EXHIBIT 13


















                         COMMUNITY FIRST BANCORPORATION

                            Portions of Registrant's
                              2006 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2006 Form 10-K




<PAGE>

Financial Summary

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                     ------------------------
                                                               2006            2005            2004           2003            2002
                                                               ----            ----            ----           ----            ----
                                                                           (Dollars in thousands, except per share data)
Financial Condition
<S>                                                         <C>             <C>             <C>             <C>             <C>
     Securities ....................................        $109,082        $109,821        $101,452        $ 86,023        $ 62,968
     Allowance for loan losses .....................           2,242           2,266           2,240           2,197           1,950
     Net loans (1) .................................         200,724         167,052         155,535         145,453         135,409
     Premises and equipment - net ..................           7,937           6,805           4,413           4,454           4,148
     Total assets ..................................         353,909         320,712         305,348         280,526         232,855
     Noninterest bearing deposits ..................          40,576          38,061          34,903          32,273          24,416
     Interest bearing deposits .....................         267,381         241,932         233,245         224,278         187,223
     Total deposits ................................         307,957         279,993         268,148         256,551         211,639
     Total liabilities .............................         320,694         291,858         279,412         257,989         212,770
     Total shareholders' equity ....................          33,215          28,854          25,936          22,537          20,085

Results of Operations
     Interest income ...............................        $ 19,600        $ 15,923        $ 13,948        $ 12,664        $ 12,580
     Interest expense ..............................          10,385           6,621           5,077           5,089           4,716
                                                            --------        --------        --------        --------        --------
     Net interest income ...........................           9,215           9,302           8,871           7,575           7,864
     Provision for loan losses .....................              65             250             380             522           1,291
                                                            --------        --------        --------        --------        --------
     Net interest income after provision ...........           9,150           9,052           8,491           7,053           6,573
     Other income ..................................           2,154           2,139           2,054           2,033           1,413
     Other expenses ................................           6,752           5,420           5,151           4,414           3,697
                                                            --------        --------        --------        --------        --------
     Income before income taxes ....................           4,552           5,771           5,394           4,672           4,289
     Income tax expense ............................           1,534           2,041           1,957           1,667           1,527
                                                            --------        --------        --------        --------        --------
     Net income ....................................        $  3,018        $  3,730        $  3,437        $  3,005        $  2,762
                                                            ========        ========        ========        ========        ========

Per Share Data (2)
     Net income ....................................        $   1.02        $   1.28        $   1.18        $   1.05        $   0.97
     Net income, assuming dilution .................            0.96            1.21            1.12            1.00            0.92
     Period end book value .........................           11.23            9.82            8.88            7.87            7.03
</TABLE>

------------------------------
(1)  Excludes loans held for sale.
(2)  Per share  amounts  have been  retroactively  adjusted  to reflect 5% stock
     dividends  effective  December  18, 2006 and November 30, 2005, a 10% stock
     dividend  effective  November  30,  2004 and 5% stock  dividends  effective
     November 28, 2003 and November 28, 2002.


                                       1
<PAGE>

Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                       2006                                   2005
                                                                       ----                                   ----
                                                       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 .......................    $5,208    $4,942    $4,803    $4,647    $4,154    $4,011    $3,907    $3,851
Interest expense ...................................     2,832     2,672     2,551     2,330     1,898     1,752     1,512     1,459
                                                        ------    ------    ------    ------    ------    ------    ------    ------

Net interest income ................................     2,376     2,270     2,252     2,317     2,256     2,259     2,395     2,392
Provision for loan losses ..........................         -        15        25        25        35         -        75       140
                                                        ------    ------    ------    ------    ------    ------    ------    ------

Net interest income after provision ................     2,376     2,255     2,227     2,292     2,221     2,259     2,320     2,252
Noninterest income .................................       517       559       539       539       558       543       551       487
Noninterest expense ................................     2,171     1,469     1,676     1,436     1,362     1,383     1,352     1,323
                                                        ------    ------    ------    ------    ------    ------    ------    ------

Income before income taxes .........................       722     1,345     1,090     1,395     1,417     1,419     1,519     1,416
Provision for income taxes .........................       261       441       348       484       503       489       542       507
                                                        ------    ------    ------    ------    ------    ------    ------    ------

Net income .........................................    $  461    $  904    $  742    $  911    $  914    $  930    $  977    $  909
                                                        ======    ======    ======    ======    ======    ======    ======    ======

Earnings per share *
Basic ..............................................    $ 0.16    $ 0.30    $ 0.25    $ 0.31    $ 0.32    $ 0.32    $ 0.33    $ 0.31
Diluted ............................................      0.15      0.28      0.24      0.29      0.33      0.29      0.30      0.29
</TABLE>
---------------------------------
*   Per share  amounts  have been  retroactively  adjusted  to  reflect 5% stock
    dividends effective December 18, 2006 and November 30, 2005.

         A  significant  portion of the  decrease in net income and earnings per
share  for  2006  was  attributable  to a  change  in the  Company's  method  of
accounting  for stock  options  required by Statement  of  Financial  Accounting
Standards No. 123 (revised 2004) ("SFAS No. 123(R)) "Share-Based Payment." Prior
to 2005,  the Company used the minimum value method to compute the fair value of
its stock  options as  permitted  by  previously  effective  generally  accepted
accounting  principles.  The  minimum  value  method  does  not  incorporate  an
assumption  about the volatility of the market value of the underlying  security
into the  calculation of the of the grant date fair value of stock options.  The
Company's  grants of stock  options  established  the  exercise  prices of those
grants equal to the market price of the  Company's  stock on the grant date.  No
compensation  cost  has  been  recognized  for  options  issued  prior  to 2005.
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  123  fair  value  method  using  that
Statement's  disclosure only provisions.  Effective January 1, 2006, the Company
adopted the provisions of SFAS No. 123(R) and began including the costs of stock
options  granted in 2005 and 2006 in the  determination  of net  income.  In the
fourth  quarter  of  2006,  the  Company's  board  of  directors   modified  all
outstanding options so that they would be vested in full. Therefore,  all of the
applicable  compensation costs for all affected options granted in 2005 and 2006
were  included  in the  determination  of net  income  for  2006.  As a  result,
approximately  $394,000 of pre-tax  compensation  costs were  recognized  in the
fourth quarter of 2006 that otherwise  would have been  recognized in 2007, 2008
and 2009.

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


                                       2
<PAGE>

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 not  guarantees of
future performance,  and 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.  The  risks and
uncertainties include, but are not limited to

     o    our growth and our ability to maintain growth;
     o    governmental  monetary and fiscal policies, as well as legislative and
          regulatory changes;
     o    the effect of interest  rate changes on our level and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;
     o    the effects of competition from other financial institutions operating
          in our market area and  elsewhere,  including  institutions  operating
          locally,  nationally and  internationally,  together with  competitors
          that offer  banking  products  and  services  by mail,  telephone  and
          computer and/or the Internet;
     o    failure of assumptions  underlying the  establishment of our allowance
          for loan losses, including the value of collateral securing loans; and
     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

         The Company  undertakes no obligation to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

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.OB." The following  table  summarizes the range of high and low bid prices
for the  Company's  common stock as reported on the OTC Bulletin  Board for each
quarterly period of 2006 and 2005.  Prices shown represent  inter-dealer  prices
without retail markup,  markdown or  commissions,  and may not represent  actual
transactions.  Furthermore,  trading in the Company's stock is very limited. Per
share  prices in the table have been  adjusted  to  reflect a 5% stock  dividend
effective December 18, 2006 and a 5% stock dividend effective November 30, 2005.

                                       2006                      2005
                                       ----                      ----
    Quarter Ended                High        Low          High           Low
    -------------                ----        ---          ----           ---
            March 31            $21.90      $17.24       $16.78         $15.87
             June 30            $22.38      $20.05       $16.92         $15.87
        September 30            $20.95      $20.10       $17.23         $16.79
         December 31            $20.48      $18.10       $18.14         $17.23


         As of February 28, 2007, there were approximately 786 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 2007.

         The Board of Directors  declared 5% stock dividends  effective December
18, 2006 and November 30, 2005 and a 10% stock dividend  effective  November 30,
2004.

