EXHIBIT 13


















                         COMMUNITY FIRST BANCORPORATION

                            Portions of Registrant's
                              2005 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2005 Form 10-K




<PAGE>


Financial Summary

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                     ------------------------
                                                               2005            2004            2003            2002            2001
                                                               ----            ----            ----            ----            ----
                                                                           (Dollars in thousands, except per share data)
Financial Condition
<S>                                                         <C>             <C>             <C>             <C>             <C>
     Securities ....................................        $109,821        $101,452        $ 86,023        $ 62,968        $ 71,339
     Allowance for loan losses .....................           2,266           2,240           2,197           1,950           1,200
     Net loans (1) .................................         167,052         155,535         145,453         135,409         118,544
     Premises and equipment - net ..................           6,805           4,413           4,454           4,148           3,232
     Total assets ..................................         320,712         305,348         280,526         232,855         211,898
     Noninterest bearing deposits ..................          38,061          34,903          32,273          24,416          25,449
     Interest bearing deposits .....................         241,932         233,245         224,278         187,223         168,070
     Total deposits ................................         279,993         268,148         256,551         211,639         193,519
     Total liabilities .............................         291,858         279,412         257,989         212,770         194,881
     Total shareholders' equity ....................          28,854          25,936          22,537          20,085          17,017

Results of Operations
     Interest income ...............................        $ 15,923        $ 13,948        $ 12,664        $ 12,580        $ 13,969
     Interest expense ..............................           6,621           5,077           5,089           4,716           8,212
                                                            --------        --------        --------        --------        --------
     Net interest income ...........................           9,302           8,871           7,575           7,864           5,757
     Provision for loan losses .....................             250             380             522           1,291             567
                                                            --------        --------        --------        --------        --------
     Net interest income after provision ...........           9,052           8,491           7,053           6,573           5,190
     Other income ..................................           2,139           2,054           2,033           1,413           1,021
     Other expenses ................................           5,420           5,151           4,414           3,697           3,239
                                                            --------        --------        --------        --------        --------
     Income before income taxes ....................           5,771           5,394           4,672           4,289           2,972
     Income tax expense ............................           2,041           1,957           1,667           1,527           1,067
                                                            --------        --------        --------        --------        --------
     Net income ....................................        $  3,730        $  3,437        $  3,005        $  2,762        $  1,905
                                                            ========        ========        ========        ========        ========
Per Share Data (2)
     Net income ....................................        $   1.34        $   1.24        $   1.10        $   1.02        $   0.70
     Net income, assuming dilution .................            1.27            1.18            1.05            0.97            0.67
     Period end book value .........................           10.31            9.32            8.26            7.38            6.31
</TABLE>
_____________________________________
(1) Excludes loans held for sale.
(2) Per share  amounts  have been  retroactively  adjusted to reflect a 5% stock
    dividend  effective  November  30,  2005,  a 10%  stock  dividend  effective
    November  30,  2004 and 5% stock  dividends  effective  November  28,  2003,
    November 28, 2002, and December 21, 2001.



                                       1
<PAGE>


Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                       2005                                    2004
                                                                       ----                                    ----
                                                        Fourth    Third    Second     First    Fourth     Third     Second    First
                                                        Quarter  Quarter   Quarter   Quarter   Quarter   Quarter    Quarter  Quarter
                                                        -------   -------  -------   -------   -------    -------   -------  -------
                                                                           (Dollars in thousands, except per share)
<S>                                                   <C>       <C>       <C>       <C>       <C>       <C>        <C>       <C>
Interest and dividend income ......................   $ 4,154   $ 4,011   $ 3,907   $ 3,851   $ 3,600   $ 3,620    $ 3,412   $ 3,316
Interest expense ..................................     1,898     1,752     1,512     1,459     1,350     1,248      1,230     1,249
                                                      -------   -------   -------   -------   -------   -------    -------   -------

Net interest income ...............................     2,256     2,259     2,395     2,392     2,250     2,372      2,182     2,067
Provision for loan losses .........................        35         -        75       140        65       180         55        80
                                                      -------   -------   -------   -------   -------   -------    -------   -------

Net interest income after provision ...............     2,221     2,259     2,320     2,252     2,185     2,192      2,127     1,987
Noninterest income ................................       558       543       551       487       515       538        543       467
Gains (losses) on sales of securities .............         -         -         -         -         -       (14)         -         5
Noninterest expense ...............................     1,362     1,383     1,352     1,323     1,312     1,303      1,359     1,177
                                                      -------   -------   -------   -------   -------   -------    -------   -------

Income before income taxes ........................     1,417     1,419     1,519     1,416     1,388     1,413      1,311     1,282
Provision for income taxes ........................       503       489       542       507       517       509        481       450
                                                      -------   -------   -------   -------   -------   -------    -------   -------

Net income ........................................   $   914   $   930   $   977   $   909   $   871   $   904    $   830   $   832
                                                      =======   =======   =======   =======   =======   =======    =======   =======

Earnings per share *
Basic .............................................   $  0.34   $  0.33   $  0.35   $  0.32   $  0.32   $  0.32    $  0.30   $  0.30
Diluted ...........................................      0.35      0.30      0.32      0.30      0.31      0.30       0.28      0.29
</TABLE>
-------
*   Per share  amounts  have been  retroactively  adjusted to reflect a 5% stock
    dividend  effective  November  30, 2005 and a 10% stock  dividend  effective
    November 30, 2004.

Forward-Looking Statements

         Statements  included in this report which are not  historical in nature
are intended to be, and are hereby  identified as "forward  looking  statements"
for  purposes  of the safe  harbor  provided  by Section  21E of the  Securities
Exchange Act of 1934, as amended.  Forward-looking statements include statements
concerning plans, objectives,  goals,  strategies,  future events or performance
and underlying  assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified,  without
limitation,  by the use of the  words  "anticipates,"  "believes,"  "estimates,"
"expects," "intends," "plans," "predicts,"  "projects," and similar expressions.
The Company's expectations,  beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable  basis,  including  without
limitation,  management's  examination  of  historical  operating  trends,  data
contained in the Company's  records and other data available from third parties,
but  there  can be no  assurance  that  management's  beliefs,  expectations  or
projections  will result or be achieved or  accomplished.  The Company  cautions
readers that  forward-looking  statements,  including without limitation,  those
relating to the Company's recent and continuing  expansion,  its future business
prospects,  revenues, working capital, liquidity, capital needs, interest costs,
income,  and adequacy of the allowance for loan losses, are subject to risks and
uncertainties  that could cause actual results to differ  materially  from those
indicated in the  forward-looking  statements,  due to several important factors
herein  identified,  among others,  and other risks and factors  identified from
time to time in the  Company's  reports filed with the  Securities  and Exchange
Commission.


Market for Common Stock and Dividends

         During the first quarter of 2004, trading in the Company's common stock
began being reported on the OTC Bulletin Board under the ticker symbol CFOK. The
following  table  summarizes  the range of high and low prices for the Company's
common stock as reported on the OTC Bulletin Board for each quarterly  period of


                                       2
<PAGE>

2004 and 2005. Prices shown represent  interdealer 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 5% stock  dividend  effective  November 30, 2005
and a 10% stock dividend effective November 30, 2004.


<TABLE>
<CAPTION>
                                                             2005                                  2004
                                                             ----                                  ----
            Quarter Ended                           High              Low                 High              Low
            -------------                           ----              ---                 ----              ---
<S>                     <C>                      <C>               <C>                 <C>               <C>
                  March 31 ...................   $ 19.05           $ 17.14             $ 14.71           $ 14.07
                   June 30 ...................   $ 18.57           $ 17.14             $ 16.45           $ 14.07
              September 30 ...................   $ 19.05           $ 17.68             $ 19.30           $ 15.58
               December 31 ...................   $ 19.05           $ 18.33             $ 18.23           $ 15.82
</TABLE>


         As of February 28, 2006, there were approximately 802 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 2006.

         The Board of Directors  declared a 5% stock dividend effective November
30,  2005,  a 10% stock  dividend  effective  November  30,  2004 and a 5% stock
dividend effective November 28, 2003.

         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.





                                       3
<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 5% stock dividend effective
November  30, 2005, a 10% stock  dividend  effective  November 30, 2004 and a 5%
stock dividend effective November 28, 2003.


Earnings Performance

2005 Compared with 2004

         For the year ended December 31, 2005,  the Company  recorded net income
of $3,730,000,  an increase of $293,000,  or 8.5%, over net income of $3,437,000
for 2004.  Net income per share for 2005 was $1.34 compared with $1.24 for 2004.
Per share net income,  assuming  dilution from  outstanding  stock options,  was
$1.27 for 2005 and $1.18 for 2004.  Return on average  assets was 1.21% for 2005
compared with 1.17% for 2004. Return on average  shareholders' equity was 13.65%
for 2005 compared with 14.20% for 2004.

         Net income  for 2005  increased  primarily  due to an  increase  in net
interest income.  Rising interest rates throughout 2005, coupled with increasing
volumes of interest-earning assets and interest-bearing liabilities, resulted in
increased  interest  earnings and interest expenses across all major categories.
Interest income on loans increased $1,233,000.  Approximately two-thirds of this
increase  was  attributable  to  increased  amounts  of  loans  outstanding  and
one-third was related to increases in the associated yields earned.  The Company
also  continued  to  experience  a high  level  of  activity  in its  investment
securities  portfolio as issuers continued to redeem  securities  outstanding in
2005. The Company  increased the yield on securities by 19 basis points for 2005
by purchasing securities  throughout the year to replace those redeemed.  Yields
on federal funds sold also increased in 2005.

         More than 80% of the  increase  in  interest  expense was the result of
higher rates paid primarily to retain  interest-bearing  funds on deposit. Total
deposits  grew  $11,845,000  during 2005 with  approximately  one-fourth of that
growth accounted for in non-interest  bearing demand deposits.  In 2005, average
interest-bearing  deposits  were  $4,333,000  more  than  in  2004  and  average
non-interest bearing demand deposits were $3,240,000 more than in 2004.

         The  provision  for loans losses for 2005 was  $250,000,  a decrease of
$130,000  or  34.2%  from  the  amount  provided  in 2004.  For  2005,  net loan
charge-offs decreased by $113,000. Year end 2005 nonperforming loans (nonaccrual
loans and accruing loans 90 days or more past due)  decreased  $569,000 from the
amount at the end of 2004. Potential problem loans increased $745,000 by the end
of 2005 compared with the end of 2004,  but 83.7% of the 2005 year end potential
problem loans were secured by real estate  mortgages  compared with 53.5% at the
end of 2004.

         Other income and other expenses each continued to grow in 2005.  Growth
in other income was  attributable  primarily  to continued  increases in service
charges on deposit accounts  resulting from the Company's  continuing efforts to
identify and charge  appropriately  for services it performs for its  customers.
Other expense  increased  primarily due to normal  salary  increases  granted to
employees and increased  expenses of operating the banking  subsidiary's  office
network and its data processing operation.


2004 Compared with 2003

         For the year ended December 31, 2004,  the Company  recorded net income
of $3,437,000, an increase of $432,000, or 14.4%, above net income of $3,005,000
for 2003.  Net income per share for 2004 was $1.24 compared with $1.10 for 2003.
Per share net income,  assuming dilution for unexercised stock options was $1.18
for 2004 and  $1.05  for  2003.  Return  on  average  assets  was 1.17% for 2004
compared with 1.12% for 2003. Return on average  shareholders' equity was 14.20%
for 2004 and 14.03% for 2003.

         Net  income  for  2004  increased  primarily  due  to  an  increase  of
$1,062,000 in interest income earned on investment  securities and a decrease of
$142,000 in the provision for loan losses.  The Company also was able in 2004 to
slightly decrease  interest expenses  associated with deposits and other funding
sources.


                                       4
<PAGE>


         Late in the second  quarter of 2004, the Company  borrowed  $10,000,000
from the Federal  Home Loan Bank of Atlanta  and  invested  the  majority of the
proceeds   in   mortgage-backed   securities   classified   by   management   as
held-to-maturity  which had a year-end carrying value of $9,369,000.  Securities
available-for-sale as of December 31, 2004 totaled approximately $6,060,000 more
than at the prior year-end.

         On average, investment securities were $30,283,000 more in 2004 than in
2003 and loans increased by  $10,224,000.  Growth in these  categories  resulted
primarily from decreasing the Company's average investment in federal funds sold
by  $14,339,000  and  increasing  average  deposits and other  external  funding
sources by $23,115,000.

         Other expenses for 2004 were approximately  $737,000 more than in 2003,
primarily  as a result of  increases  in  personnel  costs,  depreciation,  data
processing  expenses and costs  associated  with  foreclosed  properties held or
disposed of in 2004. Expenses of operating the banking  subsidiary's  network of
offices  continued  to increase in 2004 due  partially  to the  operation of the
Bank's newest office in Westminster for a full year compared with  approximately
eight months in 2003.


Comprehensive Income

         Comprehensive   income  for  2005,   2004  and  2003  was   $2,832,000,
$3,137,000,  and  $2,427,000,  respectively.   Accounting  principles  generally
require that recognized revenue,  expenses,  gains and losses be included in net
income.  Other elements of  comprehensive  income for the Company are correlated
directly to the effects that changing  market rates of interest have on the fair
values of the Company's holdings of available-for-sale securities. The resulting
changes in unrealized  holding gains and losses on such  securities are reported
as a separate  component of shareholders'  equity.  Those changes in fair value,
net of income tax  effects,  combined  with net income,  comprise  comprehensive
income.


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.

2005 Compared with 2004

         Net interest  income was  $9,302,000,  $8,871,000,  and  $7,575,000 for
2005, 2004 and 2003, respectively.  Interest income for 2005 was $15,923,000, an
increase  of  $1,975,000,  or 14.2%,  over 2004.  Interest  expense for 2005 was
$6,621,000,  an  increase  of  $1,544,000,  or 30.4%,  over  2004.  The  Company
experienced   higher   average   volumes   of   interest-earning    assets   and
interest-bearing  liabilities in 2005 as well as higher average yields and rates
on those instruments.

         As expected,  managing net interest  margin  effectively  in the rising
rate environment that prevailed throughout the year was a challenge during 2005.
Although the average  interest rate spread  (average  yield on interest  earning
assets less the average rate paid on interest bearing  liabilities)  declined by
14 basis points in 2005  compared  with 2004,  the net yield on average  earning
assets (net interest income divided by average interest earning assets) declined
by just one  basis  point.  This  result  was  achieved  by  increasing  average
non-interest  bearing  funding  sources  through  growth in demand  deposits and
retention of earnings.

         During 2005, the Federal Reserve Bank's Open Market Committee continued
its policy of measured interest rate increases  affecting  primarily the federal
funds rate and loans made by Federal  Reserve Banks to their member banks.  As a
result,  interest  rates on a broad  array  of  generally  short-term  financial
instruments, including the prime rate, a key determinant of rates charged to the
Bank's most credit-worthy  customers and a factor considered in all loan-pricing
decisions,  also rose. As also  experienced  in the latter half of 2004 when the
current policy was first  implemented,  longer term rates  (generally  rates for
instruments  with original  maturities of more than five years)  remained mostly
stable during 2005. As a result of these  factors,  the yield curve changed from
steep to almost flat during 2005.

         Another factor affecting the Company's yields on loans,  especially new
loans  originated  in  2005,  were  attractive  interest  rates  offered  by the
financing  subsidiaries of automobile  manufacturers.  The Company's outstanding
loans to individuals to purchase automobiles were virtually unchanged at the end
of 2005 from the  amounts  of such  loans at the end of 2004.  Furthermore,  the


                                       5
<PAGE>

average  yield on such  loans  was  lower at the end of 2005  than at the end of
2004.  Other  manufacturers of consumer and household goods  increasingly  offer
incentive-rate  financing  of their  products  through  related  companies in an
effort to increase their sales.  These companies  represent a relatively new and
growing source of competition to banks and other financial institutions.

