounting  Standards Board  Interpretation  No. 48 ("FIN 48"),  "Accounting for
Uncertainty  in Income  Taxes,  an  interpretation  of FASB  Statement No. 109,"
clarify  the  accounting  for  uncertainty  in  income  tax  positions.  FIN  48
prescribes  a two-step  evaluation  process  that  includes  both a  recognition
threshold and a measurement  attribute for tax positions taken or expected to be
taken in a tax return.  The  provisions of FIN 48 were effective for the Company
as of January 1, 2007. The adoption of FIN 48 did not have a material  effect on
the Company's consolidated financial statements.

Fair Value Option -The provisions of Statement of Financial Accounting Standards
No. 159 ("SFAS  No.  159"),  "The Fair  Value  Option for  Financial  Assets and
Financial  Liabilities  Including an amendment of FASB  Statement  No. 115," are
effective as of January 1, 2008.  SFAS No 159 allows  entities to choose whether
or not to measure many  financial  instruments  and certain  other items at fair
value.  However,  the Statement  also  specifies the times at which an entity is
allowed  choose  to elect the fair  value  option  for a  particular  item.  For
eligible  financial  instruments that an entity elects to measure at fair value,
all changes in fair value,  including  both  unrealized  and realized  gains and
losses,  will be recognized in income.  The Company currently does not expect to
value any items using the fair value  option of SFAS No. 159 and adoption of the
Statement,  therefore,  is expected to have no effect on the Company's financial
statements.

                                       53
<PAGE>

NOTE P - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                     2007                    2006
                                                                                                     ----                    ----
Condensed Balance Sheets
       Assets
<S>                                                                                               <C>                    <C>
             Cash ....................................................................            $ 1,633,623            $ 1,172,196
             Investment in banking subsidiary ........................................             36,269,433             32,030,672
             Other assets ............................................................                  7,932                 12,162
                                                                                                  -----------            -----------
                  Total assets .......................................................            $37,910,988            $33,215,030
                                                                                                  ===========            ===========
       Liabilities
             Other liabilities .......................................................            $         -            $         -
       Shareholders' equity ..........................................................             37,910,988             33,215,030
                                                                                                  -----------            -----------
                  Total liabilities and shareholders' equity .........................            $37,910,988            $33,215,030
                                                                                                  ===========            ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                     2007               2006                2005
                                                                                     ----               ----                ----
Condensed Statements of Income
       Income
<S>                                                                             <C>                 <C>                 <C>
             Interest income ...........................................        $    41,048         $    38,182         $    15,191
             Other income ..............................................                  -                   -               6,070
                                                                                -----------         -----------         -----------
                  Total income .........................................             41,048              38,182              21,261
                                                                                -----------         -----------         -----------
       Expenses
             Other expenses ............................................             64,378              73,953              53,098
                                                                                -----------         -----------         -----------
                  Total expenses .......................................             64,378              73,953              53,098
                                                                                -----------         -----------         -----------
       Income (loss) before income taxes and equity in
             undistributed earnings of banking subsidiary ..............            (23,330)            (35,771)            (31,837)
       Income tax expense (credit) .....................................             (7,932)            (12,162)            (10,825)
       Equity in undistributed earnings
             of banking subsidiary .....................................          3,346,110           3,041,578           3,750,938
                                                                                -----------         -----------         -----------
       Net income ......................................................        $ 3,330,712         $ 3,017,969         $ 3,729,926
                                                                                ===========         ===========         ===========
</TABLE>

                                       55
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Years Ended December 31,
                                                                                                 ------------------------
                                                                                         2007               2006            2005
                                                                                         ----               ----            ----
Condensed Statements of Cash Flows
       Operating activities
<S>                                                                                   <C>              <C>              <C>
             Net income .........................................................     $ 3,330,712      $ 3,017,969      $ 3,729,926
                  Adjustments to reconcile net income to net
                        cash used by operating activities
                              Equity in undistributed earnings
                                of banking subsidiary ...........................      (3,346,110)      (3,041,578)      (3,750,938)
                              Decrease (increase) in other assets ...............           4,230           (1,337)           2,625
                                                                                      -----------      -----------      -----------
                                Net cash used by operating activities ...........         (11,168)         (24,946)         (18,387)
                                                                                      -----------      -----------      -----------
       Financing activities
             Exercise of employee stock options .................................         478,090           83,197           92,059
             Payment of cash in lieu of fractional
                  shares for stock dividend .....................................          (5,495)          (6,803)          (6,349)
                                                                                      -----------      -----------      -----------
                                Net cash provided by financing activities .......         472,595           76,394           85,710
                                                                                      -----------      -----------      -----------
       Increase in cash and cash equivalents ....................................         461,427           51,448           67,323
       Cash and cash equivalents, beginning .....................................       1,172,196        1,120,748        1,053,425
                                                                                      -----------      -----------      -----------
       Cash and cash equivalents, ending ........................................     $ 1,633,623      $ 1,172,196      $ 1,120,748
                                                                                      ===========      ===========      ===========
</TABLE>

                                       54