         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>

Shareholder Return Performance Graph

         The Company is required to provide its  shareholders  with a line graph
comparing the Company's total cumulative  shareholder  return with a performance
indicator of the overall stock market and either a published industry index or a
Company-determined   peer  comparison.   Shareholder  return  (measured  through
increases in stock prices and payment of dividends) is often a benchmark used in
assessing  corporate  performance and the reasonableness of compensation paid to
executive officers.

         The performance graph presented below compares the Company's cumulative
total  return over the most recent five year period with the Russell  2000 Index
(reflecting  overall stock market  performance for small cap stocks) and the SNL
100-500 OTC BB and Pink Banks Index (reflecting  changes in overall stock market
performance  for a national  group of 404  banking  companies  with asset  sizes
ranging from $100 - $500 million, the trades of which are reported either on the
OTC Bulletin  Board or in the Pink Sheets).  Returns are shown on a total return
basis,  assuming  reinvestment  of dividends and a beginning stock price of $100
per share.  Values  presented for the Company's  stock are based on  information
compiled by SNL Financial,  LC, which prepared the  performance  graph,  and are
based on limited transactions.

<TABLE>
<CAPTION>
                                                                                       Period Ending
                                                                                       -------------
                                                     12/31/01      12/31/02      12/31/03     12/31/04      12/31/04      12/31/06
                                                     --------      --------      --------     --------      --------      --------
Index
<S>                                                   <C>           <C>          <C>           <C>           <C>          <C>
Community First Bancorporation                        100.00         97.00       113.62        134.54        143.66       165.97
Russell 2000                                          100.00         79.52       117.09        138.55        144.86       171.47
SNL $100M-$500M OTC-BB and Pink Banks Index           100.00        119.94       162.94        196.93        218.70       239.40
</TABLE>




                                       4
<PAGE>

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

         This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of Community First  Bancorporation
and its wholly-owned  subsidiary,  Community First Bank (the "Bank"),  which are
collectively  referred to as the "Company".  This information should be reviewed
in  conjunction  with the  consolidated  financial  statements and related notes
contained  elsewhere  in this  report.  Per share  net  income  and net  income,
assuming  dilution,  have been adjusted to reflect 5% stock dividends  effective
December  18,  2006 and  November  30, 2005 and a 10% stock  dividend  effective
November 30, 2004.

Earnings Performance

2006 Compared with 2005

         For the year ended December 31, 2006,  the Company  recorded net income
of $3,018,000,  a decrease of $712,000,  or 19.1%, from net income of $3,730,000
for 2005.  Net income per share for 2006 was $1.02 compared with $1.28 for 2005.
Per share net income, assuming dilution from outstanding stock options, was $.96
for 2006 and  $1.21  for  2005.  Return  on  average  assets  was 0.89% for 2006
compared with 1.21% for 2005. Return on average  shareholders'  equity was 9.87%
for 2006 compared with 13.65% for 2005.

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

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

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

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

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

         As  discussed  in more detail under  "Quarterly  Financial  Information
(Unaudited),"  the Company adopted Statement of Financial  Accounting  Standards
No. 123 (revised 2004),  "Share-Based  Payment,"  ("SFAS  123(R)")  effective on
January 1, 2006.  Accordingly,  compensation  expenses  related to certain stock
options issued to officers and directors  were initially  recognized in 2006. In
2006, the Company modified the terms of all remaining  non-vested options issued
in 2005 to  provide  for the  vesting  of those  options  in 2006  (under  their
original terms,  those options would have vested in four equal annual increments
after  2005).  Furthermore,  in the  fourth  quarter  of 2006,  the terms of all
options issued in 2006 were modified to provide for their immediate vesting.  As
a result,  all of the future  compensation  costs  associated with the Company's
option grants to date were accelerated and recognized  during 2006.  Share-based
compensation  expenses  recognized  in 2006  totaled  $593,000.  Of this amount,
$302,000  was  included in salaries  and  employee  benefits  and  $291,000  was
included in other expense.

                                       5
<PAGE>

         During the second quarter of 2006, the Company  completed  construction
of a multi-story office building which houses an additional full service banking
office in Seneca,  SC.  Certain  executive  officers  and other  personnel  were
relocated  into the building,  as well.  The banking  office employs 8 full-time
personnel.

         The Bank has received  regulatory  approval to open a new  full-service
banking  office in the City of  Anderson,  SC.  Construction  of this  office is
expected  to begin  during the first  quarter of 2007 with  completion  expected
during the fourth  quarter of 2007. The cost of  construction  is expected to be
approximately  $800,000.  Land  intended  to be  used  for  the  Bank's  further
expansion in Anderson County has also been obtained near Powdersville, SC.

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

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 $1.28 compared with $1.18 for 2004.
Per share net income,  assuming  dilution from  outstanding  stock options,  was
$1.21 for 2005 and $1.12 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 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.

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


                                       6
<PAGE>

by changes in the volume and mix of interest earning assets and interest bearing
liabilities.

2006 Compared with 2005

         Net interest  income was  $9,215,000,  $9,302,000,  and  $8,871,000 for
2006, 2005 and 2004, respectively.  Interest income for 2006 was $19,600,000, an
increase  of  $3,677,000,  or 23.1%,  over 2005.  Interest  expense for 2006 was
$10,385,000,  an  increase  of  $3,764,000,  or 56.8%,  over 2005.  The  Company
experienced   higher   average   volumes   of   interest-earning    assets   and
interest-bearing  liabilities in 2006 as well as higher average yields and rates
on those instruments.

         Managing  net interest  margin  effectively  during 2006 was  extremely
challenging.  During  the  first  seven  months  of 2006,  the  Federal  Reserve
continued the regular,  quarter-point  increases in the federal funds rate which
began in June 2004.  For the  remainder of the year,  the central bank adopted a
"wait and see"  attitude,  and  maintained  their  interest  rate targets at the
levels set previously.  Since the end of 2003,  short-term market interest rates
(rates on instruments  with  maturities up to one year) have  increased  between
approximately  350 and 400 basis points while the rates  associated  with longer
term  instruments  have been less affected.  For example,  rates associated with
five year maturities  increased  approximately 175 basis points and rates on ten
year  maturities  increased   approximately  70  basis  points.  Interest  rates
applicable to the Company's deposit and loan products are centered mainly in the
shorter, more volatile end of the maturity spectrum.  Some investment securities
have   longer-term   maturities  and  certain   longer-term   loans,   primarily
collateralized by real estate,  may contain terms that allow the Company to vary
their interest rates no less frequently than every five years.

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

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

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

         Average  interest  earning  assets  during 2006 were  $326,279,000,  an
increase of $28,429,000  or 9.5% over 2005.  Average  investment  securities for
2006  totaled  $116,379,000,  an  increase of  $5,823,000  or 5.3% over the 2005
average  amount.   Average  loans  for  the  2006  twelve-month  period  totaled
$184,032,000,  an increase of $19,789,000 or 12.0% over 2005. Average loans were
56.4%  and  55.1%  of  average  interest  earning  assets  for  2006  and  2005,
respectively.  Average federal funds sold for 2006 were $24,814,000, an increase
of $2,930,000 or 13.4% over 2005.  Average interest bearing  liabilities  during
2006 totaled $268,493,000, representing an increase of $24,985,000 or 10.3% over
the amount for 2005. Average interest bearing transaction  accounts increased to
$46,942,000  for 2006, an increase of $10,831,000 or 30.0% over the 2005 average
amount.  Average time deposits of $100,000 and over increased to $72,936,000 for
2006 from  $64,821,000  in the prior year,  an increase of  $8,115,000 or 12.5%.
Average time deposits less than $100,000 increased to $114,091,000 for 2006 from
$105,798,000 in 2005,  representing  an increase of $8,293,000 or 7.8%.  Average
short and long-term  borrowings decreased to $6,011,000 for 2006 from $8,192,000
for 2005. 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 2006,
$5,500,000 of that debt remained outstanding.

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.

                                       7
<PAGE>

         As expected,  managing net interest  margin  effectively  in the rising
rate environment that prevailed  throughout the year was also 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
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, was 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  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 a result of depositors attempting 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.

         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, 2006,  2005 and
2004.