         As of  December  31,  2005  and  2004,  approximately  $47,000,000  and
$48,000,000,  respectively,  or 27.8% and 30.4%,  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 2005 was 7.00%, compared
with 6.73% during 2004.

         Competition for  interest-bearing  deposits was strong in 2005, and the
Company responded by increasing the rates paid for those funds. As a result, the
average rate paid for average interest  bearing  deposits  increased by 57 basis
points for 2005 when compared with 2004, and interest expense for those funds in
2005 was $1,429,000,  or 29.2%, more than in 2004. Year-over-year deposit growth
was noted in noninterest bearing demand accounts and time deposits.  The Company
believes that reductions in interest  bearing  transaction  accounts and savings
accounts were  experienced  as  depositors  attempted to maximize the returns on
their funds by shifting to  longer-term  instruments,  such as  certificates  of
deposit, that offered higher rates.  Additionally,  widely-disseminated  reports
that the current  Federal  Reserve  policy to increase  interest  rates might be
coming to an end may have  influenced some depositors to invest their funds on a
longer-term basis before rates began to decline once again.

         Average  interest  earning  assets  during 2005 were  $297,850,000,  an
increase of $14,234,000  or 5.0% over 2004.  Average  investment  securities for
2005  totaled  $110,556,000,  an  increase of  $4,507,000  or 4.2% over the 2004
average  amount.   Average  loans  for  the  2005  twelve-month  period  totaled
$164,243,000,  an increase of $11,697,000 or 7.7% over 2004.  Average loans were
55.1%  and  53.8%  of  average  interest  earning  assets  for  2005  and  2004,
respectively.  Average federal funds sold for 2005 were $21,884,000,  a decrease
of $2,242,000 or 9.3% from 2004.  Average  interest bearing  liabilities  during
2005 totaled  $243,508,000,  representing an increase of $7,116,000 or 3.0% over
the amount for 2004.  Average time  deposits of $100,000  and over  increased to
$64,821,000  for 2005  from  $60,301,000  in the  prior  year,  an  increase  of
$4,520,000  or 7.5%.  Average  time  deposits  less than  $100,000  increased to
$105,798,000  for 2005 from  $103,923,000  in 2004,  representing an increase of
$1,875,000 or 1.8%.  Average interest  bearing  transaction and savings accounts
decreased to  $64,697,000  for 2005, a decrease of $2,062,000 or 3.1% from 2004.
Average  short and long-term  borrowings  increased to  $8,192,000.  The banking
subsidiary borrowed  $10,000,000 from the Federal Home Loan Bank of Atlanta late
in the second  quarter of 2004. As of the end of 2005,  $6,500,000 of that debt,
which  originally was in the forms of both  short-term  borrowings and long-term
debt, remained outstanding.

2004 Compared with 2003

         Interest income for 2004 was $1,284,000,  or 10.1%,  more than in 2003.
Interest expense for 2004 decreased $12,000, or .2%, from the prior year amount.
The  $1,296,000  increase  in net  interest  income for 2004  resulted  from the
effects of larger  average  amounts of  interest  earning  assets.  Lower  rates
associated with interest bearing liabilities substantially offset the effects of
higher volumes of those funding sources.

         The  average  rate  earned  on  interest  earning  assets  for 2004 was
unchanged  from its 2003  level of 4.92%.  The  average  rate paid for  interest
bearing  liabilities  during 2004 was 2.15%,  a decrease of 19 basis points from
the 2003 level.  The interest rate spread for 2004  increased 19 basis points to
2.77%. Net yield on earning assets increased 19 basis points, also, to 3.13% for
2004.

         Average  interest  earning  assets  during 2004 were  $283,616,000,  an
increase of $26,332,000 or 10.2% over 2003.  Average  investment  securities for
2004 totaled  $106,049,000,  an increase of  $30,283,000  or 40.0% over the 2003
average  amount.   Average  loans  for  the  2004  twelve-month  period  totaled
$152,546,000,  an increase of $10,224,000 or 7.2% over 2003.  Average loans were
53.8%  and  55.3%  of  average  interest  earning  assets  for  2004  and  2003,
respectively.  Average federal funds sold for 2004 were $24,126,000,  a decrease
of $14,339,000 or 37.3% from 2003.  Average interest bearing  liabilities during
2004 totaled $236,392,000,  representing an increase of $18,458,000 or 8.5% over
the amount for 2003.  Average time  deposits of $100,000  and over  decreased to
$60,301,000  for  2004  from  $63,106,000  in the  prior  year,  a  decrease  of
$2,805,000  or 4.4%.  Average  time  deposits  less than  $100,000  increased to
$103,923,000  for 2004 from  $93,588,000  in 2003,  representing  an increase of
$10,335,000 or 11.0%.  Average interest bearing transaction and savings accounts
increased to $66,759,000  for 2004, an increase of $5,519,000 or 9.0% from 2003.
Average  short and  long-term  borrowings  increased  to  $5,409,000  due to the
banking  subsidiary's  borrowing  $10,000,000 from the Federal Home Loan Bank of
Atlanta  late in the second  quarter of 2004.  Approximately  $8,500,000  of the
amount  originally  borrowed carried fixed rates ranging from 2.44% to 4.40% and
maturity dates ranging from 2005 to 2014.

         During 2004, the Federal  Reserve Bank's Open Market  Committee began a
series of measured interest rate increases affecting primarily the federal funds
rate and loans made by Federal Reserve Banks to their member banks. As a result,

                                       6
<PAGE>

interest rates on a broad array of generally short-term  financial  instruments,
including the prime rate, a key  determinant of rates charged to the Bank's most
credit-worthy  customers and a factor considered in all loan-pricing  decisions,
also rose.  Longer term rates,  however,  remained  mostly  stable  during 2004.
Market rates of interest were relatively  stable in 2003.  During the year ended
December 31, 2003, the Open Market  Committee  lowered key target interest rates
on one  occasion,  resulting  in a reduction  of 25 basis points in those target
rates. Consequently, the prime rate was similarly reduced.

         As  of  December  31,  2004  and   December  31,  2003,   approximately
$48,000,000 and $48,000,000,  respectively, or 30.4% and 32.5%, 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 during
2004 was 6.73%, compared with 6.98% for 2003.

         The Company successfully attracted deposit accounts of all types during
2004, resulting in a year-over-year increase in total deposits of $11,597,000 or
4.5%.  Growth was well distributed among the various deposit  categories.  Rates
associated with interest bearing deposits  decreased in 2004 compared with 2003:
the  average  rate  paid for such  liabilities  was 2.12% for 2004 and 2.34% for
2003.

         Because  growth  in  loan  demand  continued  to be  below  the  levels
experienced  prior to 2003,  the Company  invested the funds it acquired  during
2004 primarily in the lower-yielding investment securities category. Loan demand
in the Company's  market areas was adversely  affected in 2003 by the bankruptcy
of  a  relatively   unregulated   mortgage  banking  operation's  local  funding
subsidiary  which resulted in the recognition of  approximately  $200,000,000 of
losses by local investors.  Although the longer-term effect of the bankruptcy on
the local economy is uncertain,  loan demand in 2004 was somewhat better than in
2003.

         The table, "Average Balances,  Yields and Rates",  provides an analysis
of the average amounts of the Company's assets and liabilities and the effective
yields  and rates on the  categories  of  average  interest  earning  assets and
interest  bearing  liabilities  for the years ended December 31, 2005,  2004 and
2003.



                                       7
<PAGE>

                       Average Balances, Yields and Rates

<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                                            ------------------------
                                                         2005                         2004                           2003
                                                         ----                         ----                           ----
                                              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 ..  $     168  $     5   2.98%   $     29  $     1   3.45%     $     25   $     -     0.00%
Taxable securities ........................    106,149    3,564   3.36%    103,973    3,285   3.16%       75,069     2,270     3.02%
Tax-exempt securities (2) .................      4,407      150   3.40%      2,076       73   3.52%          697        26     3.73%
Federal funds sold ........................     21,884      668   3.05%     24,126      295   1.22%       38,465       403     1.05%
Federal Home Loan Bank stock ..............        999       38   3.80%        866       29   3.35%          706        27     3.82%
Loans (2) (3) (4) .........................    164,243   11,498   7.00%    152,546   10,265   6.73%      142,322     9,938     6.98%
                                             ---------  -------           --------  -------             --------   -------
        Total interest earning assets .....    297,850   15,923   5.35%    283,616   13,948   4.92%      257,284    12,664     4.92%
Cash and due from banks ...................      4,845                       4,786                         4,194
Allowance for loan losses .................     (2,304)                     (2,268)                       (2,188)
Unrealized securities gains (losses) ......     (1,601)                       (684)                          265
Premises and equipment ....................      5,240                       4,365                         4,352
Other assets ..............................      3,346                       3,943                         3,752
                                             ---------                    --------                      --------
        Total assets ......................  $ 307,376                    $293,758                      $267,659
                                             =========                    ========                      ========

Liabilities and shareholders' equity
Interest bearing deposits
     Interest bearing transaction accounts   $  36,111  $   383   1.06%   $ 35,707  $   244   0.68%     $ 32,985   $   251     0.76%
     Savings ..............................     28,586      381   1.33%     31,052      154   0.50%       28,255       161     0.57%
     Time deposits $100M and over .........     64,821    2,118   3.27%     60,301    1,481   2.46%       63,106     1,609     2.55%
     Other time deposits ..................    105,798    3,438   3.25%    103,923    3,012   2.90%       93,588     3,068     3.28%
                                             ---------  -------           --------  -------             --------   -------
        Total interest bearing
          deposits ........................    235,316    6,320   2.69%    230,983    4,891   2.12%      217,934     5,089     2.34%
Short-term borrowings .....................        736       18   2.45%      1,352       27   2.00%            -         -     0.00%
Long-term debt ............................      7,456      283   3.80%      4,057      159   3.92%            -         -     0.00%
                                             ---------  -------           --------  -------             --------   -------
        Total interest bearing liabilities     243,508    6,621   2.72%    236,392    5,077   2.15%      217,934     5,089     2.34%
Noninterest bearing demand deposits .......     34,675                      31,435                        26,778
Other liabilities .........................      1,873                       1,735                         1,529
Shareholders' equity ......................     27,320                      24,196                        21,418
                                             ---------                    --------                      --------
        Total liabilities and
         shareholders' equity .............  $ 307,376                    $293,758                      $267,659
                                             =========                    ========                      ========
Interest rate spread (5) ..................                       2.63%                       2.77%                            2.58%
Net interest income and net yield
     on earning assets (6) ................             $ 9,302   3.12%             $ 8,871   3.13%                $ 7,575     2.94%
Interest free funds supporting
      earning assets (7) ..................  $  54,342                    $ 47,224                      $ 39,350
</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.


                                       8
<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,  and the rates earned and paid on such assets
and liabilities.


     Volume and Rate Variance Analysis

<TABLE>
<CAPTION>
                                                                2005 Compared with 2004                2004 Compared with 2003
                                                                -----------------------                -----------------------
                                                            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 .............     $     4      $     -      $     4      $     -      $     1      $     1
Taxable securities ...................................          70          209          279          909          106        1,015
Tax-exempt securities ................................          79           (2)          77           48           (1)          47
Federal funds sold ...................................         (30)         403          373         (168)          60         (108)
Federal Home Loan Bank stock .........................           4            5            9            5           (3)           2
Loans ................................................         808          425        1,233          697         (370)         327
                                                           -------      -------      -------      -------      -------      -------
             Total interest income ...................         935        1,040        1,975        1,491         (207)       1,284
                                                           -------      -------      -------      -------      -------      -------
Interest bearing deposits
     Interest bearing transaction accounts ...........           3          136          139           20          (27)          (7)
     Savings .........................................         (13)         240          227           15          (22)          (7)
     Time deposits $100M and over ....................         118          519          637          (70)         (58)        (128)
     Other time deposits .............................          55          371          426          320         (376)         (56)
Short-term borrowings ................................         (16)           7           (9)          27            -           27
Long-term debt .......................................         130           (6)         124          159            -          159
                                                           -------      -------      -------      -------      -------      -------
             Total interest expense ..................         277        1,267        1,544          471         (483)         (12)
                                                           -------      -------      -------      -------      -------      -------
             Net interest income .....................     $   658      $  (227)     $   431      $ 1,020      $   276      $ 1,296
                                                           =======      =======      =======      =======      =======      =======
</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  expects that  interest  rates will move slightly
higher during the first half of 2006 and remain  relatively  stable,  or decline
slightly,  during  the  remainder  of the  year.  Management  has not  presently
identified  any factors that it believes  might cause interest rates to increase
or  decrease  rapidly in a short  period of time.  However,  changes in interest
rates  that  can  significantly   affect  the  Company,   either  positively  or
negatively,  are  possible.  In the  absence  of  significant  changes in market
interest rate levels, any significant changes in net interest income during 2006
are expected to result primarily from changes in the volumes of interest earning
assets and liabilities.


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 $250,000, $380,000 and $522,000 for the years ended December 31, 2005, 2004
and 2003,  respectively.  The decreased provisions in 2005 and 2004 were largely
the result of low amounts of net loan  charge-offs,  slower rates of loan growth
during 2005 and 2004,  and a lower amount of  nonaccrual  and past due loans for
2005.  The  allowance for loan losses as a percentage of total loans at year-end
was 1.34% for 2005  compared with 1.42% as of the end of 2004.  Net  charge-offs
for 2005 were  $224,000,  a  decrease  of  $113,000  from the 2004  amount.  Net
charge-offs  for 2004 were $337,000,  an increase of $62,000 over the amount for
2003.  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.


                                       9
<PAGE>


Other Income

         Noninterest  income for 2005  increased  by $85,000 over the amount for
2004,  primarily due to increased service charges on deposit accounts and higher
amounts  of other  income.  There were no  realized  gains or losses on sales of
investment  securities in 2005.  Mortgage  brokerage income for 2005 was $39,000
less than for 2004 because the  Company's  volume of  residential  mortgage loan
originations was lower than in prior years. As was the case in 2004,  management
believes   that   refinancing   activity   related   solely  to  interest   rate
considerations   was  virtually  ended  by  early  2005.   Also,  the  Company's
residential mortgage lender left the Company during the last quarter of 2005 and
has not yet been replaced on a full-time basis.

         Noninterest  income for 2004  increased  by $21,000 over the amount for
2003,  primarily due to increased service charges on deposit accounts and higher
amounts of other income.  In 2004, net losses on sales of investment  securities
were $10,000  compared  with net gains  totaling  $80,000 on such sales in 2003.
Income from mortgage  brokerage  activities  for 2004 decreased to $149,000 from
$202,000 in 2003.  Because  interest rates for  residential  mortgage loans have
been at  historically  low levels for the past few years,  refinancing  of those
loans had largely occurred in prior years.


Other Expenses

2005 Compared with 2004

         Noninterest  expense for 2005 increased by $269,000,  or 5.2%, over the
amount for 2004. Salaries and employee benefits increased by $123,000,  or 4.4%,
over the amount for 2004 primarily due to normal periodic  salary  increases and
increases in expenses for employee insurance benefits.

         As of December  31,  2005,  the Company  has two  stock-based  employee
compensation  plans.  The Company accounts 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.  No
stock-based  employee  compensation  cost is  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  Company  has
adopted the  disclosure  provisions  of  Financial  Accounting  Standards  Board
("FASB")  Statement  No. 123,  "Accounting  for  Stock-Based  Compensation,"  as
amended.  Refer  to  "Stock-Based  Compensation"  in Note A to the  consolidated
financial  statements  included in this report for the pro-forma  effects on net
income and net  income  per share if the  Company  had  applied  such fair value
method recognition.

         The Company  adopted  the  provisions  of FASB  Statement  No.  123(R),
"Share-Based  Payment,"  on  January  1,  2006.  Under  the  provisions  of that
Statement,  the Company is required to measure and record  compensation  expense
for future  share-based  payments to  employees  based on the fair values of the
awards on the date  granted.  The Company has elected to recognize  compensation
expense for share-based  payments with graded vesting on a  straight-line  basis
over the vesting period. In addition, under the transition method elected by the
Company,  compensation  expense must be recognized  for the unvested  portion of
such  awards  made prior to the  adoption  of the  Statement.  Accordingly,  the
Company will recognize  compensation  expense for previously issued but unvested
share-based payments of $121,000 in 2006.

         Net occupancy and furniture and equipment expenses increased in 2005 by
$38,000,  primarily due to higher real estate taxes,  increased depreciation and
maintenance expenses associated with the Company's data processing operations.

         Other expenses for 2005 increased by $109,000, or 6.1%, over the amount
for 2004 as a result of higher  expenses  associated  with software used for the
Company's  data  processing  operations,  expenses  for  professional  services,
advertising,  services obtained from correspondent bank and fidelity  insurance.
Additionally,  during 2005 the Bank  experienced  losses of $166,000  related to
fraudulent check activity,  representing an increase of $153,000 over the amount
of such losses in 2004.  Reductions in expenses for 2005 were noted for expenses
related to foreclosed  assets,  primarily due to lower losses on sales and fewer
valuation  losses  recognized  on  properties  held,  a reduction  in the FDIC's
deposit  insurance  assessment,  and lower expense for stationery,  printing and
postage.

         Noninterest  expenses  are expected to continue to increase in 2006 due
to the expected  completion  of the  Company's  new  corporate  office  building
located  in Seneca,  SC in the  second  quarter  of 2006,  the  commencement  of
operation of a new branch  office at that  location,  and  continued  technology
investment  needed to ensure the  Company's  competitive  posture.  Increases in
noninterest  expenses are closely monitored and cost control will continue to be
emphasized  by  management  where  possible  in order to  achieve  profitability
objectives and attain the goal of growth in the Company's market share in Oconee
and Anderson counties.


                                       10
<PAGE>

2004 Compared with 2003

         Noninterest expenses for 2004 increased by $737,000, or 16.7%, over the
amount for 2003.  Salaries and employee benefits increased  $360,000,  or 14.9%,
over the amount for 2003.  This increase was comprised of an increase of $80,000
in  employee  bonuses,  the  effects of normal  salary  increases  granted  from
time-to-time,  higher  staffing  levels needed to manage the Company's  expanded
office network,  higher  participation levels in the Company's 401(k) plan and a
$20,000 increase in expenses for employee insurance benefits.

         Furniture and equipment  expense for 2004 was $32,000 more than in 2003
due to higher depreciation expense  attributable  primarily to imaging equipment
originally acquired during 2003.

         Other  expense for 2004  increased  $335,000,  or 22.9%,  over the 2003
amount. Professional services expenses increased by $18,000, property, fidelity,
liability  and federal  deposit  insurance  expenses  increased by $26,000,  and
expenses  related to holding and  disposing of  foreclosed  assets  increased by
$159,000, including realized losses of $35,000 and writedowns of such properties
totaling $125,000.  Expenses for the Company's  accounting software increased by
$70,000 in 2004.  Accounting software expense is determined in large part by the
number  of  customer  accounts  maintained  by the  Company.  As  the  Company's
geographic footprint expands and its marketing efforts are successful,  software
upgrades and expense increases become necessary.


Income Taxes

         For 2005,  federal and state income tax expenses  increased by $84,000,
or 4.3%,  to  $2,041,000.  For 2004,  federal  and  state  income  tax  expenses
increased by $290,000 to $1,957,000. The increases in income tax expense are due
to increased  amounts of earnings.  The  effective  income tax rates (income tax
expense  divided by income before  income taxes) were 35.4% for 2005,  36.3% for
2004 and 35.7% for 2003. The Company's income from nontaxable  sources,  such as
nontaxable  investment  securities  or  loans  to  local  governments,  is not a
significant factor in the determination of its effective tax rate.


Securities

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


<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                                   ------------
                                                                                2005                   2004                   2003
                                                                                ----                   ----                   ----
                                                                                               (Dollars in thousands)
        Available-for-sale
<S>                                                                           <C>                    <C>                    <C>
        U. S. Government agencies .....................................       $ 58,004               $ 46,768               $ 53,171
        State, county and municipal ...................................          9,960                  2,101                  2,021
        Mortgage-backed securities ....................................         34,106                 43,214                 30,831
                                                                              --------               --------               --------
                 Total available-for-sale .............................        102,070                 92,083                 86,023
                                                                              --------               --------               --------
        Held-to-maturity
        Mortgage-backed securities ....................................          7,751                  9,369                      -
                                                                              --------               --------               --------
                 Total securities .....................................       $109,821               $101,452               $ 86,023
                                                                              ========               ========               ========
</TABLE>



                                       11
<PAGE>

         The following table presents  maturities and weighted average yields of
securities  at  December  31,  2005.  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, 2005
                                                                              -----------------
                                                                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>
U. S. Government agencies ...........   $ 15,290    2.42%  $ 40,714    3.73%  $  2,000    3.43%  $      -    0.00%  $ 58,004   3.37%
State, county and municipal .........          -    0.00%       307    2.79%     1,712    3.25%     7,941    4.01%     9,960   3.84%
Mortgage-backed securities (1) ......         33    3.75%    12,740    3.58%     9,763    3.77%    19,321    4.15%    41,857   3.89%
                                        --------           --------           --------           --------           --------
              Total .................   $ 15,323    2.42%  $ 53,761    3.69%  $ 13,475    3.65%  $ 27,262    4.11%  $109,821   3.61%
                                        ========           ========           ========           ========           ========
</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.

         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 2005, the Company realized no gains or losses on sales
of  investment  securities.  During  2004,  the Company  realized  net losses of
$10,000 on the sale of securities  available-for-sale.  During 2003, the Company
sold several  available-for-sale  securities  resulting in net realized gains of
$80,000. No transfers of  available-for-sale  or held-to-maturity  securities to
other categories were made in any of the years 2003 through 2005.

         The  investment  portfolio  grew by  $8,369,000  in 2005  over the 2004
year-end  amount.  This  growth was funded by  decreasing  the amount of federal
funds sold and by deposit  growth.  Significant  growth was noted in  securities
issued by U.S. government agencies and state, county and municipal  governments.
Throughout the interest rate cycle, the advantages of holding different types of
securities changes.  Consequently,  the composition of the investment  portfolio
may change as management  continually  seeks to maximize the yield realized from
the portfolio within the confines of other risk mitigation policies.

         For  example,  during a period of  rapidly  declining  interest  rates,
callable U.S.  government agency securities may not be as advantageous to own as
mortgage-backed  securities  due to an  increased  probability  that the  agency
securities might be called. In these circumstances,  mortgage-backed  securities
might be more favored,  even though  unusually high levels of prepayments  might
occur.  The  prepayment of the  underlying  mortgage  loans would not ordinarily
result in the complete repayment of the mortgage-backed security in a very short
time frame. Conversely, during periods of increasing  short-to-intermediate term
interest rates, holding callable securities issued by short-to-intermediate-term
U.S. government agencies may be more desirable.  In some circumstances,  because
changes in interest rates are usually not uniform across all future  maturities,
the  probability  that  the  U.S.  agency  security  might  be  called  could be
negligible  while the level of prepayments of  mortgage-backed  securities might
continue at a rapid  pace.  Depending  on the  Company's  anticipated  needs for
liquidity, income, or other considerations, it may favor one type of security or
the other.

         During  2005,  the  Company  reduced its  holdings  of  mortgage-backed
securities  by  approximately  $10,726,000.  Generally,  the Company  invests in
pass-through  mortgage backed  securities  issued by U. S. Government  agencies.
Those  pass-through  securities  supply the Company  with a source of  liquidity
since payments made on the mortgage  loans  underlying the securities are passed
through to the Company  monthly.  Rapid repayment of such  securities  continued
throughout  2005 in response to the continued low interest  rates  available for
financing  residential  mortgage  loans.  The  Company  acquired   approximately
$3,778,000 of  mortgage-backed  securities,  and  repayments of such  securities
totaled approximately $14,504,000 during 2005.

         By reducing its holdings of  mortgage-backed  securities and increasing
other types of securities held, management believes that it has reduced, at this
point in the interest rate cycle,  much of the  uncertainty  associated with the
cash flows expected from its securities  portfolio.  Contractual cash flows from
mortgage-backed  securities  consist of the  aggregated  principal  and interest

                                       12
<PAGE>

payments of the  underlying  mortgage loans that were pooled during the creation
of the  specific  security.  However,  actual  cash  flows  derived  from  those
securities have generally  exceeded the amounts  required  contractually  due to
refinancing  and  other  activity  conducted  by  homeowners.  As a  result,  as
prepayments have been received,  the Company has expended considerable effort to
maintain the  investment  portfolio at the levels needed to satisfy its pledging
requirements  for  governmental   deposits  and  to  meet  its  earnings  goals.
Conversely, cash flows from securities issued by governmental entities currently
are more  predictable  because they are  generally  made up of only  semi-annual
interest  payments and the inflow at maturity of the face value of the security.
While many such securities  contain provisions for early redemption at a certain
date (or  sometimes  at any  interest  payment  date),  the  issuer's  potential
exercise of those provisions  normally occurs only if interest rates at the time
the  call  can  be  exercised  are  substantially   lower  than  the  security's
contractual  interest  rate,  and the  issuers'  intent  to  exercise  the  call
provision  is  announced   prior  to  the  effective  date  of  the  redemption.
Consequently,  the Company is afforded the  opportunity to reinvest the proceeds
of the security, if desired or needed, in a more orderly fashion. Because of the
increases  in  interest  rates  which  began in June  2004,  securities  issuers
exercised call  provisions  during the latter part of 2004 and  throughout  2005
less  frequently  than in prior  years.  During  2005,  only  $5,000,000  of the
Company's  securities were called,  whereas in 2004 more than $36,000,000 of the
Company's  investment  securities were called.  In 2003, such early  redemptions
totaled $54,300,000.

         The overall yield on investment securities held as of December 31, 2005
was 3.61%,  compared with a yield of 3.33% on securities held as of December 31,
2004. As of December 31, 2005,  securities  with a carrying value of $68,820,000
were  pledged to secure  public  deposits.  Short-term  market rates of interest
increased  during  2005 and 2004  while  longer-term  interest  rates  decreased
slightly. Interest rates decreased slightly during 2003 from the levels existing
at the end of 2002.  These  external  factors  contribute  significantly  to the
Company's  pricing  structure for its loan and deposit  products and, to a large
extent, determine the rates available on investment securities.

         The  investment  portfolio  grew by  $15,429,000  in 2004 over the 2003
year-end  amount.  Late in the second  quarter  of 2004,  the  Company  borrowed
approximately  $10,000,000  from the  Federal  Home  Loan  Bank of  Atlanta  and
invested   the   proceeds   in   mortgage-backed    securities   classified   as
held-to-maturity which had maturities at purchase ranging from fifteen to twenty
years.  Available-for-sale  securities  grew by $6,060,000 over the 2003 amount,
due  primarily  to slower  growth in loan demand in the  Company's  market area.
Also, the Company has a significant  amount of local  governmental  deposits for
which it is required by law to pledge securities as collateral.  The Company had
pledged  securities  with a  carrying  value of  $47,286,000  to  secure  public
deposits as of December 31, 2004.

         During 2004, the Company purchased longer-term securities and decreased
significantly  the  proportion  of its  securities  investments  in direct  debt
issuances of U. S. Government  agencies by increasing the proportion invested in
mortgage-backed  securities.  These  actions  were taken  because high levels of
reinvestment risk associated with early  redemptions of longer-term  callable U.
S.  Government   agencies   securities,   especially  during  2003,  made  those
investments  less  desirable.  Pass-through  mortgage-backed  issues became more
desirable in management's  opinion  because,  even in the case of extremely high
prepayment  experience,  only rarely  would the entire  issue be paid off at one
time as was then  common-place  with callable agency  securities.  Consequently,
management  believed in 2004 that the monthly  cash flows from the  pass-through
mortgage-backed  issues were generally more stable and predictable than those of
callable U.S. agency  securities,  would change  gradually over time and at that
time  were  better  aligned  with all  purposes  for  which  the  Company  holds
investment securities.

         By  purchasing  longer-term  mortgage-backed   securities,   management
potentially  accepted a higher  level of interest  rate risk than the level that
would result from investing solely in shorter-term  higher-quality  instruments.
However,  management  believed that this risk was mitigated somewhat by expected
prepayments  of  the  mortgage-backed  securities  and  the  presence  of U.  S.
Government agencies' guarantees. Such prepayments in recent years were driven to
unusually high levels by increased home mortgage  refinancing activity resulting
from historically low residential  mortgage interest rates. While it was thought
that the pace of  prepayments  likely would slow from that seen in recent years,
management  believed that the longer-term  historical  record indicated that the
average life of mortgage  loans,  and therefore  the expected  average life of a
typical mortgage-backed security, was significantly shorter than its contractual
terms due to factors other than interest rates.

         All  mortgage-backed  securities  held by the  Company in 2004 and 2005
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.

                                       13
<PAGE>

         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,
                                                                                            ------------
                                                                   2005           2004          2003           2002            2001
                                                                   ----           ----          ----           ----            ----
                                                                                      (Dollars in thousands)
Commercial, financial and industrial
<S>                                                             <C>            <C>            <C>            <C>            <C>
       Commercial and industrial ........................       $ 20,873       $ 21,907       $ 20,592       $ 19,124       $ 21,006
       Purchasing or carrying securities ................          2,136          2,372          2,323          2,547          2,578
Real estate - construction ..............................            674            338            436            822            346
Real estate - mortgage
       1-4 family residential ...........................         72,774         65,360         58,762         54,471         45,329
       Multifamily (5 or more) residential ..............          1,229          1,036          2,095          2,311          1,862
       Nonfarm, nonresidential ..........................         46,544         43,589         40,834         36,122         27,047
Consumer installment
       Credit card and checking credit ..................          1,148          1,036            998          1,033          1,030
       Other ............................................         23,940         22,137         21,610         20,929         20,546
                                                                --------       --------       --------       --------       --------
                       Total loans ......................       $169,318       $157,775       $147,650       $137,359       $119,744
                                                                ========       ========       ========       ========       ========
</TABLE>


                      Percentage Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                               ------------
                                                                      2005          2004          2003          2002           2001
                                                                      ----          ----          ----          ----           ----
Commercial, financial and industrial
<S>                                                                   <C>           <C>           <C>           <C>           <C>
       Commercial and industrial .............................        12.3%         13.9%         13.9%         13.9%         17.5%
       Purchasing or carrying securities .....................         1.3%          1.5%          1.6%          1.9%          2.1%
Real estate - construction ...................................         0.4%          0.2%          0.3%          0.6%          0.3%
Real estate - mortgage
       1-4 family residential ................................        43.0%         41.4%         39.8%         39.7%         37.9%
       Multifamily (5 or more) residential ...................         0.7%          0.7%          1.4%          1.7%          1.5%
       Nonfarm, nonresidential ...............................        27.5%         27.6%         27.7%         26.3%         22.6%
Consumer installment
       Credit card and checking credit .......................         0.7%          0.7%          0.7%          0.7%          0.9%
       Other .................................................        14.1%         14.0%         14.6%         15.2%         17.2%
                                                                     -----         -----         -----         -----         -----
                       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.
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 $11,543,000 or 7.3% in 2005, compared with $10,125,000
or 6.9% in 2004.  The ratio of total loans to total  deposits at the end of 2005
was 60.5%, compared with 58.8% at the end of 2004. 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, 2005.