                                       8
<PAGE>

                     Average Balances, Yields and Rates
<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                                             ------------------------
                                                             2006                        2005                         2004
                                                             ----                        ----                         ----
                                                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 ...    $     82  $     4   4.88%   $    168   $     5   2.98%   $     29   $     1    3.45%
Taxable securities .........................      99,922    3,868   3.87%    106,149     3,564   3.36%    103,973     3,285    3.16%
Tax-exempt securities (2) ..................      16,457      636   3.86%      4,407       150   3.40%      2,076        73    3.52%
Federal funds sold .........................      24,814    1,175   4.74%     21,884       668   3.05%     24,126       295    1.22%
Federal Home Loan Bank stock ...............         972       52   5.35%        999        38   3.80%        866        29    3.35%
Loans (2) (3) (4) ..........................     184,032   13,865   7.53%    164,243    11,498   7.00%    152,546    10,265    6.73%
                                                --------  -------           --------   -------           --------   -------
         Total interest earning assets .....     326,279   19,600   6.01%    297,850    15,923   5.35%    283,616    13,948    4.92%
Cash and due from banks ....................       6,573                       4,845                        4,786
Allowance for loan losses ..................      (2,263)                     (2,304)                      (2,268)
Unrealized securities gains (losses) .......      (2,341)                     (1,601)                        (684)
Premises and equipment .....................       7,586                       5,240                        4,365
Other assets ...............................       3,914                       3,346                        3,943
                                                --------                    --------                     --------
         Total assets ......................    $339,748                    $307,376                     $293,758
                                                ========                    ========                     ========

Liabilities and shareholders' equity
Interest bearing deposits
     Interest bearing transaction accounts .    $ 46,942  $ 1,358   2.89%   $ 36,111   $   383   1.06%   $ 35,707   $   244    0.68%
     Savings ...............................      28,513      736   2.58%     28,586       381   1.33%     31,052       154    0.50%
     Time deposits $100M and over ..........      72,936    2,953   4.05%     64,821     2,118   3.27%     60,301     1,481    2.46%
     Other time deposits ...................     114,091    5,100   4.47%    105,798     3,438   3.25%    103,923     3,012    2.90%
                                                --------  -------           --------   -------           --------   -------
         Total interest bearing deposits ...     262,482   10,147   3.87%    235,316     6,320   2.69%    230,983     4,891    2.12%
Short-term borrowings ......................          56        2   3.57%        736        18   2.45%      1,352        27    2.00%
Long-term debt .............................       5,955      236   3.96%      7,456       283   3.80%      4,057       159    3.92%
                                                --------  -------           --------   -------           --------   -------
         Total interest bearing liabilities      268,493   10,385   3.87%    243,508     6,621   2.72%    236,392     5,077    2.15%
Noninterest bearing demand deposits ........      38,197                      34,675                       31,435
Other liabilities ..........................       2,489                       1,873                        1,735
Shareholders' equity .......................      30,569                      27,320                       24,196
                                                --------                    --------                     --------
         Total liabilities and shareholders'
         equity ............................    $339,748                    $307,376                     $293,758
                                                ========                    ========                     ========
Interest rate spread  (5) ..................                        2.14%                        2.63%                         2.77%
Net interest income and net yield
     on earning assets  (6) ................              $ 9,215   2.82%              $ 9,302   3.12%              $ 8,871    3.13%
Interest free funds supporting earning
     assets  (7) ...........................    $ 57,786                    $ 54,342                     $ 47,224
</TABLE>
-----------------------------
(1)  Average balances are computed on a daily basis.
(2)  Income and yields on tax-exempt securities and loans have not been adjusted
     on a tax equivalent basis.
(3)  Nonaccrual  loans are included in the average  loan  balances and income on
     such loans generally is recognized on a cash basis.
(4)  Includes immaterial amounts of loan fees.
(5)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(6)  Net interest income divided by total interest earning assets.
(7)  Total interest earning assets less total interest bearing liabilities.

                                       9
<PAGE>

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

     Volume and Rate Variance Analysis

<TABLE>
<CAPTION>
                                                                 2006 Compared with 2005             2005 Compared with 2004
                                                                 -----------------------             -----------------------
                                                             Volume (1)    Rate (1)    Total     Volume (1)    Rate (1)      Total
                                                             -------       -----       -----     -------       -----         -----
                                                                (Dollars in thousands)
<S>                                                        <C>          <C>          <C>          <C>          <C>          <C>
Interest bearing deposits due from banks .............     $    (3)     $     2      $    (1)     $     4      $     -      $     4
Taxable securities ...................................        (218)         522          304           70          209          279
Tax-exempt securities ................................         463           23          486           79           (2)          77
Federal funds sold ...................................          99          408          507          (30)         403          373
Federal Home Loan Bank stock .........................          (1)          15           14            4            5            9
Loans ................................................       1,450          917        2,367          808          425        1,233
                                                           -------      -------      -------      -------      -------      -------
             Total interest income ...................       1,790        1,887        3,677          935        1,040        1,975
                                                           -------      -------      -------      -------      -------      -------
Interest bearing deposits
     Interest bearing transaction accounts ...........         144          831          975            3          136          139
     Savings .........................................          (1)         356          355          (13)         240          227
     Time deposits $100M and over ....................         287          548          835          118          519          637
     Other time deposits .............................         287        1,375        1,662           55          371          426
Short-term borrowings ................................         (22)           6          (16)         (16)           7           (9)
Long-term debt .......................................         (59)          12          (47)         130           (6)         124
                                                           -------      -------      -------      -------      -------      -------
             Total interest expense ..................         636        3,128        3,764          277        1,267        1,544
                                                           -------      -------      -------      -------      -------      -------
             Net interest income .....................     $ 1,154      $(1,241)     $   (87)     $   658      $  (227)     $   431
                                                           =======      =======      =======      =======      =======      =======
</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 remain relatively
stable during 2007.  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 2007 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 $65,000,  $250,000 and $380,000 for the years ended December 31, 2006, 2005
and 2004,  respectively.  The decreased provisions in 2006 and 2005 were largely
the result of low amounts of net loan charge-offs,  a slower rate of loan growth
during 2005,  and a lower amount of  nonaccrual  and past due loans for 2006 and
2005.  The  allowance for loan losses as a percentage of total loans at year-end
was 1.10 for 2006 compared with 1.34% for 2005.  Net  charge-offs  for 2006 were
$89,000,  a decrease of $135,000  from the 2005 amount.  See  "Impaired  Loans,"
"Potential  Problem Loans,"  "Allowance for Loan Losses" and "The Application of
Critical  Accounting  Policies" for further  information and a discussion of the
methodology  used and factors  considered  by  management in its estimate of the
allowance for loan losses.

                                       10
<PAGE>

Other Income

         Noninterest  income for 2006  increased  by $15,000 over the amount for
2005,  primarily  due to  increased  sales of credit life  insurance  and higher
amounts of income from ATM and other debit card-related services.  There were no
realized  gains or losses  on sales of  investment  securities  in 2006 or 2005.
Mortgage  brokerage  income for 2006 was $42,000 less than for 2005. The Company
generally  originates  fixed rate  residential  mortgage  loans  under an agency
relationship  with another financial  institution,  and, as was also the case in
2005, such originations were lower in 2006 than in prior years. Conversely,  the
Company  originates  for its own account  residential  mortgage loans with terms
that allow the Company to adjust the loans'  interest rates not less  frequently
than every five years.

         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 fixed  rate  residential
mortgage loan originations was lower than in prior years.

Other Expenses

2006 Compared with 2005

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

         As of December  31,  2006,  the Company  has two  stock-based  employee
compensation  plans.  Prior to January 1, 2006, the Company  accounted for those
plans under the recognition and measurement  principles of Accounting Principles
Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
related   interpretations.   No  stock-based  employee   compensation  cost  was
previously reflected in net income, as all options granted under those plans had
an exercise  price equal to the market value of the  underlying  common stock on
the  date  of  grant.  The  Company  previously  provided  only  the  pro  forma
disclosures  required by Financial Accounting Standards Board ("FASB") Statement
No. 123,  "Accounting  for  Stock-Based  Compensation,"  as  amended.  Effective
January 1, 2006, the Company adopted SFAS 123(R),  "Share-Based Payment." In the
fourth  quarter  of  2006,  the  Company's  board  of  directors   modified  all
outstanding options so that they would be vested immediately.  Therefore, all of
the  compensation  costs for all affected  options ever granted were included in
the determination of net income for 2006.