         Commercial  and  industrial  loans  primarily  represent  loans made 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 2005,  total  commercial,  financial and  industrial  loans  decreased by
$1,270,000 or 5.2%.  compared  with an increase of  $1,364,000  or 6.0%,  during
2004. Loans mainly for business and investment purposes that are secured by real


                                       14
<PAGE>

estate (nonfarm,  nonresidential) increased by $2,955,000 or 6.8%, compared with
an  increase  of  $2,755,000  or  6.7%  in  2004.  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 71% and
70% of the Company's loan  portfolio at the end of 2005 and 2004,  respectively.
Real  estate  mortgage  loans of all types grew  $10,562,000  during 2005 and by
$8,294,000  during 2004.  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
debt-to-worth 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.


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,  2005,  as well as the type of
interest requirement on such loans.

<TABLE>
<CAPTION>
                                                                                              December 31, 2005
                                                                                              -----------------
                                                                             One Year        One to       Five Years
                                                                             or Less       Five Years      or More           Total
                                                                             -------       ----------      -------           -----
                                                                                            (Dollars in thousands)
<S>                                                                         <C>             <C>             <C>             <C>
Commercial, financial and industrial ...............................        $ 11,031        $ 11,858        $    120        $ 23,009
Real estate - construction .........................................             139             489              46             674
Real estate - mortgage .............................................          21,866          62,681          36,000         120,547
Consumer installment ...............................................           5,341          17,312           2,435          25,088
                                                                            --------        --------        --------        --------
                    Total loans ....................................        $ 38,377        $ 92,340        $ 38,601        $169,318
                                                                            ========        ========        ========        ========


Predetermined rate, maturity greater than one year .................                        $ 87,449        $ 13,602        $101,051
                                                                                            ========        ========        ========

Variable rate or maturity within one year ..........................        $ 38,377        $  4,891        $ 24,999        $ 68,267
                                                                            ========        ========        ========        ========
</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:


                                       15
<PAGE>


      Nonaccrual and Past Due Loans

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                  2005           2004           2003           2002           2001
                                                                  ----           ----           ----           ----           ----
                                                                                         (Dollars in thousands)

<S>                                                              <C>            <C>            <C>            <C>            <C>
Nonaccrual loans ........................................        $  900         $1,465         $  997         $  866         $  609
Accruing loans 90 days or more past due .................             5              9              -              -              1
                                                                 ------         ------         ------         ------         ------
               Total ....................................        $  905         $1,474         $  997         $  866         $  610
                                                                 ======         ======         ======         ======         ======

Percent of total loans ..................................           0.5%           0.9%           0.7%           0.6%           0.5%
</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, was immaterial to the consolidated financial statements for 2005,
2004 and 2003.

         As of December 31, 2005, 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
the current  loan  repayment  terms.  The total amount of loans  outstanding  at
December 31, 2005  determined by  management  to be potential  problem loans was
$2,148,000, an increase of $745,000 over the amount of such loans as of December
31,  2004.  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, 2005
                                                            -----------------
                                                         Amount              %
                                                         ------              -
                                                         (Dollars in thousands)

     Real estate mortgage .......................       $1,798             83.7%
     Vehicles ...................................           96              4.5%
     Mobile homes ...............................           26              1.2%
     Other ......................................          142              6.6%
     Unsecured ..................................           86              4.0%
                                                        ------            -----
                   Total ........................       $2,148            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


                                       16
<PAGE>

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.


                  Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                         ------------------------
                                                                         2005         2004         2003         2002          2001
                                                                         ----         ----         ----         ----          ----
                                                                                          (Dollars in thousands)

<S>                                                                    <C>          <C>          <C>          <C>          <C>
Total loans outstanding at end of period ..........................    $169,318     $157,775     $147,650     $137,359     $119,744
Average amount of loans outstanding ...............................     164,243      152,546      142,322      130,104      106,480

Balance of allowance for loan losses - beginning ..................    $  2,240     $  2,197     $  1,950     $  1,200     $  1,000
                                                                       --------     --------     --------     --------     --------
Loans charged off
     Commercial and industrial ....................................           -           31          305          193          249
     Real estate - mortgage .......................................          61          104            -          131            -
     Consumer installment .........................................         242          226            -          223          126
                                                                       --------     --------     --------     --------     --------
           Total charge-offs ......................................         303          361          305          547          375
                                                                       --------     --------     --------     --------     --------
Recoveries of loans previously charged off
     Commercial and industrial ....................................           -            6           30            1            -
     Real estate - mortgage .......................................          10            -            -            -            -
     Consumer installment .........................................          69           18            -            5            8
                                                                       --------     --------     --------     --------     --------
           Total recoveries .......................................          79           24           30            6            8
                                                                       --------     --------     --------     --------     --------
Net charge-offs ...................................................         224          337          275          541          367
                                                                       --------     --------     --------     --------     --------
Additions to allowance charged to expense .........................         250          380          522        1,291          567
                                                                       --------     --------     --------     --------     --------
Balance of allowance for loan losses - ending .....................    $  2,266     $  2,240     $  2,197     $  1,950     $  1,200
                                                                       ========     ========     ========     ========     ========

Ratios
     Net charge-offs to average loans .............................        0.14%        0.22%        0.19%        0.42%        0.34%
     Net charge-offs to loans at end of period ....................        0.13%        0.21%        0.19%        0.39%        0.31%
     Allowance for loan losses to average loans ...................        1.38%        1.47%        1.54%        1.50%        1.13%
     Allowance for loan losses to loans at end of period ..........        1.34%        1.42%        1.49%        1.42%        1.00%
     Net charge-offs to allowance for loan losses .................        9.89%       15.04%       12.52%       27.74%       30.58%
     Net charge-offs to provision for loan losses .................       89.60%       88.68%       52.68%       41.91%       64.73%
</TABLE>

Deposits

         The average amounts and percentage  composition of deposits held by the
Company for the years ended  December 31, 2005,  2004 and 2003,  are  summarized
below:

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                               ------------------------
                                                                 2005                     2004                      2003
                                                                 ----                     ----                      ----
                                                        Amount          %         Amount           %         Amount           %
                                                        ------         ----       ------         -----       ------        -----
                                                                                (Dollars in thousands)
<S>                                                    <C>            <C>        <C>            <C>        <C>            <C>
Noninterest bearing demand .....................       $ 34,675        12.8%     $ 31,435        12.0%     $ 26,778        10.9%
Interest bearing transaction accounts ..........         36,111        13.4%       35,707        13.6%       32,985        13.6%
Savings ........................................         28,586        10.6%       31,052        11.8%       28,255        11.5%
Time deposits $100M and over ...................         64,821        24.0%       60,301        23.0%       63,106        25.8%
Other time deposits ............................        105,798        39.2%      103,923        39.6%       93,588        38.2%
                                                       --------       -----      --------       -----      --------       -----
               Total deposits ..................       $269,991       100.0%     $262,418       100.0%     $244,712       100.0%
                                                       ========       =====      ========       =====      ========       =====
</TABLE>


                                       17
<PAGE>

         As of December 31, 2005,  there were  $69,343,000  in time  deposits of
$100,000  or  more.  Approximately   $22,424,000  mature  within  three  months,
$9,616,000  mature over three  through six months,  $12,157,000  mature over six
through twelve months and $25,146,000 mature after one year. This level of large
time  deposits,  as well as the growth in other  deposits,  can be 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,
2005, approximately $16,980,000 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,
                                               ------------------------
                                           2005           2004         2003
                                           ----           ----         ----

           Return on assets .........     1.21%          1.17%         1.12%
           Return on equity .........    13.65%         14.20%        14.03%
           Dividend payout ratio ....     0.00%          0.00%         0.00%
           Equity to assets ratio ...     8.89%          8.24%         8.00%

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  66.7% of average
total assets during 2005  compared  with 68.8% during 2004.  Deposits of several
local  governmental  entities  comprised  approximately  13%  and  15% of  total
deposits at the end of 2005 and 2004,  respectively.  Because of the potentially
volatile  nature  of  this  funding  source,  management  maintains  the  Bank's
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, 2005,  the banking  subsidiary is eligible to borrow up
to an additional  $28,845,000  from the FHLB.  Such  borrowings are secured by a
lien  on its  investment  in  FHLB  stock  and  all  qualifying  first  mortgage
residential  loans held.  Assets  actually or  potentially  subject to this lien
totaled  approximately  $60,459,000  as of December 31, 2005.  In addition,  the
banking  subsidiary has available unused  short-term lines of credit to purchase
up to $8,900,000 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  mortgage-backed  securities  paydowns 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  ($3,751,000 at December 31, 2005) 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 2005, 2004 and 2003, 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.



                                       18
<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 $2,918,000 and $3,399,000 during 2005
and 2004,  respectively.  During 2005, net income increased shareholders' equity
by $3,730,000 and the exercise of employee stock options provided an increase of
$92,000.  Other  comprehensive  income or loss, which consisted primarily of the
change in unrealized holding gains and losses on available-for-sale  securities,
net of  deferred  tax  effects,  decreased  shareholders'  equity  by  $898,000.
Approximately  $6,000 was paid in lieu of the issuance of  fractional  shares in
conjunction with the 5% stock dividend declared in 2005. During 2004, net income
increased  shareholders' equity by $3,437,000 and the exercise of employee stock
options provided an increase of $269,000.  Other  comprehensive  income or loss,
which consisted primarily of the change in unrealized holding gains or losses on
available-for-sale   securities,   net  of  deferred  tax   effects,   decreased
shareholders' equity by $300,000.  In lieu of fractional shares, $7,000 was paid
with respect to the 10% stock dividend declared in 2004.

         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, 2005 and 2004,  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.


                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Minimum for          Minimum to be
                                                                                Actual         Capital Adequacy     Well Capitalized
                                                                                ------         ----------------     ----------------
                                                                         Amount       Ratio    Amount      Ratio   Amount      Ratio
                                                                         ------       -----    ------      -----   ------      -----
<S>                                                                     <C>           <C>     <C>           <C>
December 31, 2005                                                                           (Dollars in thousands)
     The Company
         Total Capital to risk weighted assets ....................     $32,518       16.7%   $15,563       8.0%        NA       NA
         Tier 1 Capital to risk weighted assets ...................     $30,252       15.6%   $ 7,781       4.0%        NA       NA
         Tier 1 Capital to average assets (leverage) ..............     $30,252        9.7%   $12,433       4.0%        NA       NA
     Community First Bank
         Total Capital to risk weighted assets ....................     $29,120       16.1%   $15,563       8.0%   $19,453     10.0%
         Tier 1 Capital to risk weighted assets ...................     $31,386       15.0%   $ 7,781       4.0%   $11,672      6.0%
         Tier 1 Capital to average assets (leverage) ..............     $31,386        9.4%   $12,433       4.0%   $15,541      5.0%

December 31, 2004
     The Company
         Total Capital to risk weighted assets ....................     $28,176       13.9%   $16,182       8.0%        NA       NA
         Tier 1 Capital to risk weighted assets ...................     $25,936       12.8%   $ 8,091       4.0%        NA       NA
         Tier 1 Capital to average assets (leverage) ..............     $25,936        8.7%   $11,884       4.0%        NA       NA
     Community First Bank
         Total Capital to risk weighted assets ....................     $27,610       13.7%   $16,182       8.0%   $20,227     10.0%
         Tier 1 Capital to risk weighted assets ...................     $25,370       12.5%   $ 8,092       4.0%   $12,136      6.0%
         Tier 1 Capital to average assets (leverage) ..............     $25,370        8.5%   $11,884       4.0%   $14,855      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:


                                       20
<PAGE>


                                                            December 31,
                                                            ------------
                                                     2005                  2004
                                                     ----                  ----
                                                      (Dollars in thousands)

              Loan commitments ................   $ 23,653              $ 19,771
              Standby letters of credit .......        874                   884

         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.

         In  2005,  the  Company  entered  into a  $1,700,000  contract  for the
construction of a new corporate office building in Seneca, South Carolina. As of
December 31, 2005,  $891,000 had been  expended  under this contract and $59,000
has been paid for other related costs. In addition to the $809,000  remaining on
the building  contract,  management  estimates that  additional  expenditures of
approximately $250,000 will be required to furnish and equip the building.

         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.

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
must be applied in  assessing  the  current  creditworthiness  of the  Company's
borrowers and in estimating  uncertain future events 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.


                                       21
<PAGE>

         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  decreased in 2005 to
$250,000 compared with $380,000 for 2004 and $522,000 in 2003. The allowance for
loan losses at the end of 2005 was  $2,266,000,  an increase of $26,000 over the
$2,240,000  allowance  as of the end of 2004.  As a  percentage  of total  loans
outstanding at year end, the allowance for loan losses was 1.34%,  1.42%, 1.49%,
1.42% and 1.00% for 2005, 2004, 2003, 2002 and 2001, respectively.

         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
substantially  lower than the trailing  four-year  average of that measure.  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  incurring  losses in the event that  foreclosure  and  liquidation  of the
collateral is necessary.

         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.

         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.  The effects of that bankruptcy  continue to
influence the Company's development of an estimate of an adequate amount of loan
loss allowance.

         In 2002,  the provision for loan losses  increased  significantly  over
prior  years  primarily  due to higher  amounts  of  nonaccrual,  past due,  and
potential  problem  loans,  higher amounts of net  charge-offs,  and loan growth
which included growth in a relatively new market area.

         In 2001, the $567,000 provision for loan losses resulted primarily from
loan charge-offs totaling $375,000 and growth in the loan portfolio.

         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 of a mortgage banking  operation's  local funding  subsidiary are now
better understood.  That failure caused losses of approximately  $200,000,000 to
numerous  large  and  small  local  investors.  While  manufacturing  remains  a
significant sector of the local economy, 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 7.3%,  6.9%, and 7.5% in 2005,
2004, and 2003, respectively. Net loan charge-offs decreased to $224,000 in 2005
after  increasing  to $337,000 in 2004 from  $275,000 in 2003.  As of the end of
2005,  impaired loans decreased to $905,000 from $1,474,000 one year earlier,  a

                                       22
<PAGE>

decrease of $569,000,  or 38.6%.  Potential  problem loans were $2,148,000 as of
the end of 2005  compared with  $1,403,000 at the end of 2004 and  $1,053,000 at
the end of 2003.  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 when considering the total credit
exposure 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
$46,309,000  from  $74,238,000 at the end of 2001 to  $120,547,000 by the end of
2005.  Of this  increase,  $27,445,000  consisted of loans secured by 1-4 family
residential real estate mortgages, and $19,497,000 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

Share-Based  Payment  Management  will  adopt  the  provisions  of SFAS No.  123
(revised 2004) ("SFAS No. 123(R)"),  "Share-Based Payment," effective January 1,
2006,  as  required  under  the  provisions  of that  Statement  and  applicable
Securities and Exchange ("SEC")  Commission Rules. That Statement  requires that
stock-based  compensation  awards be measured  and  reported at their grant date
fair value, with their costs recognized generally over the vesting period of the
awards.  The fair value of such stock-based  awards is affected by the Company's
stock price and by  assumptions  regarding  a number of complex  and  subjective
variables  and the  related  tax  impact.  In  addition,  in  March,  2005,  the
Securities and Exchange  Commission issued its Staff Accounting Bulletin No. 107
which  expresses the views of the SEC staff  regarding the  interaction  between
SFAS No 123(R) and certain SEC rules and  regulations as well as the SEC staff's
views  regarding the valuation of share-based  payment  arrangements  for public
companies.  The  provisions  of, and  guidance  provided in, SAB No. 107 will be
incorporated into the Company's implementation of SFAS No. 123(R).