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

         Certain  noninterest  expenses  are expected to continue to increase in
2007,  including  occupancy and furniture and equipment expense.  It is expected
that the  acceleration  of the vesting of stock options,  and the recognition of
the  related  expense in 2006,  will  result in lower  amounts of  salaries  and
employee benefits in 2007.  However,  the Company continues to expand the Bank's
network of offices as evidenced by the new Seneca,  SC office  opened in 2006, a
newly approved future location in the City of Anderson,  SC where grading of the
property was commenced late in the fourth  quarter of 2006, and the  acquisition
of property for future expansion near Powdersville, SC. As these new offices are
completed and opened for business,  the Company expects that other expenses will
continue to increase.  Management closely monitors  noninterest expenses so that
profitability objectives may be achieved while promoting growth in the Company's
market share in Oconee and Anderson counties.

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.

         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.

                                       11
<PAGE>

         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 a 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.

Income Taxes

         For 2006,  federal and state  income taxes  decreased  by $507,000,  or
24.8%, to $1,534,000.  For 2005, federal and state income tax expenses increased
by $84,000,  or 4.3%, to $2,041,000.  The effective income tax rates (income tax
expense  divided by income before  income taxes) were 33.7% for 2006,  35.4% for
2005 and 36.3% for 2004. The Company's income from nontaxable  sources,  such as
nontaxable  investment  securities or loans to local  governments,  has recently
become a more significant factor in the determination of its effective tax rate.
Nontaxable  securities  income  totaled  $636,000 in 2006,  $150,000 in 2005 and
$73,000 in 2004.

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,
                                                                                                  ------------
                                                                                 2006                  2005                   2004
                                                                                 ----                  ----                   ----
                                                                                              (Dollars in thousands)
Available-for-sale
<S>                                                                           <C>                    <C>                    <C>
Government-sponsored enterprises ..............................               $ 56,204               $ 58,004               $ 46,768
State, county and municipal ...................................                 18,939                  9,960                  2,101
Mortgage-backed securities ....................................                 27,344                 34,106                 43,214
                                                                              --------               --------               --------
         Total available-for-sale .............................                102,487                102,070                 92,083
                                                                              --------               --------               --------
Held-to-maturity
Mortgage-backed securities ....................................                  6,595                  7,751                  9,369
                                                                              --------               --------               --------
         Total securities .....................................               $109,082               $109,821               $101,452
                                                                              ========               ========               ========
</TABLE>


                                       12
<PAGE>

         The following table presents  maturities and weighted average yields of
securities  at  December  31,  2006.  Yields on  tax-exempt  state,  county  and
municipal obligations have not been computed on a taxable-equivalent basis.

<TABLE>
<CAPTION>
                                    December 31, 2006
                                                              After              After
                                                            One Year           Five Years
                                        Within               Through            Through             After
                                        One Year            Five Years          Ten Years          Ten Years            Total
                                        --------            ----------          ---------          ---------            -----
                                    Amount     Yield     Amount    Yield     Amount   Yield      Amount  Yield    Amount      Yield
                                    ------     -----     ------    -----     ------   -----      ------  -----    ------      -----
                                                                        (Dollars in thousands)
<S>                                 <C>        <C>     <C>         <C>     <C>         <C>     <C>        <C>     <C>         <C>
Government-sponsored
     enterprises .................  $ 10,243   2.94%   $ 36,998    4.32%   $  6,990    5.64%   $  1,973   5.37%   $ 56,204    4.27%
State, county and municipal ......         -   0.00%        556    2.92%      2,061    3.72%     16,322   3.91%     18,939    3.86%
Mortgage-backed securities (1) ...       244   3.92%     12,882    3.81%      5,095    3.73%     15,718   4.14%     33,939    3.95%
                                    --------           --------            --------            --------           --------
         Total ...................  $ 10,487   2.96%   $ 50,436    4.17%   $ 14,146    4.67%   $ 34,013   4.10%   $109,082    4.10%
                                    ========           ========            ========            ========           ========
</TABLE>
----------------------------
(1)  Maturity  categories  based  upon  final  stated  maturity  dates.  Average
     maturity  is  substantially  shorter  because  of  the  monthly  return  of
     principal on certain securities.

         Government-sponsored enterprises ("GSEs") are agencies and corporations
established by the U.S.  Government,  including,  among others, the Federal Home
Loan Banks,  Federal National Mortgage  Association,  Federal Home Loan Mortgage
Corporation  and  Federal  Farm  Credit  Banks.   Securities   issued  by  these
enterprises are not obligations of the U.S. Government and are not backed by the
full faith and credit of the U.S. Government or otherwise guaranteed by the U.S.
Government.   Evidencing  the  high-quality  of  the  issuers,   however,  these
securities  generally are eligible to be used as security for public deposits of
the U.S.  Treasury,  government  agencies and  corporations and states and other
political  subdivisions.  As of December 31,  2006,  the Company had invested in
securities  issued by GSEs in amounts  exceeding 10% of  stockholders  equity as
follows: Federal Home Loan Mortgage Corporation - $28,586,000, Federal Home Loan
Banks - $27,966,000 and Federal National Mortgage Association - $31,447,000. The
Company  believes  that its  investment  in these  securities at these levels is
prudent, given the excellent credit ratings enjoyed by the GSEs.

         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 2006 and 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.  No  transfers  of
available-for-sale or held-to-maturity  securities to other categories were made
in any of the years 2004 through 2006.

         The  investment  portfolio  decreased by $739,000 in 2006 from the 2005
year-end amount.  During 2006, the Company's  investment in securities issued by
state, county and municipal governments increased by $8,979,000, or 90.2%, while
its investment in mortgage-backed  securities decreased by $7,918,000, or 18.9%,
continuing  a trend  which  began in 2005.  During  2006,  the  Company  did not
purchase any mortgage-backed securities. Income from securities issued by state,
county and municipal  governments is generally exempt from federal income taxes.
Through the interest rate cycle,  the advantages of holding  different  types of
securities changes.  Consequently,  the composition of the investment  portfolio
may change as management  continually  seeks to maximize the yield realized from
the portfolio within the restraints of other risk mitigation policies.

         During  2005,  the  Company's  holdings of  mortgage-backed  securities
decreased by approximately  $10,726,000.  Generally, the Company's investment in
mortgage-backed  securities consists of pass-through  securities issued by GSEs.
Those  pass-through  securities  supply the Company  with a source of  liquidity
since payments made on the mortgage loans underlying the securities are remitted
to the Company monthly.  Rapid repayment of such securities  occurred throughout
2005 in response to the low fixed  interest  rates then  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 reduced 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 payments of the underlying mortgage loans that


                                       13
<PAGE>

were pooled during the creation of the specific security.  However,  actual cash
flows derived from those securities recently have generally exceeded the amounts
required  contractually  due to  refinancing  and other  activity  conducted  by
homeowners.  As a result,  as prepayments  were received,  the Company  expended
considerable  effort to maintain the  investment  portfolio at levels  needed to
satisfy its  pledging  requirements  for  governmental  deposits and to meet its
earnings goals. Conversely,  cash flows from non-pass-through  securities issued
directly by GSEs 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 issuer's  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 and
2006 less  frequently than in prior years.  During 2006 and 2005,  calls totaled
$3,203,000 and $5,000,000,  respectively.  In 2004 more than  $36,000,000 of the
Company's investment securities were called.

         The overall yield on investment securities held as of December 31, 2006
was 4.10%,  compared with a yield of 3.61% on securities held as of December 31,
2005. As of December 31, 2006,  securities  with a carrying value of $72,203,000
were  pledged to secure  public  deposits.  Short-term  market rates of interest
increased  somewhat  during  2006 and  more  dramatically  in 2005.  Longer-term
interest rates in both years were relatively more stable.
 These  external  factors  contribute  significantly  to the  Company's  pricing
structure for its loan and deposit  products  and, to a large extent,  determine
the yields available on investment securities.

         All  mortgage-backed  securities  held by the  Company in 2006 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.

         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:

                                       14
<PAGE>

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                                   2006           2005         2004            2003           2002
                                                                   ----           ----         ----            ----           ----
                                                                                       (Dollars in thousands)
Commercial, financial and industrial
<S>                                                             <C>            <C>            <C>            <C>            <C>
       Commercial and industrial ........................       $ 22,268       $ 20,873       $ 21,907       $ 20,592       $ 19,124
       Purchasing or carrying securities ................          2,000          2,136          2,372          2,323          2,547
Real estate - construction ..............................          1,982            674            338            436            822
Real estate - mortgage
       1-4 family residential ...........................         98,708         72,774         65,360         58,762         54,471
       Multifamily (5 or more) residential ..............          1,900          1,229          1,036          2,095          2,311
       Nonfarm, nonresidential ..........................         47,337         46,544         43,589         40,834         36,122
Consumer installment
       Credit card and checking credit ..................          1,334          1,148          1,036            998          1,033
       Other ............................................         27,437         23,940         22,137         21,610         20,929
                                                                --------       --------       --------       --------       --------
                       Total loans ......................       $202,966       $169,318       $157,775       $147,650       $137,359
                                                                ========       ========       ========       ========       ========
</TABLE>

                      Percentage Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                                ------------
                                                                       2006          2005          2004          2003          2002
                                                                       ----          ----          ----          ----          ----
Commercial, financial and industrial
<S>                                                                    <C>           <C>           <C>           <C>           <C>
       Commercial and industrial .............................         11.0%         12.3%         13.9%         13.9%         13.9%
       Purchasing or carrying securities .....................          1.0%          1.3%          1.5%          1.6%          1.8%
Real estate - construction ...................................          1.0%          0.4%          0.2%          0.3%          0.6%
Real estate - mortgage
       1-4 family residential ................................         48.6%         43.0%         41.4%         39.8%         39.7%
       Multifamily (5 or more) residential ...................          0.9%          0.7%          0.7%          1.4%          1.7%
       Nonfarm, nonresidential ...............................         23.3%         27.5%         27.6%         27.7%         26.3%
Consumer installment
       Credit card and checking credit .......................          0.7%          0.7%          0.7%          0.7%          0.8%
       Other .................................................         13.5%         14.1%         14.0%         14.6%         15.2%
                                                                      -----         -----         -----         -----         -----
                       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   $33,648,000  or  19.9%  in  2006,   compared  with
$11,543,000  or 7.3% in 2005.  The ratio of total loans to total deposits at the
end of 2006 was 65.9%,  compared with 60.5% at the end of 2005.  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,
2006.

         Commercial  and  industrial   loans   primarily   represent   loans  to
businesses,  and may be made on either a secured  or an  unsecured  basis.  When
taken,   collateral  usually  consists  of  liens  on  receivables,   equipment,
inventories,  furniture and  fixtures.  Unsecured  business  loans are generally
short-term with emphasis on repayment  strengths and low  debt-to-worth  ratios.
During 2006,  total  commercial,  financial and  industrial  loans  increased by
$1,259,000 or 5.5%, compared with a decrease of $1,270,000 or 5.2%, during 2005.
Loans  mainly for  business  and  investment  purposes  that are secured by real


                                       15
<PAGE>

estate (nonfarm, nonresidential) increased by $793,000 or 1.7%, compared with an
increase of $2,955,000 or 6.8% in 2005.  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 73% and
71% of the Company's loan  portfolio at the end of 2006 and 2005,  respectively.
Real  estate  mortgage  loans of all types grew  $27,398,000  during 2006 and by
$10,562,000  during 2005.  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,  2006,  as well as the type of
interest requirement on such loans.

<TABLE>
<CAPTION>
                                                                                               December 31, 2006
                                                                                               -----------------
                                                                             Due in          Due after
                                                                            One Year        One through    Due after
                                                                             or Less         Five Years    Five Years        Total
                                                                             -------         ----------    ----------        -----
                                                                                            (Dollars in thousands)
<S>                                                                         <C>             <C>             <C>             <C>
Commercial, financial and industrial ...............................        $ 12,120        $ 11,582        $    566        $ 24,268
Real estate - construction .........................................           1,205             749              28           1,982
Real estate - mortgage .............................................          39,989          68,699          39,257         147,945
Consumer installment ...............................................           7,225          18,938           2,608          28,771
                                                                            --------        --------        --------        --------
                    Total loans ....................................        $ 60,539        $ 99,968        $ 42,459        $202,966
                                                                            ========        ========        ========        ========


Predetermined rate, maturity greater than one year .................                        $ 93,216        $ 12,863        $106,079
                                                                                            ========        ========        ========

Variable rate or maturity within one year ..........................        $ 60,539        $  6,752        $ 29,596        $ 96,887
                                                                            ========        ========        ========        ========
</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:



                                       16
<PAGE>

                Nonaccrual and Past Due Loans

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                                   2006         2005            2004           2003           2002
                                                                   ----         ----            ----           ----           ----
                                                                                      (Dollars in thousands)

<S>                                                              <C>            <C>            <C>            <C>            <C>
Nonaccrual loans ........................................        $   50         $  900         $1,465         $  997         $  866
Accruing loans 90 days or more past due .................             -              5              9              -              -
                                                                 ------         ------         ------         ------         ------
               Total ....................................        $   50         $  905         $1,474         $  997         $  866
                                                                 ======         ======         ======         ======         ======

Percent of total loans ..................................           0.0%           0.5%           0.9%           0.7%           0.6%
</TABLE>

         When an  impaired  loan is 90 days or more past due as to  interest  or
principal or there is serious doubt as to ultimate  collectibility,  the accrual
of interest income is generally  discontinued.  Previously  accrued  interest on
loans placed in a nonaccrual  status is reversed  against  current  income,  and
subsequent interest income is recognized on a cash basis when received. When the
collectibility  of a  significant  amount  of  principal  is in  serious  doubt,
collections  are credited  first to the  remaining  principal  balance on a cost
recovery  basis.  An impaired  nonaccrual loan is not returned to accrual status
unless  principal and interest are current and the borrower has demonstrated the
ability to continue  making  payments as agreed.  The amount of interest  income
that would have been included in income if nonaccrual  loans had been current in
accordance with their terms and the amounts of interest income actually  accrued
and collected were immaterial to the consolidated financial statements for 2006,
2005 and 2004.

         As of December 31, 2006, 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, 2006  determined by  management  to be potential  problem loans was
$3,176,000,  an  increase  of  $1,028,000  over the  amount of such  loans as of
December  31,  2005.  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, 2006
                                                            -----------------
                                                        Amount               %
                                                        ------               -
                                                         (Dollars in thousands)

Real estate mortgage .......................            $2,745           86.4%
Vehicles ...................................               196            6.2%
Mobile homes ...............................                11            0.3%
Other ......................................               129            4.1%
Unsecured ..................................                95            3.0%
                                                        ------          -----
              Total ........................            $3,176          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


                                       17
<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,
                                                                                          ------------------------
                                                                         2006        2005          2004         2003          2002
                                                                         ----        ----          ----         ----          ----
                                                                                          (Dollars in thousands)

<S>                                                                    <C>          <C>          <C>          <C>          <C>
Total loans outstanding at end of period ..........................    $202,966     $169,318     $157,775     $147,650     $137,359
Average amount of loans outstanding ...............................     184,032      164,243      152,546      142,322      130,104

Balance of allowance for loan losses - beginning ..................    $  2,266     $  2,240     $  2,197     $  1,950     $  1,200
                                                                       --------     --------     --------     --------     --------
Loans charged off
     Commercial and industrial ....................................          13            -           31          305          193
     Real estate - mortgage .......................................           6           61          104            -          131
     Consumer installment .........................................         115          242          226            -          223
                                                                       --------     --------     --------     --------     --------
           Total charge-offs ......................................         134          303          361          305          547
                                                                       --------     --------     --------     --------     --------
Recoveries of loans previously charged off
     Commercial and industrial ....................................           -            -            6           30            1
     Real estate - mortgage .......................................          31           10            -            -            -
     Consumer installment .........................................          14           69           18            -            5
                                                                       --------     --------     --------     --------     --------
           Total recoveries .......................................          45           79           24           30            6
                                                                       --------     --------     --------     --------     --------
Net charge-offs ...................................................          89          224          337          275          541
                                                                       --------     --------     --------     --------     --------
Additions to allowance charged to expense .........................          65          250          380          522        1,291
                                                                       --------     --------     --------     --------     --------
Balance of allowance for loan losses - ending .....................    $  2,242     $  2,266     $  2,240     $  2,197     $  1,950
                                                                       ========     ========     ========     ========     ========