The Company will recognize the  compensation  cost for  stock-based  awards on a
straight-line  basis over the requisite  service period for the entire award and
at  present  intends  to use  the  modified  prospective  transition  method  of
accounting  for  previously  issued  stock  options.   Accordingly,  only  costs
associated  with the unvested  portions of prior awards and awards granted after
December 31, 2005 will affect the  Company's  financial  position and results of
operations.  In 2006 and 2007, we expect to recognize  compensation  expenses of
approximately $121,000 and $152,000, respectively, related to previously-issued,
unvested stock options.

SFAS  123(R)  also  amends  SFAS No. 95 to  require  that  excess  tax  benefits
resulting  from those  transactions  be reported as financing  cash flows rather
than as a reduction of taxes paid.

Management  expects that  adoption of SFAS No.  123(R) will affect the Company's
future net income and net income per share  calculations in much the same manner
as previously reported in the pro forma disclosures as provided in Note A to the
Company's consolidated financial statements contained elsewhere herein.

Other-Than-Temporarily  Impaired  Investments On November 3, 2005, the Financial
Accounting  Standards Board issued FASB Staff Position ("FSP") FAS 115-1 and FAS
124-1 which reverts to  other-than-temporary  impairment  ("OTTI") guidance that
existed prior to the effective date of Emerging Issues Task Force ("EITF") Issue
03-1. However, the new FSP retains the disclosure requirements of 03-1 that have
been in effect since the end of 2003.

FSP FAS 115-1 and 124-1 requires the application of a three-step model to assess
and account for investments  that may be impaired.  If an investment is found to
be impaired (its fair value is less than the recorded  cost),  the extent of the


                                       23
<PAGE>

impairment is assessed using the guidance  contained in Paragraph 16 of SFAS No.
115,  SEC  Staff  Accounting  Bulletin  Topic  5.M,  Paragraph  6 of  Accounting
Principles Board Opinion 18 and EITF Issue 99-20. If the assessment results in a
conclusion that the impairment is other-than-temporary, an impairment loss equal
to the amount  that the  investment's  recorded  cost  exceeds its fair value is
recognized  in earnings and the  investment's  carrying  value is reduced to its
fair value.  That fair value becomes the  investment's  new "cost" basis and any
subsequent recoveries of fair value are not recognized.  After recognition of an
impairment loss, income recognition is based on the investment's  estimated cash
flows rather than its contractual  cash flows, and any discount or premium would
be amortized over the remaining life of the security.

The  provisions  of this FSP were adopted as of December 31, 2005, as permitted,
and had no effects on the  financial  position or results of  operations  of the
Company.

Accounting  Changes and Error  Corrections In May 2005, the FASB issued SFAS No.
154,  "Accounting  Changes and Error Corrections." This Statement applies to all
voluntary  changes  in  accounting  principles  and to  changes  required  by an
accounting  pronouncement  when  the  pronouncement  does not  include  specific
transition  provisions.  The  Statement  requires  that  changes  in  accounting
principles be applied  retrospectively  unless it is  impracticable to determine
either the  period-specific  effects or the cumulative  effect of the change. In
those  cases,  retrospective  application  of the new  accounting  principle  is
required  to be applied to the  balances  of assets  and  liabilities  as of the
beginning  of  the  earliest  period  for  which  retrospective  application  is
practicable  with a  corresponding  adjustment  to retained  earnings  (or other
appropriate equity account) at that time. If application of the new principle is
impracticable for all prior periods, then it is to be adopted prospectively from
the earliest date  practicable.  Only the direct effects of the change are to be
applied retrospectively; indirect changes are accounted for in the period of the
change.

This  Statement  also  requires that certain  changes in  accounting  methods be
accounted  for as a change  in  accounting  estimate  effected  by a  change  in
accounting principle with retrospective application applied.

This  Statement  carries  forward the guidance of APB Opinion 20 with regards to
corrections  of  accounting  errors.  Restatement  of  prior  periods  financial
statements  is required in these cases,  with  adjustments  made to the carrying
amounts  of  assets  and  liabilities,   with  an  offsetting   capital  account
adjustment, as of the beginning of the first period presented.

This  Statement was adopted  effective  January 1, 2006 and had no effect on the
Company's  financial  position or results of operations for any period presented
in the consolidated 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.


                                       24
<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 "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.  Maturity
periods for investment securities are generally not extended beyond the three to
five year range unless long-term  funding for the investment has been secured in
advance.

         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 2005 by  $93,654,000,  resulting in a cumulative
gap ratio of .50.  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 2005 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.

         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.


                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                                                            December 31, 2005
                                                                                            -----------------
                                                                   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 .............     $     182      $       -      $       -     $       -     $     182
      Securities ...........................................         5,202         10,749         61,940        31,930       109,821
      Federal Home Loan Bank stock .........................           948              -              -             -           948
      Federal funds sold ...................................        22,205              -              -             -        22,205
      Loans (1) ............................................        38,326         16,207        100,011        13,874       168,418
                                                                 ---------      ---------      ---------     ---------     ---------
              Total interest earning assets ................        66,863         26,956        161,951        45,804     $ 301,574
                                                                 ---------      ---------      ---------     ---------     =========

Interest bearing liabilities
      Interest bearing deposits
          Interest bearing transaction accounts ............     $  33,148      $       -      $       -     $       -     $  33,148
          Savings ..........................................        27,480              -              -             -        27,480
          Time deposits $100M and over .....................        22,424         21,773         25,146             -        69,343
          Other time deposits ..............................        18,907         55,741         37,313             -       111,961
      Short-term borrowings ................................         3,500              -              -             -         3,500
      Long-term debt .......................................         3,500          1,000          2,000             -         6,500
                                                                 ---------      ---------      ---------     ---------     ---------
              Total interest bearing liabilities ...........       108,959         78,514         64,459             -     $ 251,932
                                                                 ---------      ---------      ---------     ---------     =========

Interest sensitivity gap ...................................     $ (42,096)     $ (51,558)     $  97,492     $  45,804
Cumulative interest sensitivity gap ........................     $ (42,096)     $ (93,654)     $   3,838     $  49,642
Gap ratio ..................................................          0.61          0.34
Cumulative gap ratio .......................................          0.61          0.50
</TABLE>
-------------------------------------------
(1) Loans are net of nonaccruing loans totaling $900,000.

         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.



                                       26
<PAGE>

<TABLE>
<CAPTION>
                                          2005 Year-
                                            End
                                          Average                                                                         Estimated
                                          Yield/Rate  2006      2007     2008      2009       2010   Thereafter   Balance Fair Value
                                          ----------  ----      ----     ----      ----       ----   ----------   ------- ----------
                                                                                 (Dollars in thousands)
<S>                                          <C>    <C>       <C>       <C>       <C>        <C>       <C>       <C>        <C>
Interest earning assets
    Interest-bearing deposits
      with other banks ....................  2.97%  $    182  $     -   $     -   $     -    $     -   $     -   $    182   $    182
    Investment securities .................  3.61%    35,103    9,774    19,503    13,312     11,075    21,053    109,820    109,741
    Federal funds sold ....................  4.25%    22,205        -         -         -          -         -     22,205     22,205
    Loans .................................  7.01%    97,274   28,640    19,094    20,544      2,769       997    169,318    165,856

Interest bearing liabilities
    Savings ...............................  2.26%  $ 27,480  $     -   $     -   $     -    $     -   $     -   $ 27,480   $ 27,480
    Interest bearing transaction accounts..  1.33%    33,148        -         -         -          -         -     33,148     33,148
    Time deposits .........................  3.79%   118,723   29,037    26,545     4,219      2,780         -    181,304    181,371
                                                    --------  -------   -------   -------    -------   -------   --------   --------
        Total interest bearing deposits....  3.10%   179,351   29,037    26,545     4,219      2,780         -    241,932    241,999
    Short-term borrowings .................  4.60%     3,500        -         -         -          -         -      3,500      3,500
    Long-term debt ........................  3.89%     1,000    1,000     1,000         -          -     3,500      6,500      6,532

</TABLE>



                                       27
<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, 2005 and 2004,
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, 2005.  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.  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, 2005 and 2004,
and the  consolidated  results of their operations and their  consolidated  cash
flows for each of the three years in the period  ended  December  31,  2005,  in
conformity with U. S. generally accepted accounting principles.



s/J. W. Hunt and Company, LLP

J. W. Hunt and Company, LLP
Columbia, South Carolina
January 26, 2006












                                       28
<PAGE>



Consolidated Balance Sheets
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                      2005                  2004
                                                                                                      ----                  ----
Assets
<S>                                                                                             <C>                   <C>
     Cash and due from banks (Note B) ..................................................        $  10,063,495         $   5,652,056
     Interest bearing deposits due from banks ..........................................              181,892                36,139
     Federal funds sold ................................................................           22,205,000            34,214,000
                                                                                                -------------         -------------
         Cash and cash equivalents .....................................................           32,450,387            39,902,195
     Securities available-for-sale (Note C) ............................................          102,069,706            92,083,693
     Securities held-to-maturity (fair value of $7,671,093 for 2005 and
         $9,560,157 for 2004) (Note C) .................................................            7,750,610             9,368,609
     Federal Home Loan Bank stock, at cost .............................................              948,400             1,011,100
     Loans (Note D) ....................................................................          169,317,675           157,774,989
         Allowance for loan losses .....................................................           (2,266,086)           (2,239,873)
                                                                                                -------------         -------------
            Loans - net ................................................................          167,051,589           155,535,116
     Premises and equipment - net (Note E) .............................................            6,804,647             4,412,780
     Accrued interest receivable .......................................................            1,628,754             1,331,458
     Other assets ......................................................................            2,007,867             1,702,686
                                                                                                -------------         -------------

            Total assets ...............................................................        $ 320,711,960         $ 305,347,637
                                                                                                =============         =============

Liabilities
     Deposits (Note F)
         Noninterest bearing ...........................................................        $  38,060,728         $  34,903,113
         Interest bearing ..............................................................          241,931,871           233,245,112
                                                                                                -------------         -------------
            Total deposits .............................................................          279,992,599           268,148,225
     Accrued interest payable ..........................................................            1,817,133             1,222,118
     Short-term borrowings (Note G) ....................................................            3,500,000             2,500,000
     Long-term debt (Note H) ...........................................................            6,500,000             7,500,000
     Other liabilities .................................................................               47,840                40,849
                                                                                                -------------         -------------
            Total liabilities ..........................................................          291,857,572           279,411,192
                                                                                                -------------         -------------

     Commitments and contingent liabilities (Note M)

Shareholders' equity (Note I)
     Common stock - no par value; 10,000,000 shares authorized; issued and
         outstanding - 2,798,409 for 2005 and
         2,648,230 for 2004 ............................................................           26,955,661            24,216,002
     Retained earnings .................................................................            3,296,060             2,220,083
     Accumulated other comprehensive income (loss) .....................................           (1,397,333)             (499,640)
                                                                                                -------------         -------------
            Total shareholders' equity .................................................           28,854,388            25,936,445
                                                                                                -------------         -------------

            Total liabilities and shareholders' equity .................................        $ 320,711,960         $ 305,347,637
                                                                                                =============         =============
</TABLE>







See accompanying notes to consolidated financial statements.



                                       29
<PAGE>

Consolidated Statements of Income
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                 2005                 2004                  2003
                                                                                 ----                 ----                  ----
Interest income
<S>                                                                          <C>                  <C>                   <C>
     Loans, including fees .........................................         $ 11,497,766         $ 10,265,563          $  9,938,187
     Securities
        Taxable ....................................................            3,564,081            3,285,186             2,269,718
        Tax-exempt .................................................              149,880               73,013                26,427
     Federal funds sold ............................................              667,735              295,000               402,559
     Other .........................................................               38,714               28,888                26,961
     Interest bearing deposits due from banks ......................                5,003                  558                   276
                                                                             ------------         ------------          ------------
        Total interest income ......................................           15,923,179           13,948,208            12,664,128
                                                                             ------------         ------------          ------------

Interest expense
     Time deposits $100,000 and over ...............................            2,117,851            1,481,410             1,608,789
     Other deposits ................................................            4,202,097            3,409,058             3,480,591
     Short-term borrowings .........................................               17,971               26,975                     -
     Long-term debt ................................................              282,893              159,475                     -
                                                                             ------------         ------------          ------------
        Total interest expense .....................................            6,620,812            5,076,918             5,089,380
                                                                             ------------         ------------          ------------

Net interest income ................................................            9,302,367            8,871,290             7,574,748
Provision for loan losses (Note D) .................................              250,000              380,000               521,842
                                                                             ------------         ------------          ------------
Net interest income after provision ................................            9,052,367            8,491,290             7,052,906
                                                                             ------------         ------------          ------------

Other income
     Service charges on deposit accounts ...........................            1,580,043            1,524,179             1,461,488
     Credit life insurance commissions .............................               32,422               35,481                45,814
     Gain (loss) on sale of securities (Note C) ....................                    -               (9,580)               80,488
     Mortgage brokerage income .....................................              109,890              148,850               202,330
     Other income ..................................................              416,244              354,883               242,859
                                                                             ------------         ------------          ------------
        Total other income .........................................            2,138,599            2,053,813             2,032,979
                                                                             ------------         ------------          ------------

Other expenses (Notes J and L)
     Salaries and employee benefits ................................            2,902,693            2,779,863             2,420,268
     Net occupancy expense .........................................              267,760              255,004               243,826
     Furniture and equipment expense ...............................              344,687              320,217               288,229
     Other expense .................................................            1,905,008            1,796,249             1,461,175
                                                                             ------------         ------------          ------------
        Total other expenses .......................................            5,420,148            5,151,333             4,413,498
                                                                             ------------         ------------          ------------

Income before income taxes .........................................            5,770,818            5,393,770             4,672,387
Income tax expense (Note K) ........................................            2,040,892            1,957,063             1,667,418
                                                                             ------------         ------------          ------------
Net income .........................................................         $  3,729,926         $  3,436,707          $  3,004,969
                                                                             ============         ============          ============

Per share (Note I)
     Net income, basic .............................................         $       1.34         $       1.24          $       1.10
     Net income, assuming dilution .................................                 1.27                 1.18                  1.05
</TABLE>

See accompanying notes to consolidated financial statements.



                                       30
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Common Stock
                                                                    ------------                        Accumulated
                                                            Number of                   Retained    Other Comprehensive
                                                              Shares          Amount    Earnings       Income (Loss)       Total
                                                              ------          ------    --------       -------------       -----
<S>                                                         <C>         <C>            <C>             <C>             <C>
Balance, January 1, 2003 .............................      2,242,417   $ 17,569,241   $  2,137,103    $    378,508    $ 20,084,852

Comprehensive income:
    Net income .......................................              -              -      3,004,969               -       3,004,969
                                                                                                                       ------------
    Unrealized net holding losses on available-
    for-sale securities arising during the period,
    net of income tax effects of $294,953 ............              -              -              -        (526,643)       (526,643)
    Reclassification adjustment,
    net of income tax effects of $28,895 .............              -              -              -         (51,592)        (51,592)
                                                                                                                       ------------
    Total other comprehensive income (loss) ..........              -              -              -               -        (578,235)
                                                                                                                       ------------
    Total comprehensive income .......................              -              -              -               -       2,426,734
                                                                                                                       ------------
Issuance of 5% stock dividend,
    including cash payment for
    fractional shares ................................        112,117      2,018,106     (2,024,640)              -          (6,534)
Exercise of employee stock options ...................          7,523         32,242              -               -          32,242
                                                         ------------   ------------   ------------    ------------    ------------
Balance, December 31, 2003 ...........................      2,362,057     19,619,589      3,117,432        (199,727)     22,537,294

Comprehensive income:
    Net income .......................................              -              -      3,436,707               -       3,436,707
                                                                                                                       ------------
    Unrealized net holding losses on available-
    for-sale securities arising during the period,
    net of income tax effects of $171,409 ............              -              -              -        (306,053)       (306,053)
    Reclassification adjustment,
    net of income tax effects of $3,439 ..............              -              -              -           6,140           6,140
                                                                                                                       ------------
    Total other comprehensive income (loss) ..........              -              -              -               -        (299,913)
                                                                                                                       ------------
    Total comprehensive income .......................              -              -              -               -       3,136,794
                                                                                                                       ------------
Issuance of 10% stock dividend,
    including cash payment for
    fractional shares ................................        240,352      4,327,578     (4,334,056)              -          (6,478)
Exercise of employee stock options ...................         45,821        268,835              -               -         268,835
                                                         ------------   ------------   ------------    ------------    ------------
Balance, December 31, 2004 ...........................      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
                                                         ============   ============   ============    ============    ============
</TABLE>


See accompanying notes to consolidated financial statements.