Ratios
     Net charge-offs to average loans .............................        0.05%        0.14%        0.22%        0.19%        0.42%
     Net charge-offs to loans at end of period ....................        0.04%        0.13%        0.21%        0.19%        0.39%
     Allowance for loan losses to average loans ...................        1.22%        1.38%        1.47%        1.54%        1.50%
     Allowance for loan losses to loans at end of period ..........        1.10%        1.34%        1.42%        1.49%        1.42%
     Net charge-offs to allowance for loan losses .................        3.97%        9.89%       15.04%       12.52%       27.74%
     Net charge-offs to provision for loan losses .................      136.92%       89.60%       88.68%       52.68%       41.91%
</TABLE>

Deposits

         The average amounts and percentage  composition of deposits held by the
Company for the years ended  December 31, 2006,  2005 and 2004,  are  summarized
below:



                                       18
<PAGE>

    Average Deposits

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                          ------------------------
                                                                 2006                       2005                     2004
                                                                 ----                       ----                     ----
                                                      Amount           %         Amount           %       Amount             %
                                                      ------           -         ------           -       ------             -
                                                                             (Dollars in thousands)

<S>                                                    <C>           <C>        <C>           <C>        <C>              <C>
Noninterest bearing demand .....................       $ 38,197       12.7%     $ 34,675       12.8%     $ 31,435          12.0%
Interest bearing transaction accounts ..........         46,942       15.6%       36,111       13.4%       35,707          13.6%
Savings ........................................         28,513        9.5%       28,586       10.6%       31,052          11.8%
Time deposits $100M and over ...................         72,936       24.3%       64,821       24.0%       60,301          23.0%
Other time deposits ............................        114,091       37.9%      105,798       39.2%      103,923          39.6%
                                                       --------      -----      --------       -----     --------         -----
             Total deposits ....................       $300,679      100.0%     $269,991      100.0%     $262,418         100.0%
                                                       ========      =====      ========      =====      ========         =====
</TABLE>

         As of December 31, 2006,  there were  $68,277,000  in time  deposits of
$100,000  or  more.  Approximately   $19,868,000  mature  within  three  months,
$15,672,000  mature over three through six months,  $19,311,000  mature over six
through twelve months and $13,426,000 mature after one year. This level of large
time deposits,  as well as the growth in other deposits, is attributed to growth
planned by management.  The vast majority of time deposits $100,000 and over are
acquired  within the Company's  market areas in the ordinary  course of business
from customers  with standing  banking  relationships.  As of December 31, 2006,
approximately  $13,668,000  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,
                                               ------------------------
                                            2006          2005           2004
                                            ----          ----           ----

Return on assets ...................       0.89%          1.21%          1.17%
Return on equity ...................       9.87%         13.65%         14.20%
Dividend payout ratio ..............       0.00%          0.00%          0.00%
Equity to assets ratio .............       9.00%          8.89%          8.24%

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  67.0% of average
total assets during 2006  compared  with 66.7% during 2005.  Deposits of several
local governmental entities comprised approximately 13% of total deposits at the
end of both 2006 and 2005.  Because of the  potentially  volatile nature of this


                                       19
<PAGE>

funding source,  the Bank maintains  membership in the Federal Home Loan Bank of
Atlanta  (the  "FHLB") in order to gain  access to its credit  programs.  During
2004, the banking subsidiary  obtained  approximately  $10,000,000 of short-term
borrowings and long-term debt from the FHLB. As of December 31, 2006, $5,500,000
of these borrowings remained  outstanding and the banking subsidiary is eligible
to borrow up to an additional  $33,452,000  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 $86,052,000 as of December 31, 2006. In addition, the
banking  subsidiary has available unused  short-term lines of credit to purchase
up to an additional  $6,400,000 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  ($3,042,000 at December 31, 2006) 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 2006, 2005 and 2004, 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.

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

Capital Resources

         Shareholders' equity increased by $4,361,000 and $2,918,000 during 2006
and 2005,  respectively.  During 2006, net income increased shareholders' equity
by $3,018,000 and the exercise of employee stock options provided an increase of
$83,000.  Share-based  compensation  costs included in net income were offset by
increases in additional paid-in capital totaling  $593,000,  as required by SFAS
123(R).  Other  comprehensive  income or loss, which consisted  primarily of the
change in unrealized holding gains and losses on available-for-sale  securities,
net of  deferred  tax  effects,  increased  shareholders'  equity  by  $673,000.
Approximately  $6,000 was paid in lieu of the issuance of  fractional  shares in
conjunction with the 5% stock dividend declared in 2006. 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.

         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, 2006 and 2005,  that the Company and the Bank exceeded all capital  adequacy
minimum requirements to which they were subject.

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


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                                                  Minimum for        Minimum to be
                                                                              Actual            Capital Adequacy    Well Capitalized
                                                                              ------            ----------------    ----------------
                                                                         Amount      Ratio    Amount       Ratio   Amount     Ratio
                                                                         ------      -----    ------       -----   ------     -----
December 31, 2006                                                                            (Dollars in thousands)
<S>                                                                     <C>           <C>     <C>           <C>    <C>         <C>
     The Company
         Total Capital to risk weighted assets ....................     $35,457       15.7%   $18,063       8.0%        NA      NA
         Tier 1 Capital to risk weighted assets ...................     $33,215       14.7%   $ 9,032       4.0%        NA      NA
         Tier 1 Capital to average assets (leverage) ..............     $33,215        9.7%   $13,737       4.0%        NA      NA
     Community First Bank
         Total Capital to risk weighted assets ....................     $34,997       15.5%   $18,063       8.0%   $22,579     10.0%
         Tier 1 Capital to risk weighted assets ...................     $32,755       14.5%   $ 9,032       4.0%   $13,547      6.0%
         Tier 1 Capital to average assets (leverage) ..............     $32,755        9.5%   $13,738       4.0%   $17,172      5.0%

December 31, 2005
     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%
</TABLE>

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

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

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

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

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

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


                                       21
<PAGE>

                                                               December 31,
                                                               ------------
                                                          2006             2005
                                                          ----             ----
                                                          (Dollars in thousands)

Loan commitments .............................          $33,764          $23,653
Standby letters of credit ....................            1,114              874

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

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

         The  Company  has  received  regulatory  approval to open a new banking
office building in the City of Anderson, South Carolina. It is expected that the
building will cost $800,000,  and 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 probable losses incurred in the loan portfolio based
on factors  discussed below and their potential effects based on currently known
facts and  circumstances.  Changes in the  estimated  allowance  for loan losses
arising as new events occur or more information is obtained are accounted for as
changes in accounting  estimates in the accounting period in which such a change
occurs.

                                       22
<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 2006 to
$65,000 compared with $250,000 for 2005 and $380,000 for 2004. The allowance for
loan losses at the end of 2006 was  $2,242,000,  a decrease of $24,000  from the
$2,266,000  allowance  as of the end of 2005.  As a  percentage  of total  loans
outstanding at year end, the allowance for loan losses was 1.10%,  1.34%, 1.42%,
1.49% and 1.42% for 2006, 2005, 2004, 2003 and 2002, respectively.

         Higher  levels of loans  collateralized  by  mortgages  on real estate,
lower amounts of  nonperforming  loans,  and a significantly  lower incidence in
loan  charge-offs in 2006  contributed to the decrease in the 2006 provision for
loan losses.  The Company's loan portfolio  increasingly  is  collateralized  by
residential and commercial  real estate.  Such  collateral,  combined with other
conservative   underwriting   standards,   is  believed  to  offer  the  Company
substantial  protection  from  ultimately  incurring  losses in the  event  that
foreclosure and liquidation of the collateral is necessary.

         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.

         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.