                                       31
<PAGE>


Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiary
<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                      2005               2004               2003
                                                                                      ----               ----               ----
Operating activities
<S>                                                                              <C>                <C>                <C>
     Net income ...........................................................      $  3,729,926       $  3,436,707       $  3,004,969
     Adjustments to reconcile net income to net
         cash provided by operating activities
            Provision for loan losses .....................................           250,000            380,000            521,842
            Writedowns of foreclosed assets ...............................            25,000            125,000                  -
            Depreciation ..................................................           298,889            284,033            245,281
            Deferred income taxes .........................................           (43,114)           (10,440)            31,625
            Amortization of net loan fees and costs .......................           (96,374)           (93,669)           (69,999)
            Securities accretion and premium amortization .................           275,137            799,472          1,045,958
            Loss (gain) on sale of available-for-sale securities ..........                 -              9,580            (80,488)
            Gain on sale of loans held for sale ...........................                 -                  -           (202,330)
            Loss on sale or other disposition of fixed assets .............             5,000                  -                  -
            Loss (gain) on sale of foreclosed assets ......................             9,191             34,758             (1,009)
            (Increase) decrease in interest receivable ....................          (297,296)            92,847            (73,731)
            Increase (decrease) in interest payable .......................           595,015           (134,804)           287,745
            Decrease (increase) in prepaid expenses .......................           148,738             79,733           (290,503)
            Increase (decrease) in other accrued expenses .................             6,991            (40,492)            19,434
            Proceeds of sales of loans held for sale ......................                 -                  -          4,631,235
            Originations of loans held for sale ...........................                 -                  -         (4,217,778)
                                                                                 ------------       ------------       ------------
                Net cash provided by operating activities .................         4,907,103          4,962,725          4,852,251
                                                                                 ------------       ------------       ------------

Investing activities
     Purchases of available-for-sale securities ...........................       (58,600,965)       (56,099,448)       (98,268,759)
     Purchases of held-to-maturity securities .............................                 -         (9,949,464)                 -
     Maturities, calls and paydowns of available-for-sale securities ......        46,930,477         43,485,333         69,275,918
     Maturities, calls and paydowns of held-to-maturity securities ........         1,626,880            584,492                  -
     Proceeds from sale of available-for-sale securities ..................                 -          5,272,766          4,069,965
     Purchases of other investments .......................................          (162,300)          (260,900)          (195,700)
     Proceeds of redemptions of other investments .........................           225,000                  -                  -
     Net increase in loans made to customers ..............................       (11,670,099)       (10,509,396)       (11,293,567)
     Purchases of premises and equipment ..................................        (2,695,756)          (179,551)          (550,982)
     Proceeds from sale of foreclosed assets ..............................            57,768            489,139             61,009
     Proceeds from sale of real estate held for sale ......................                 -            741,522                  -
                                                                                 ------------       ------------       ------------
                Net cash used by investing activities .....................       (24,288,995)       (26,425,507)       (36,902,116)
                                                                                 ------------       ------------       ------------

Financing activities
     Net (decrease) increase in demand deposits, interest
         bearing transaction accounts and savings accounts ................        (1,966,994)         7,330,419         20,240,116
     Net increase in certificates of deposit and other
         time deposits ....................................................        13,811,368          4,267,084         24,671,979
     Net increase in short-term borrowings ................................         1,000,000          2,500,000                  -
     Proceeds of issuing long-term debt ...................................                 -          7,500,000                  -
     Repayment of long-term debt ..........................................        (1,000,000)                 -                  -
     Payment of cash in lieu of fractional shares
         for stock dividend ...............................................            (6,349)            (6,478)            (6,534)
     Exercise of employee stock options ...................................            92,059            268,835             32,242
                                                                                 ------------       ------------       ------------
                Net cash provided by financing activities .................        11,930,084         21,859,860         44,937,803
                                                                                 ------------       ------------       ------------
(Decrease) increase in cash and cash equivalents ..........................        (7,451,808)           397,078         12,887,938
Cash and cash equivalents, beginning ......................................        39,902,195         39,505,117         26,617,179
                                                                                 ------------       ------------       ------------
Cash and cash equivalents, ending .........................................      $ 32,450,387       $ 39,902,195       $ 39,505,117
                                                                                 ============       ============       ============
Supplemental  Disclosure  of Cash Flow  Information
Cash paid during the period for:
         Interest (net of amount capitalized) .............................      $  6,025,797       $  5,211,712       $  4,801,635
         Income taxes .....................................................         1,980,856          1,922,666          1,672,319
     Noncash investing and financing activities:
         Transfer of loans to foreclosed assets ...........................                 -            141,364            796,813
         Transfer from real estate held for sale to premises
            and equipment .................................................                 -             63,481                  -
         Transfers from retained earnings to common stock
            in connection with stock dividends ............................         2,647,600          4,327,578          2,018,106
         Other comprehensive income (loss) ................................          (897,693)          (299,913)          (578,235)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       32
<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 headquarters office in
Walhalla,  and other offices in 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

                                       33
<PAGE>

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
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 possible 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 possible 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  uncertain  future  events  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.

                                       34
<PAGE>

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  internal  auditor  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
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, loan 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  $137,321  and  $229,280 as of  December  31, 2005 and 2004,
respectively.

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 postretirement or postemployment benefits.

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,  2005,  the  Company  has  two
stock-based employee  compensation plans, which are described more fully in Note
I. The Company  accounts 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.  No  stock-based
employee  compensation  cost is 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.  Per share  amounts  have been  adjusted  to reflect the
effects of a 5% stock  dividend as of November 30,  2005,  a 10% stock  dividend
effective November 30, 2004 and a 5% stock dividend effective November 28, 2003.

                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                            ------------------------
                                                                               2005                    2004                  2003
                                                                               ----                    ----                  ----

<S>                                                                     <C>                    <C>                    <C>
Net income, as reported .......................................         $   3,729,926          $   3,436,707          $   3,004,969
Deduct:  Total stock-based employee
     compensation expense determined under
     fair value based method for all awards,
     net of any related tax effects ...........................              (237,807)              (235,535)              (226,091)
                                                                        -------------          -------------          -------------
Pro forma net income ..........................................         $   3,492,119          $   3,201,172          $   2,778,878
                                                                        =============          =============          =============

Net income per share, basic
     As reported ..............................................         $        1.34          $        1.24          $        1.10
     Pro forma ................................................                  1.25                   1.15                   1.02
Net income per share, assuming dilution
     As reported ..............................................         $        1.27          $        1.18          $        1.05
     Pro forma ................................................                  1.19                   1.10                   0.97
</TABLE>

Prior to 2005, the Company was a non-public company under the definition of SFAS
No. 123 and was eligible  to, and did,  use the minimum  value method to compute
the  fair  value  of its  stock  options.  The  minimum  value  method  does not
incorporate  an  assumption  about the  volatility  of the  market  price of the
underlying  security into the  calculation of the grant date fair value of stock
options.  Throughout  2005,  the  Company's  common stock was traded in a public
market and its market prices were quoted on the Over-The-Counter Bulletin Board.
Accordingly,  in 2005,  the  Company  was no longer  eligible to use the minimum
value method and  implemented  the SFAS No. 123 fair value  method.  That method
includes an explicit  market  price  volatility  assumption.  The effect of this
change in  calculation  method was not  material  with  respect to pro forma net
income  shown  above.  Had the  minimum  value  method  been used to value stock
options granted in 2005, pro-forma compensation expense for 2005 would have been
approximately  $222,049,  pro forma net income per share,  basic would have been
$1.32 and pro forma net income per share, diluted would have been $1.25.

The fair values of options granted during 2005, 2004 and 2003 were $8.46, $9.39,
and $9.59 per share, respectively.  For 2005, the fair value was estimated as of
the grant  date using the fair  value  method of SFAS No. 123 and the  following
assumptions: dividend yield of 0%, expected life of 10 years, risk free interest
rate of 4.38% and stock price volatility of 25.71%.  Because of the limited time
during which the Company's stock has traded in a public market,  the Company has
estimated stock price volatility  based primarily on the historic  volatility of
another bank holding  company  domiciled in South Carolina and which 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 over time.  For 2004 and 2003,  fair value was  estimated  as of the
date of the grant using the minimum value option pricing  method.  The following
assumptions  were  used for  grants  in 2004  and  2003:  dividend  yield of 0%,
expected life of 10 years,  and risk-free  interest  rates of 4.36%,  and 3.87%,
respectively.

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.

                                       36
<PAGE>

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, 2005 and 2004 were approximately $1,953,000 and
$1,500,000, 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:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
                                                2005                                                    2004
                                                ----                                                    ----
                                          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
                             ----         -----        ------         -----         ----          -----        ------        -----
Available-for-sale
<S>                       <C>            <C>        <C>           <C>            <C>            <C>         <C>         <C>
  U.S. Government
      agencies ........   $ 58,978,413   $ 20,696   $   995,563   $ 58,003,546   $ 47,152,289   $   5,750   $ 389,675   $ 46,768,364
  Mortgage-backed
      securities ......     35,250,267      1,462     1,145,702     34,106,027     43,644,218      58,518     488,214     43,214,522
  State, county and
      municipal .......     10,020,953     28,767        89,587      9,960,133      2,066,656      35,456       1,305      2,100,807
                          ------------   --------   -----------   ------------   ------------   ---------   ---------   ------------
        Total .........   $104,249,633   $ 50,925   $ 2,230,852   $102,069,706   $ 92,863,163   $  99,724   $ 879,194   $ 92,083,693
                          ============   ========   ===========   ============   ============   =========   =========   ============

Held-to-maturity
  U.S. Government
      agencies ........   $          -   $      -   $         -   $          -   $          -   $       -   $       -   $          -
  Mortgage-backed
      securities ......      7,750,610          -        79,517      7,671,093      9,368,609     191,548           -      9,560,157
  State, county and
      municipal .......              -          -             -              -              -           -           -              -
                          ------------   --------   -----------   ------------   ------------   ---------   ---------   ------------
        Total .........   $  7,750,610   $      -   $    79,517   $  7,671,093   $  9,368,609   $ 191,548   $       -   $  9,560,157
                          ============   ========   ===========   ============   ============   =========   =========   ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                     December 31, 2005
                                                                                     -----------------
                                                                  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 ............................         $ 15,495,567         $ 15,289,508         $          -         $          -
Due after one through five years ...............           41,763,919           41,021,645                    -                    -
Due after five through ten years ...............            3,747,614            3,711,502                    -                    -
Due after ten years ............................            7,992,266            7,941,024                    -                    -
                                                         ------------         ------------         ------------         ------------
                                                           68,999,366           67,963,679                    -                    -
Mortgage-backed securities .....................           35,250,267           34,106,027            7,750,610            7,671,093
                                                         ------------         ------------         ------------         ------------
   Total .......................................         $104,249,633         $102,069,706         $  7,750,610         $  7,671,093
                                                         ============         ============         ============         ============
</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,  2005  and  2004  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.


                                       37
<PAGE>
<TABLE>
<CAPTION>
                                                                                December 31, 2005
                                                                                -----------------
                                                        Continuously in Unrealized Loss Position for a Period of
                                                        --------------------------------------------------------
                                                  Less than 12 Months            12 Months or more                 Total
                                                  -------------------            -----------------                 -----
                                               Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized
                                               Fair Value        Loss        Fair Value        Loss        Fair Value        Loss
                                               ----------        ----        ----------        ----        ----------        ----
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
 Available-for-sale
  U.S. Treasury obligations and
    direct obligations of U.S.
    government agencies ..................    $14,120,482    $   133,275    $40,886,814    $   862,288    $55,007,296    $   995,563
  Federal agency mortgage-
    backed securities ....................      8,526,327        193,958     25,283,999        951,744     33,810,326      1,145,702
  State, county and
    municipal securities .................      5,986,258         89,587              -              -      5,986,258         89,587
                                              -----------    -----------    -----------    -----------    -----------    -----------
              Total ......................    $28,633,067    $   416,820    $66,170,813    $ 1,814,032    $94,803,880    $ 2,230,852
                                              ===========    ===========    ===========    ===========    ===========    ===========
Held-to-maturity
  Federal agency mortgage-
    backed securities ....................    $ 7,750,610    $    79,517    $         -    $         -    $ 7,750,610    $    79,517
                                              -----------    -----------    -----------    -----------    -----------    -----------
              Total ......................    $ 7,750,610    $    79,517    $         -    $         -    $ 7,750,610    $    79,517
                                              ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                December 31, 2004
                                                                                -----------------
                                                        Continuously in Unrealized Loss Position for a Period of
                                                        --------------------------------------------------------
                                                  Less than 12 Months            12 Months or more                 Total
                                                  -------------------            -----------------                 -----
                                               Estimated      Unrealized     Estimated      Unrealized     Estimated      Unrealized
                                               Fair Value        Loss        Fair Value        Loss        Fair Value        Loss
                                               ----------        ----        ----------        ----        ----------        ----
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Available-for-sale
  U.S. Treasury obligations and
    direct obligations of U.S.
    government agencies ..................    $40,332,547    $   355,302    $ 2,166,813    $    34,373    $42,499,360    $   389,675
  Federal agency mortgage-
    backed securities ....................     19,437,482        275,362     10,595,571        212,852     30,033,053        488,214
  State, county and
    municipal securities .................        243,395          1,305              -              -        243,395          1,305
                                              -----------    -----------    -----------    -----------    -----------    -----------
                Total ....................    $60,013,424    $   631,969    $12,762,384    $   247,225    $72,775,808    $   879,194
                                              ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

At  December  31,  2005,  fifty three  securities  had been  continuously  in an
unrealized loss position for less than twelve months and seventy four securities
had been  continuously in an unrealized loss position for twelve months or more.
The Company does not consider  these  investments  to be  other-than-temporarily
impaired because the unrealized losses resulted primarily from the volatility of
interest  rates and the  securities  consist  of  issuances  of U.S.  Government
Agencies or U.S. Government-sponsored  agencies. 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.  In addition,  there have been no significant  adverse  changes in the
credit  ratings of any of the security  issuers that would  indicate the Company
will be unable to collect  all  principal  and  interest  amounts  according  to
contractual terms. All of the issuers of state, county and municipal  securities
held were rated at least "investment grade" as of December 31, 2005 and 2004.

During 2005, the Company did not sell any available-for -sale securities. During
2004,  the Company  sold  available-for-sale  securities  with  amortized  costs
totaling  $5,282,346  for proceeds of  $5,272,766,  resulting in gross  realized
gains of $41,974 and gross realized losses of $51,554.  The income tax provision
credited to expense  applicable to the net realized losses of $9,580 was $3,439.
During 2003, the Company sold available-for-sale securities with amortized costs
totaling  $3,989,477  for proceeds of  $4,069,965,  resulting in gross  realized
gains of $107,420 and gross realized losses of $26,932. The income tax provision
charged to expense  applicable  to the net realized gain of $80,488 was $28,895.
There were no transfers of available-for-sale  securities to other categories in
2005, 2004 or 2003.