         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 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 19.9%,  7.3%, and 6.9% in 2006,
2005, and 2004, respectively.  Net loan charge-offs decreased to $89,000 in 2006
after  decreasing  to $224,000 in 2005 from  $337,000 in 2004.  As of the end of

                                       23
<PAGE>

2006,  impaired  loans  decreased to $50,000 from $905,000 one year  earlier,  a
decrease of $855,000,  or 94.5%.  Potential  problem loans were $3,176,000 as of
the end of 2006  compared with  $2,148,000 at the end of 2005 and  $1,403,000 at
the end of 2004.  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
$55,041,000,  or 59.2%,  from  $92,904,000 at the end of 2002 to $147,945,000 by
the end of 2006. Of this increase, $44,237,000 consisted of loans secured by 1-4
family  residential real estate  mortgages,  and $11,215,000  consisted of loans
secured by nonfarm,  nonresidential  real estate  mortgages.  A  significant  or
prolonged downturn in national and local economic and business  conditions could
negatively  affect the  borrowers'  capacity to repay these loans as well as the
value  of  the  underlying   collateral.   This  scenario  would  be  likely  to
substantially  increase  the  level of  impaired  or  non-performing  loans  and
non-earning  foreclosed assets and increase overall credit risk by shrinking the
margin of collateral values as compared with loans  outstanding.  Another factor
that could adversely  affect  borrowers'  ability to make payments in accordance
with loan terms is the potential  for  continued  increases in rates charged for
loans. The Company has a significant  amount of variable rate loans outstanding.
In addition, some loans are refinanced at maturity rather than being paid out in
a lump sum. If interest  rates were to increase  sharply in a short time period,
some  loan  customers  might  not be able to afford  payments  on loans  made or
repriced at the higher  resulting  interest rates, nor would they necessarily be
able to obtain more favorable terms elsewhere. This could also cause an increase
in the amounts of impaired or non-performing assets and other credit risks.

Impact of Recent Accounting Changes

Hybrid  Financial  Instruments  -  The  provisions  of  Statement  of  Financial
Accounting  Standards No. 155 ("SFAS No. 155"),  "Accounting  for Certain Hybrid
Financial  Instruments,  an amendment of FASB  Statements  No. 133 and 140," are
effective  January 1, 2007.  SFAS No. 155  simplifies the accounting for certain
financial instruments containing embedded derivatives.  SFAS No. 155 allows fair
value measurement for any hybrid financial  instrument that contains an embedded
derivative  that  otherwise  would  require  bifurcation  under  SFAS  No.  133,
"Accounting for Derivative  Instruments and Hedging Activities." In addition, it
amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" to allow a qualifying special-purpose entity
to hold a derivative financial instrument that pertains to a beneficial interest
other  than  another  derivative  financial  instrument.  The  adoption  of  the
Statement  is  not  expected  to  have  a  material   effect  on  the  Company's
consolidated financial statements.

Servicing  of  Financial  Assets - The  provisions  of  Statement  of  Financial
Accounting  Standards  No. 156 ("SFAS No.  156"),  "Accounting  for Servicing of
Financial  Assets, an amendment of FASB Statement No. 140" are effective January
1, 2007.  This  Statement  potentially  simplifies the accounting for separately
recognized loan servicing  assets and liabilities and any financial  instruments
used to hedge risks  associated  with those assets and  liabilities.  Under SFAS
156,  separately  recognized  servicing assets and liabilities are accounted for
initially at fair value,  if  practicable,  and  subsequently  are accounted for
either at fair value or amortized  over the economic lives of the related loans.
If the fair  value  method of  subsequent  valuation  is  elected,  SFAS No. 156
permits income statement  recognition of the potential offsetting changes in the
fair values of the financial servicing rights and liabilities and the derivative
instruments  used to  hedge  them in the same  accounting  period.  The  Company
currently has no separately recognized loan servicing rights or liabilities, and
adoption  of SFAS No.  156 in 2007 is not  expected  to have any  effect  on the
Company's consolidated financial statements.

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

                                       24
<PAGE>

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

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


                                       25
<PAGE>

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 2006 by  $126,714,000,  resulting in a cumulative
gap ratio of .48.  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 2006 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.

                 Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                           December 31, 2006
                                                                                           -----------------
                                                                     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 .............     $      67      $       -      $       -     $       -     $      67
      Securities ...........................................         7,397          3,904         56,354        41,427       109,082
      Federal Home Loan Bank stock .........................           980              -              -             -           980
      Federal funds sold ...................................        24,126              -              -             -        24,126
      Loans (1) ............................................        43,533         34,733        109,962        14,688       202,916
                                                                 ---------      ---------      ---------     ---------     ---------
              Total interest earning assets ................        76,103         38,637        166,316        56,115     $ 337,171
                                                                 ---------      ---------      ---------     ---------     =========

Interest bearing liabilities
      Interest bearing deposits
          Interest bearing transaction accounts ............     $  52,619            $ -            $ -           $ -     $  52,619
          Savings ..........................................        30,656              -              -             -        30,656
          Time deposits $100M and over .....................        19,992         34,859         13,426             -        68,277
          Other time deposits ..............................        19,462         74,866         21,500             -       115,828
      Short-term borrowings ................................         4,500              -              -             -         4,500
      Long-term debt .......................................         3,500          1,000          1,000             -         5,500
                                                                 ---------      ---------      ---------     ---------     ---------
              Total interest bearing liabilities ...........       130,729        110,725         35,926             -     $ 277,380
                                                                 ---------      ---------      ---------     ---------     =========

Interest sensitivity gap ...................................     $ (54,626)     $ (72,088)     $ 130,390     $  56,115
Cumulative interest sensitivity gap ........................     $ (54,626)     $(126,714)     $   3,676     $  59,791
Gap ratio ..................................................          0.58          0.35
Cumulative gap ratio .......................................          0.58          0.48
</TABLE>

-----------------------
(1)  Loans are net of nonaccruing loans totaling $50,000.



                                       26
<PAGE>

         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.

<TABLE>
<CAPTION>
                                            2006 Year-
                                              End
                                             Average                                                                      Estimated
                                              Rate    2007      2008      2009       2010      2011  Thereafter  Balance  Fair Value
                                              ----    ----      ----      ----       ----      ----  ----------  -------  ----------
Interest earning assets
<S>                                           <C>    <C>        <C>       <C>       <C>       <C>      <C>       <C>       <C>
  Interest-bearing deposits with other banks  4.88%  $     67   $     -   $     -   $     -   $     -  $     -   $     67  $     67
  Investment securities ....................  3.87%    18,561    27,079    19,863    14,214     8,938   20,427    109,082   109,017
  Federal funds sold .......................  4.74%    24,126         -         -         -         -        -     24,126    24,126
  Loans (Balance represents gross loans) ...  7.53%    94,672    29,354    40,507    16,175    18,530    3,728    202,966   200,447


Interest bearing liabilities
   Savings ..................................  2.58%  $ 30,656  $      -  $     -   $     -   $     -  $     -   $ 30,656  $ 30,656
   Interest bearing transaction accounts ....  2.89%    52,619         -        -         -         -        -     52,619    52,619
   Time deposits ............................  4.31%   138,294    29,469   12,947     3,047       200      149    184,106   183,475
                                                      --------  --------  -------   -------   -------  -------   --------  --------
         Total interest bearing deposits ....  3.87%   221,569    29,469   12,947     3,047       200      149    267,381   266,750
   Short-term borrowings ....................  3.57%     4,500         -        -         -         -        -      4,500     4,500
   Long-term debt ...........................  3.96%     1,000     1,000        -         -         -    3,500      5,500     5,497
</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, 2006 and 2005,
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, 2006.  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, 2006 and 2005,
and the  consolidated  results of their operations and their  consolidated  cash
flows for each of the three years in the period  ended  December  31,  2006,  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
March 29, 2007


                                       28
<PAGE>

Consolidated Balance Sheets
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                       2006                2005
                                                                                                       ----                ----
Assets
<S>                                                                                              <C>                  <C>
      Cash and due from banks (Note B) ...................................................       $   6,951,934        $  10,063,495
      Interest bearing deposits due from banks ...........................................              66,941              181,892
      Federal funds sold .................................................................          24,126,000           22,205,000
                                                                                                 -------------        -------------
          Cash and cash equivalents ......................................................          31,144,875           32,450,387
      Securities available-for-sale (Note C) .............................................         102,487,395          102,069,706
      Securities held-to-maturity (fair value of $6,529,691 for 2006 and
          $7,671,093 for 2005) (Note C) ..................................................           6,595,026            7,750,610
      Federal Home Loan Bank stock, at cost ..............................................             980,200              948,400
      Loans (Note D) .....................................................................         202,965,700          169,317,675
          Allowance for loan losses ......................................................          (2,241,947)          (2,266,086)
                                                                                                 -------------        -------------
              Loans - net ................................................................         200,723,753          167,051,589
      Premises and equipment - net (Note E) ..............................................           7,937,482            6,804,647
      Accrued interest receivable ........................................................           2,181,572            1,628,754
      Other assets .......................................................................           1,859,069            2,007,867
                                                                                                 -------------        -------------

              Total assets ...............................................................       $ 353,909,372        $ 320,711,960
                                                                                                 =============        =============