At December 31, 2005 and 2004,  securities  with a carrying value of $68,819,737
and  $47,286,217,  respectively,  were pledged as  collateral  to secure  public
deposits.


                                       38
<PAGE>

NOTE D - LOANS

Loans consisted of the following:

                                                          December 31,
                                                          ------------
                                                   2005                 2004
                                                   ----                 ----
Commercial, financial and industrial .....     $  23,008,656      $  24,278,799
Real estate- construction ................           674,269            338,073
Real estate - mortgage ...................       120,547,171        109,984,976
Consumer installment .....................        25,087,579         23,173,141
                                               -------------      -------------
     Total ...............................       169,317,675        157,774,989
Allowance for loan losses ................        (2,266,086)        (2,239,873)
                                               -------------      -------------
     Loans - net .........................     $ 167,051,589      $ 155,535,116
                                               =============      =============

Net deferred  loan fees of $204,231 and $190,335  were  allocated to the various
loan categories as of December 31, 2005 and 2004, 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,
                                                                                                             ------------
                                                                                                      2005                   2004
                                                                                                      ----                   ----
Investment in impaired loans
<S>                                                                                                <C>                    <C>
     Nonaccrual ......................................................................             $  900,044             $1,464,593
     Accruing 90 days and over past due ..............................................                  5,000                  8,677
                                                                                                   ----------             ----------
         Total .......................................................................             $  905,044             $1,473,270
                                                                                                   ==========             ==========

Average total investment in impaired loans during the year ...........................             $1,052,000             $1,039,000
Allowance for loan losses on impaired loans at year end ..............................                311,163                620,662
</TABLE>

The average total  investment in impaired loans during 2003 was $832,000.  There
were no  irrevocable  commitments  to lend  additional  funds to  debtors  owing
amounts on impaired loans at December 31, 2005.

As of December 31, 2005 and 2004,  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.

Transactions in the allowance for loan losses are summarized below:


                                              Years Ended December 31,
                                              ------------------------
                                          2005          2004            2003
                                          ----          ----            ----

Balance at January 1 ..............   $ 2,239,873    $ 2,196,500    $ 1,950,000
Provision charged to expense ......       250,000        380,000        521,842
Recoveries ........................        79,374         24,662         29,626
Charge-offs .......................      (303,161)      (361,289)      (304,968)
                                      -----------    -----------    -----------
Balance at December 31 ............   $ 2,266,086    $ 2,239,873    $ 2,196,500
                                      ===========    ===========    ===========

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

                                       39
<PAGE>

rates  and   collateral,   and  do  not   involve   more  than  normal  risk  of
collectibility.  The aggregate  dollar amount of these loans was  $7,839,433 and
$8,880,609 at December 31, 2005 and 2004, respectively.  During 2005, $2,944,527
of new loans were made and repayments totaled $3,985,703.


NOTE E - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                                            December 31,
                                                            ------------
                                                       2005              2004
                                                       ----              ----

Land .........................................       $2,916,997       $1,374,047
Buildings and land improvements ..............        2,859,008        2,763,574
Furniture and equipment ......................        2,303,286        2,200,956
Construction in progress .....................          950,042                -
                                                     ----------       ----------
     Total ...................................        9,029,333        6,338,577
Accumulated depreciation .....................        2,224,686        1,925,797
                                                     ----------       ----------
     Premises and equipment - net ............       $6,804,647       $4,412,780
                                                     ==========       ==========

Depreciation  expense for the years ended  December 31, 2005,  2004 and 2003 was
$298,889,  $284,033,  and  $245,281,  respectively.  During  2005,  the  Company
capitalized interest of $13,176 to construction in progress.

NOTE F - DEPOSITS

A summary of deposits follows:

                                                             December 31,
                                                             ------------
                                                        2005             2004
                                                        ----              ----
Noninterest bearing demand ...................     $ 38,060,728     $ 34,903,113
Interest bearing transaction accounts ........       33,148,225       34,055,022
Savings ......................................       27,479,937       31,697,749
Time deposits $100,000 and over ..............       69,342,755       61,673,173
Other time deposits ..........................      111,960,954      105,819,168
                                                   ------------     ------------
     Total deposits ..........................     $279,992,599     $268,148,225
                                                   ============     ============

As of  December  31,  2005  and  2004,  local  governmental  deposits  comprised
approximately  13% and 15% of total deposits,  respectively.  As of December 31,
2005 and 2004, $137,031 and $137,340,  respectively, of overdrawn demand deposit
balances have been reclassified as loans.

At December 31, 2005, the scheduled maturities of time deposits are as follows:


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

                  2006                           $ 118,722,859
                  2007                              29,036,737
                  2008                              26,544,578
                  2009                               4,219,319
                  2010                               2,780,216



                                       40
<PAGE>

NOTE G - SHORT-TERM BORROWINGS

Short-term borrowings consisted of:

                                                             December 31,
                                                             ------------
                                                       2005              2004
                                                       ----              ----

Federal funds purchased ......................       $3,500,000       $        -

Short-term borrowings from Federal
   Home Loan Bank .............................               -        2,500,000
                                                     ----------       ----------
     Total short-term borrowings .............       $3,500,000       $2,500,000
                                                     ==========       ==========

As of December  31,  2005,  short-term  borrowings  consisted  of federal  funds
purchased from a  correspondent  bank at a rate of 4.60% which were repayable on
January 3, 2006.  As of December 31, 2004,  short-term  borrowings  consisted of
$1,500,000  of Daily Rate  Advances,  which was  repaid at the Bank's  option on
March 3, 2005, and a $1,000,000  one-year Fixed Rate Credit Advance due June 18,
2005, each obtained from the Federal Home Loan Bank of Atlanta  ("FHLB").  As of
December 31, 2004, the variable interest rate payable on the Daily Rate Advances
was 2.44% and on the one year Fixed Rate Credit  Advance  was 2.43%.  See Note H
for information regarding collateral  requirements related to the FHLB borrowing
arrangement.

As of December 31, 2005,  the banking  subsidiary had unused  short-term  credit
accommodations available from unrelated banks which allow the banking subsidiary
to purchase up to  $8,900,000 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. There were no borrowings under these facilities
in 2004.

NOTE H - LONG-TERM DEBT

Long-term debt consisted of:


                                                              December 31,
                                                              ------------
                                                        2005              2004
                                                        ----              ----

Fixed rate notes due to FHLB due in
   annual installments of $1,000,000
   beginning in 2005 .........................       $3,000,000       $4,000,000
Variable rate note due to FHLB
   due June 18, 2014 .........................        3,500,000        3,500,000
                                                     ----------       ----------
                                                     $6,500,000       $7,500,000
                                                     ==========       ==========

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  total  $3,000,000 at rates ranging from 3.29% to
4.40%,  maturing  in  $1,000,000  increments  on June 18 of each  year from 2006
through 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  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, 2005,
the  3-month  LIBOR  rate was  4.54%.  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.


                                       41
<PAGE>

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

                                                  December 31, 2005
                                                  -----------------
                                       Fixed Rate   Variable Rate       Total
                                       ----------   -------------       -----

Due in 2006 ....................      $1,000,000      $        -      $1,000,000
Due in 2007 ....................       1,000,000               -       1,000,000
Due in 2008 ....................       1,000,000               -       1,000,000
Due after 2010 .................               -       3,500,000       3,500,000
                                      ----------      ----------      ----------
     Total long-term debt ......      $3,000,000      $3,500,000      $6,500,000
                                      ==========      ==========      ==========

The Company has pledged all 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, 2005 was
approximately  $60,459,000.  The qualifying  collateral  instruments required to
secure the Company's short-term borrowings and long-term debt as of December 31,
2005 was approximately $8,351,000.

The banking  subsidiary had unused credit  availability under the FHLB's blanket
lien  agreement  of up to an  additional  $28,845,000  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, 2005 to
secure any additional FHLB borrowings totaled approximately $52,108,000.


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 ($3,750,938 at December
31, 2005) are subject to the prior approval of the South  Carolina  Commissioner
of Banking. Therefore,  $23,971,877 of the Company's equity in the net assets of
the bank was restricted as of December 31, 2005. 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 November 30, 2005,  November 30,
2004 and  November 28, 2003 the  Company's  Board of  Directors  declared  stock
dividends of 5%, 10% 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, 2005 and 2004,
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
$(1,397,333) and $(499,640) respectively.

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


                                       42
<PAGE>

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                       2005               2004               2003
                                                                                       ----               ----               ----
Net income per share, basic
<S>                                                                                 <C>                <C>                <C>
  Numerator - net income ..................................................         $3,729,926         $3,436,707         $3,004,969
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          2,783,241          2,771,747          2,726,864
                                                                                    ==========         ==========         ==========
                Net income per share, basic ...............................         $     1.34         $     1.24         $     1.10
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution
  Numerator - net income ..................................................         $3,729,926         $3,436,707         $3,004,969
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          2,783,241          2,771,747          2,726,864
    Effect of dilutive stock options ......................................            161,073            147,363            139,153
                                                                                    ----------         ----------         ----------
                Total shares ..............................................          2,944,314          2,919,110          2,866,017
                                                                                    ==========         ==========         ==========
                Net income per share, assuming dilution ...................         $     1.27         $     1.18         $     1.05
                                                                                    ==========         ==========         ==========
</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,
2005 and 2004,  that the Company and its  subsidiary  bank  exceeded all capital
adequacy minimum requirements.

As of December 31, 2005, 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.


                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Minimum for          Minimum to be
                                                                           Actual           Capital Adequacy      Well Capitalized
                                                                           ------           ----------------      ----------------
                                                                    Amount       Ratio     Amount        Ratio    Amount       Ratio
                                                                    ------       -----     ------        -----    ------       -----
December 31, 2005                                                                          (Dollars in thousands)
     The Company
<S>                                                                <C>            <C>      <C>            <C>
        Total Capital to risk weighted assets ...............      $32,518        16.7%    $15,563        8.0%         NA       NA
        Tier 1 Capital to risk weighted assets ..............      $30,252        15.6%    $ 7,781        4.0%         NA       NA
        Tier 1 Capital to average assets (leverage) .........      $30,252         9.7%    $12,433        4.0%         NA       NA
     Community First Bank
        Total Capital to risk weighted assets ...............      $29,120        16.1%    $15,563        8.0%    $19,453      10.0%
        Tier 1 Capital to risk weighted assets ..............      $31,386        15.0%    $ 7,781        4.0%    $11,672       6.0%
        Tier 1 Capital to average assets (leverage) .........      $31,386         9.4%    $12,433        4.0%    $15,541       5.0%

December 31, 2004
     The Company
        Total Capital to risk weighted assets ...............      $28,176        13.9%    $16,182        8.0%         NA       NA
        Tier 1 Capital to risk weighted assets ..............      $25,936        12.8%    $ 8,091        4.0%         NA       NA
        Tier 1 Capital to average assets (leverage) .........      $25,936         8.7%    $11,884        4.0%         NA       NA
     Community First Bank
        Total Capital to risk weighted assets ...............      $27,610        13.7%    $16,182        8.0%    $20,227      10.0%
        Tier 1 Capital to risk weighted assets ..............      $25,370        12.5%    $ 8,092        4.0%    $12,136       6.0%
        Tier 1 Capital to average assets (leverage) .........      $25,370         8.5%    $11,884        4.0%    $14,855       5.0%
</TABLE>


Stock  Options.  In 1998,  the  Company's  shareholders  approved the 1998 Stock
Option Plan under which an aggregate of 617,720 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  431,735 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 through
the end of 2005,  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, or if there is a change in control of the Company, in accordance with the
provisions of the two plans. Options awarded during 2005, 2004 and 2003 provided
for 20% vesting immediately upon award, with 20% vesting on the anniversary date
of the  award for each of the four  subsequent  years,  and ten year  expiration
dates.

Transactions under the plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                              ------------------------
                                                             2005                    2004                    2003
                                                             ----                    ----                    ----
                                                                   Wtd. Avg.                Wtd. Avg.                Wtd. Avg.
                                                                   Exercise                 Exercise                 Exercise
                                                      Shares         Price     Shares         Price     Shares         Price
                                                      ------         -----     ------         -----     ------         -----
<S>                                                  <C>         <C>           <C>        <C>           <C>         <C>
Outstanding at beginning of year ............        412,716     $   10.59     400,481    $    9.23     398,316     $    8.96
Granted .....................................         34,755         18.10      68,318        14.41      11,279         14.02
Exercised ...................................        (18,043)         5.07     (52,922)        5.08      (9,102)         3.54
Forfeited or expired ........................         (1,148)        14.68      (3,161)       12.72         (13)         3.26
                                                     -------                   -------                  -------
Outstanding at end of year ..................        428,280         11.43     412,716        10.59     400,481          9.23
                                                     =======                   =======                  =======
Options exercisable at year-end .............        349,690     $   10.49     325,621    $    9.70     333,248     $    8.48
                                                     =======                   =======                  =======
</TABLE>
------
Numbers of shares and exercise  prices have been adjusted in the table above for
a 5% stock dividend  effective November 30, 2005, a 10% stock dividend effective
November 30, 2004, and for a 5% stock dividend effective November 28, 2003.

                                       44
<PAGE>

The following table summarizes information about the options outstanding:


<TABLE>
<CAPTION>
                                                                 December 31, 2005
                                                                 -----------------
                                          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>
$ 3.28  to $ 5.99               123,193            1.97          $    5.56          123,193          $    5.56
 12.30  to  13.47               192,723            4.95              12.80          186,331              12.79
 13.98  to  18.10               112,364            8.52              15.50           40,166              14.96
                                -------                                              ------

                                428,280            5.03          $   11.43          349,690          $   10.49
                                =======                                             =======
</TABLE>
Of the 1,049,455  shares of the  Company's  authorized  common stock  originally
reserved for  issuance  upon the  exercise of options  under the plans,  193,914
shares  authorized  under the 1998 plan remain available for future grants as of
December 31, 2005.


NOTE J - OTHER EXPENSES

Other expenses are summarized below:

<TABLE>
                                                                                                Years Ended December 31,
                                                                                                ------------------------
                                                                                      2005                2004                2003
                                                                                      ----                ----                ----
<S>                                                                               <C>                 <C>                 <C>
Salaries and employee benefits .........................................          $2,902,693          $2,779,863          $2,420,268
Net occupancy expense ..................................................             267,760             255,004             243,826
Furniture and equipment expense ........................................             344,687             320,217             288,229
Other expense
         Stationery, printing and postage ..............................             247,126             260,264             275,898
         Telephone .....................................................             102,249              96,223              76,000
         Advertising and promotion .....................................              97,258              82,135             100,522
         Professional services .........................................             169,465             150,837             133,130
         Insurance .....................................................              67,374              50,284              36,769
         FDIC insurance assessment .....................................              35,785              42,600              30,439
         Directors' fees ...............................................             100,800             112,400             113,700
         Foreclosed assets costs and expenses, net .....................              42,933             188,936              30,255
         Data processing expenses ......................................             236,445             192,262             130,229
         Other .........................................................             805,573             620,308             534,233
                                                                                  ----------          ----------          ----------
                Total ..................................................          $5,420,148          $5,151,333          $4,413,498
                                                                                  ==========          ==========          ==========
</TABLE>


                                       45
<PAGE>

NOTE K - INCOME TAXES

Income tax expense consisted of:

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                          ------------------------
                                                                           2005                      2004                  2003
                                                                           ----                      ----                  ----
Current
<S>                                                                      <C>                     <C>                     <C>
   Federal ..................................................            $ 1,915,653             $ 1,811,676             $ 1,498,380
   State ....................................................                168,353                 155,827                 137,413
                                                                         -----------             -----------             -----------
              Total current .................................              2,084,006               1,967,503               1,635,793
                                                                         -----------             -----------             -----------
Deferred
  Federal ...................................................                (43,114)                (10,440)                 31,625
  State .....................................................                      -                       -                       -
                                                                         -----------             -----------             -----------
             Total deferred .................................                (43,114)                (10,440)                 31,625
                                                                         -----------             -----------             -----------
             Total income tax expense .......................            $ 2,040,892             $ 1,957,063             $ 1,667,418
                                                                         ===========             ===========             ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                           ------------------------
                                                                             2005                    2004                    2003
                                                                             ----                    ----                    ----
<S>                                                                       <C>                     <C>                     <C>
Provision for loan losses ..................................              $  (8,656)              $  (9,872)              $ (78,965)
Accelerated depreciation ...................................                (29,869)                 12,645                 129,972
Deferred net loan costs and fees ...........................                 (4,589)                 (3,307)                (19,382)
Writedowns of other real estate ............................                      -                  (9,906)                      -
                                                                          ---------               ---------               ---------
               Total .......................................              $ (43,114)              $ (10,440)              $  31,625
                                                                          =========               =========               =========
</TABLE>

Income before income taxes presented in the consolidated statement of income for
the years ended December 31, 2005, 2004 and 2003 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:

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                          ------------------------
                                                                           2005                     2004                  2003
                                                                           ----                     ----                  ----
<S>                                                                     <C>                     <C>                     <C>
Tax expense at statutory rate ..............................            $ 1,962,078             $ 1,833,882             $ 1,588,612
State income tax, net of federal
     income tax benefit ....................................                111,403                 102,846                  90,693
Tax-exempt interest income .................................                (60,143)                (37,392)                (22,089)
Non-deductible interest expense to
     carry tax-exempt instruments ..........................                  7,209                   3,344                   1,932
Other, net .................................................                 20,345                  54,383                   8,270
                                                                        -----------             -----------             -----------
               Total .......................................            $ 2,040,892             $ 1,957,063             $ 1,667,418
                                                                        ===========             ===========             ===========
</TABLE>

                                       46
<PAGE>

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

                                                               December 31,
                                                               ------------
                                                          2005             2004
                                                          ----             ----
Deferred tax assets
     Allowance for loan losses ...................     $  601,030     $  592,374
     Writedowns of other real estate .............          9,906          9,906
     Deferred net loan fees ......................         67,438         62,849
     Unrealized net holding losses on
       available-for-sale securities .............        782,594        279,830
                                                       ----------     ----------
               Gross deferred tax assets .........      1,460,968        944,959
     Valuation allowance .........................              -              -
                                                       ----------     ----------
               Total .............................      1,460,968        944,959
                                                       ----------     ----------

Deferred tax liabilities
     Accelerated depreciation ....................        219,161        249,030
                                                       ----------     ----------
               Gross deferred tax liabilities ....        219,161        249,030
                                                       ----------     ----------
Net deferred income tax assets ...................     $1,241,807     $  695,929
                                                       ==========     ==========

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 2005, 2004 and 2003, $502,764 was credited,  $167,970 was
credited,  and  $323,848  was  credited to other  comprehensive  income or loss,
respectively.  In 2005,  $43,114 was  credited to income tax  expense;  in 2004,
$10,440 was credited to income tax expense; and, in 2003, $31,625 was charged to
income tax expense.

Management  believes that the Company will fully realize the deferred tax assets
as of December 31, 2005 and 2004 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
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 2005, 2004 and 2003 totaled $58,983,
$62,284, and $44,848, respectively.


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  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.


                                       47
<PAGE>

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

                                                           December 31,
                                                           ------------
                                                       2005             2004
                                                       ----             ----

          Loan commitments ...................    $ 23,653,192     $ 19,771,069
          Standby letters of credit ..........         873,880          883,600



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, 2005.  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 Corporate  Office  Building.  In 2005, the Company entered into a $1,700,000
contract to build a new corporate office building in Seneca, South Carolina.  As
of December 31, 2005,  $891,000 had been  expended on this  contract and $59,000
had been paid for other related costs. In addition to the $809,000  remaining on
the  building  contract,   management  estimates   additional   expenditures  of
approximately  $250,000 to furnish and equip the  building.  The  building  will
house an additional banking office,  mortgage lending department,  and executive
and other  administrative  support  offices.  The  building  is  expected  to be
completed and ready for occupancy in the second quarter of 2006.

Westminster  Office.  In May of 2003, a temporary banking office facility opened
for commercial  operations in  Westminster,  South Carolina on land purchased in
2002.  Management has not yet formulated  plans, or considered a capital budget,
for a future permanent facility in Westminster.

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


                                       48
<PAGE>

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 U.S. Government agencies debt securities 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.


                                       49
<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,
                                                                                            ------------
                                                                              2005                                2004
                                                                              ----                                ----
                                                                  Carrying          Estimated          Carrying           Estimated
                                                                   Amount          Fair Value           Amount            Fair Value
                                                                   ------          ----------           ------            ----------
Financial assets
<S>                                                            <C>                <C>                <C>                <C>
   Cash and due from banks .............................       $ 10,063,495       $ 10,063,495       $  5,652,056       $  5,652,056
   Interest bearing deposits due from banks ............            181,892            181,892             36,139             36,139
   Federal funds sold ..................................         22,205,000         22,205,000         34,214,000         34,214,000
   Securities available-for-sale .......................        102,069,706        102,069,706         92,083,693         92,083,693
   Securities held-to-maturity .........................          7,750,610          7,671,093          9,368,609          9,560,157
   Federal Home Loan Bank stock ........................            948,400            948,400          1,011,100          1,011,100
   Loans ...............................................        167,051,589        165,856,000        155,535,116        155,961,000
   Accrued interest receivable .........................          1,628,754          1,628,754          1,331,458          1,331,458
Financial liabilities
   Deposits ............................................        279,992,599        280,060,000        268,148,225        269,244,000
   Accrued interest payable ............................          1,817,133          1,817,133          1,222,118          1,222,118
   Short-term borrowings ...............................          3,500,000          3,500,000          2,500,000          2,500,000
   Long-term debt ......................................          6,500,000          6,532,000          7,500,000          7,694,000
</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,
                                                                                          ------------
                                                                              2005                                  2004
                                                                              ----                                  ----
                                                                   Notional/        Estimated             Notional/      Estimated
                                                                    Contract          Fair                Contract         Fair
                                                                    Amount            Value                Amount          Value
                                                                    ------            -----                ------          -----
Off-balance sheet commitments
<S>                                                                 <C>               <C>              <C>                  <C>
Loan commitments .......................................            $23,653,192       $ -              $19,771,069          $ -
Standby letters of credit ..............................                873,880         -                  883,600            -
</TABLE>


NOTE O - ACCOUNTING CHANGES


Share-Based  Payment.  Management  will  adopt the  provisions  of SFAS No.  123
(revised 2004) ("SFAS No. 123(R)"),  "Share-Based Payment," effective January 1,
2006,  as  required  under  the  provisions  of that  Statement  and  applicable
Securities and Exchange ("SEC")  Commission Rules. That Statement  requires that
stock-based  compensation  awards be measured  and  reported at their grant date
fair value, with their costs recognized generally over the vesting period of the
awards.  The fair value of such stock-based  awards is affected by the Company's
stock price and by  assumptions  regarding  a number of complex  and  subjective
variables  and the  related  tax  impact.  In  addition,  in  March,  2005,  the
Securities and Exchange  Commission issued its Staff Accounting Bulletin No. 107
which  expresses the views of the SEC staff  regarding the  interaction  between
SFAS No 123(R) and certain SEC rules and  regulations as well as the SEC staff's
views  regarding the valuation of share-based  payment  arrangements  for public
companies.  The  provisions  of, and  guidance  provided in, SAB No. 107 will be
incorporated into the Company's implementation of SFAS No. 123(R).

The Company will recognize the  compensation  cost for  stock-based  awards on a
straight-line  basis over the requisite  service period for the entire award and
at  present  intends  to use  the  modified  prospective  transition  method  of
accounting  for  previously  issued  stock  options.   Accordingly,  only  costs
associated  with the unvested  portions of prior awards and awards granted after
December 31, 2005 will affect the  Company's  financial  position and results of
operations.  In 2006 and 2007, we expect to recognize  compensation  expenses of
approximately $121,000 and $152,000, respectively, related to previously-issued,
unvested stock options.

SFAS  123(R)  also  amends  SFAS No. 95 to  require  that  excess  tax  benefits
resulting  from those  transactions  be reported as financing  cash flows rather
than as a reduction of taxes paid.


                                       50
<PAGE>

Management  expects that  adoption of SFAS No.  123(R) will affect the Company's
future net income and net income per share  calculations in much the same manner
as  previously  reported in the pro forma  disclosures  as provided in Note A to
these consolidated financial statements.

Other-Than-Temporarily  Impaired Investments. On November 3, 2005, the Financial
Accounting  Standards Board issued FASB Staff Position ("FSP") FAS 115-1 and FAS
124-1 which reverts to  other-than-temporary  impairment  ("OTTI") guidance that
existed prior to the effective date of Emerging Issues Task Force ("EITF") Issue
03-1. However, the new FSP retains the disclosure requirements of 03-1 that have
been in effect since the end of 2003.

FSP FAS 115-1 and 124-1 requires the application of a three-step model to assess
and account for investments  that may be impaired.  If an investment is found to
be impaired (its fair value is less than the recorded  cost),  the extent of the
impairment is assessed using the guidance  contained in Paragraph 16 of SFAS No.
115,  SEC  Staff  Accounting  Bulletin  Topic  5.M,  Paragraph  6 of  Accounting
Principles Board Opinion 18 and EITF Issue 99-20. If the assessment results in a
conclusion that the impairment is other-than-temporary, an impairment loss equal
to the amount  that the  investment's  recorded  cost  exceeds its fair value is
recognized  in earnings and the  investment's  carrying  value is reduced to its
fair value.  That fair value becomes the  investment's  new "cost" basis and any
subsequent recoveries of fair value are not recognized.  After recognition of an
impairment loss, income recognition is based on the investment's  estimated cash
flows rather than its contractual  cash flows, and any discount or premium would
be amortized over the remaining life of the security.

The  provisions  of this FSP were adopted as of December 31, 2005, as permitted,
and had no effects on the  financial  position or results of  operations  of the
Company.

Accounting Changes and Error Corrections.  In May 2005, the FASB issued SFAS No.
154,  "Accounting  Changes and Error Corrections." This Statement applies to all
voluntary  changes  in  accounting  principles  and to  changes  required  by an
accounting  pronouncement  when  the  pronouncement  does not  include  specific
transition  provisions.  The  Statement  requires  that  changes  in  accounting
principles be applied  retrospectively  unless it is  impracticable to determine
either the  period-specific  effects or the cumulative  effect of the change. In
those  cases,  retrospective  application  of the new  accounting  principle  is
required  to be applied to the  balances  of assets  and  liabilities  as of the
beginning  of  the  earliest  period  for  which  retrospective  application  is
practicable  with a  corresponding  adjustment  to retained  earnings  (or other
appropriate equity account) at that time. If application of the new principle is
impracticable for all prior periods, then it is to be adopted prospectively from
the earliest date  practicable.  Only the direct effects of the change are to be
applied retrospectively; indirect changes are accounted for in the period of the
change.

This  Statement  also  requires that certain  changes in  accounting  methods be
accounted  for as a change  in  accounting  estimate  effected  by a  change  in
accounting principle with retrospective application applied.

This  Statement  carries  forward the guidance of APB Opinion 20 with regards to
corrections  of  accounting  errors.  Restatement  of  prior  periods  financial
statements  is required in these cases,  with  adjustments  made to the carrying
amounts  of  assets  and  liabilities,   with  an  offsetting   capital  account
adjustment, as of the beginning of the first period presented.

This  Statement was adopted  effective  January 1, 2006 and had no effect on the
Company's  financial  position or results of operations for any period presented
in the consolidated financial statements.


                                       51
<PAGE>


NOTE P - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                    2005                     2004
                                                                                                    ----                     ----
Condensed Balance Sheets
        Assets
<S>                                                                                                <C>                   <C>
               Cash ....................................................................           $ 1,120,748           $ 1,053,425
               Investment in banking subsidiary ........................................            27,722,815            24,869,570
               Other assets ............................................................                10,825                13,450
                                                                                                   -----------           -----------
                      Total assets .....................................................           $28,854,388           $25,936,445
                                                                                                   ===========           ===========
        Liabilities
               Other liabilities .......................................................                   $ -                   $ -
        Shareholders' equity ...........................................................            28,854,388            25,936,445
                                                                                                   -----------           -----------
                      Total liabilities and shareholders' equity .......................           $28,854,388           $25,936,445
                                                                                                   ===========           ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                     2005              2004                2003
                                                                                     ----              ----                ----
Condensed Statements of Income
        Income
<S>                                                                             <C>                 <C>                 <C>
               Interest income .........................................        $    15,191         $     8,973         $    13,093
               Other income ............................................              6,070               6,149               2,875
                                                                                -----------         -----------         -----------
                      Total income .....................................             21,261              15,122              15,968
                                                                                -----------         -----------         -----------
        Expenses
               Other expenses ..........................................             53,098              54,682              41,779
                                                                                -----------         -----------         -----------
                      Total expenses ...................................             53,098              54,682              41,779
                                                                                -----------         -----------         -----------
        Income (loss) before income taxes and equity in
               undistributed earnings of banking subsidiary ............            (31,837)            (39,560)            (25,811)
        Income tax expense (credit) ....................................            (10,825)            (13,450)             (8,776)
        Equity in undistributed earnings
               of banking subsidiary ...................................          3,750,938           3,462,817           3,022,004
                                                                                -----------         -----------         -----------
        Net income .....................................................        $ 3,729,926         $ 3,436,707         $ 3,004,969
                                                                                ===========         ===========         ===========
</TABLE>


                                       52
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Years Ended December 31,
                                                                                                 ------------------------
                                                                                            2005          2004              2003
                                                                                            ----          ----              ----
Condensed Statements of Cash Flows
        Operating activities
<S>                                                                                     <C>             <C>             <C>
               Net income ..........................................................    $ 3,729,926     $ 3,436,707     $ 3,004,969
                      Adjustments to reconcile net income to net
                             cash used by operating activities
                                   Equity in undistributed earnings
                                     of banking subsidiary .........................     (3,750,938)     (3,462,817)     (3,022,004)
                                   Decrease (increase) in other assets .............          2,625          (4,674)         (2,079)
                                                                                        -----------     -----------     -----------
                                     Net cash used by operating activities .........        (18,387)        (30,784)        (19,114)
                                                                                        -----------     -----------     -----------
        Financing activities
               Exercise of employee stock options ..................................         92,059         268,835          32,242
               Payment of cash in lieu of fractional
                      shares for stock dividend ....................................         (6,349)         (6,478)         (6,534)
                                                                                        -----------     -----------     -----------
                                     Net cash provided by financing activities .....         85,710         262,357          25,708
                                                                                        -----------     -----------     -----------
        Increase in cash and cash equivalents ......................................         67,323         231,573           6,594
        Cash and cash equivalents, beginning .......................................      1,053,425         821,852         815,258
                                                                                        -----------     -----------     -----------
        Cash and cash equivalents, ending ..........................................    $ 1,120,748     $ 1,053,425     $   821,852
                                                                                        ===========     ===========     ===========
</TABLE>


                                       53