Liabilities
      Deposits (Note F)
          Noninterest bearing ............................................................       $  40,576,371        $  38,060,728
          Interest bearing ...............................................................         267,380,938          241,931,871
                                                                                                 -------------        -------------
              Total deposits .............................................................         307,957,309          279,992,599
      Accrued interest payable ...........................................................           2,702,946            1,817,133
      Short-term borrowings (Note G) .....................................................           4,500,000            3,500,000
      Long-term debt (Note H) ............................................................           5,500,000            6,500,000
      Other liabilities ..................................................................              34,087               47,840
                                                                                                 -------------        -------------
              Total liabilities ..........................................................         320,694,342          291,857,572
                                                                                                 -------------        -------------

      Commitments and contingent liabilities (Note M)

Shareholders' equity (Note I)
      Common stock - no par  value; 10,000,000 shares authorized; issued and
          outstanding - 2,958,558 for 2006 and
          2,798,409 for 2005 .............................................................          30,061,392           26,955,661
      Additional paid-in capital .........................................................             593,100                    -
      Retained earnings ..................................................................           3,284,692            3,296,060
      Accumulated other comprehensive income (loss) ......................................            (724,154)          (1,397,333)
                                                                                                 -------------        -------------
              Total shareholders' equity .................................................          33,215,030           28,854,388
                                                                                                 -------------        -------------

              Total liabilities and shareholders' equity .................................       $ 353,909,372        $ 320,711,960
                                                                                                 =============        =============
</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,
                                                                                            ------------------------
                                                                                 2006                 2005                  2004
                                                                                 ----                 ----                  ----
Interest income
<S>                                                                          <C>                  <C>                  <C>
      Loans, including fees ........................................         $ 13,864,479         $ 11,497,766         $ 10,265,563
      Securities
          Taxable ..................................................            3,868,407            3,564,081            3,285,186
          Tax-exempt ...............................................              635,967              149,880               73,013
      Federal funds sold ...........................................            1,174,768              667,735              295,000
      Other ........................................................               52,121               38,714               28,888
      Interest bearing deposits due from banks .....................                4,393                5,003                  558
                                                                             ------------         ------------         ------------
          Total interest income ....................................           19,600,135           15,923,179           13,948,208
                                                                             ------------         ------------         ------------

Interest expense
      Time deposits $100,000 and over ..............................            2,952,983            2,117,851            1,481,410
      Other deposits ...............................................            7,193,745            4,202,097            3,409,058
      Short-term borrowings ........................................                1,789               17,971               26,975
      Long-term debt ...............................................              236,864              282,893              159,475
                                                                             ------------         ------------         ------------
          Total interest expense ...................................           10,385,381            6,620,812            5,076,918
                                                                             ------------         ------------         ------------

Net interest income ................................................            9,214,754            9,302,367            8,871,290
Provision for loan losses (Note D) .................................               65,000              250,000              380,000
                                                                             ------------         ------------         ------------
Net interest income after provision ................................            9,149,754            9,052,367            8,491,290
                                                                             ------------         ------------         ------------

Other income
      Service charges on deposit accounts ..........................            1,515,390            1,580,043            1,524,179
      Credit life insurance commissions ............................               48,303               32,422               35,481
      Gain (loss) on sale of securities (Note C) ...................                    -                    -               (9,580)
      Mortgage brokerage income ....................................               68,194              109,890              148,850
      Other income .................................................              521,855              416,244              354,883
                                                                             ------------         ------------         ------------
          Total other income .......................................            2,153,742            2,138,599            2,053,813
                                                                             ------------         ------------         ------------

Other expenses (Notes J and L)
      Salaries and employee benefits ...............................            3,647,451            2,902,693            2,779,863
      Net occupancy expense ........................................              346,610              267,760              255,004
      Furniture and equipment expense ..............................              431,078              344,687              320,217
      Other expense ................................................            2,326,626            1,905,008            1,796,249
                                                                             ------------         ------------         ------------
          Total other expenses .....................................            6,751,765            5,420,148            5,151,333
                                                                             ------------         ------------         ------------

Income before income taxes .........................................            4,551,731            5,770,818            5,393,770
Income tax expense (Note K) ........................................            1,533,762            2,040,892            1,957,063
                                                                             ------------         ------------         ------------
Net income .........................................................         $  3,017,969         $  3,729,926         $  3,436,707
                                                                             ============         ============         ============

Per share (Note I)
      Net income, basic ............................................         $       1.02         $       1.28         $       1.18
      Net income, assuming dilution ................................                 0.96                 1.21                 1.12
</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
                                                          ------------         Additional                  Other
                                                    Number of                   Paid-in    Retained     Comprehensive
                                                      Shares        Amount      Capital    Earnings     Income (Loss)      Total
                                                      ------        ------      -------    --------     -------------      -----

<S>              <C>                                 <C>         <C>           <C>        <C>            <C>            <C>
Balance, January 1, 2004 .........................   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

Comprehensive income:
    Net income ...................................           -             -          -     3,017,969              -      3,017,969
                                                                                                                        -----------
    Unrealized net holding losses on available-
    for-sale securities arising during the period,
    net of income tax effects of $377,023 ........           -             -          -             -        673,179        673,179
                                                                                                                        -----------
    Total other comprehensive income (loss) ......           -             -          -             -              -        673,179
                                                                                                                        -----------
    Total comprehensive income ...................           -             -          -             -              -      3,691,148
                                                                                                                        -----------
Declaration of 5% stock dividend
    distributed on January 15, 2007 and
    cash payment for fractional shares ...........     140,570     3,022,534          -    (3,029,337)             -         (6,803)
Share-based compensation, net of tax benefits ....           -             -    593,100             -              -        593,100
Exercise of employee stock options ...............      19,579        83,197          -             -              -         83,197
                                                     ---------   -----------   --------   -----------    -----------    -----------
Balance, December 31, 2006 .......................   2,958,558   $30,061,392   $593,100   $ 3,284,692    $  (724,154)   $33,215,030
                                                     =========   ===========   ========   ===========    ===========    ===========
</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,
                                                                                                  ------------------------
                                                                                             2006            2005            2004
                                                                                             ----            ----            ----
Operating activities
<S>                                                                                    <C>             <C>             <C>
      Net income ...................................................................   $  3,017,969    $  3,729,926    $  3,436,707
      Adjustments to reconcile net income to net
          cash provided by operating activities
              Provision for loan losses ............................................         65,000         250,000         380,000
              Writedowns of foreclosed assets ......................................              -          25,000         125,000
              Depreciation .........................................................        373,883         298,889         284,033
              Deferred income taxes ................................................       (131,488)        (43,114)        (10,440)
              Amortization of net loan fees and costs ..............................       (224,944)        (96,374)        (93,669)
              Securities accretion and premium amortization ........................        152,566         275,137         799,472
              Loss on sale of available-for-sale securities ........................              -               -           9,580
              Loss on sale or other disposition of fixed assets ....................              -           5,000               -
              (Gain) loss on sale of foreclosed assets .............................        (30,621)          9,191          34,758
              (Increase) decrease in interest receivable ...........................       (552,818)       (297,296)         92,847
              Increase (decrease) in interest payable ..............................        885,813         595,015        (134,804)
              (Increase) decrease in prepaid expenses ..............................       (179,823)        148,738          79,733
              (Decrease) increase in other accrued expenses ........................        (13,753)          6,991         (40,492)
              Share-based compensation expense .....................................        593,100               -               -
                                                                                       ------------    ------------    ------------
                  Net cash provided by operating activities ........................      3,954,884       4,907,103       4,962,725
                                                                                       ------------    ------------    ------------
Investing activities
      Purchases of available-for-sale securities ...................................    (25,209,833)    (58,600,965)    (56,099,448)
      Purchases of held-to-maturity securities .....................................              -               -      (9,949,464)
      Maturities, calls and paydowns of available-for-sale securities ..............     25,682,329      46,930,477      43,485,333
      Maturities, calls and paydowns of held-to-maturity securities ................      1,163,035       1,626,880         584,492
      Proceeds from sale of available-for-sale securities ..........................              -               -       5,272,766
      Purchases of other investments ...............................................        (31,800)       (162,300)       (260,900)
      Proceeds of redemptions of other investments .................................              -         225,000               -
      Net increase in loans made to customers ......................................    (33,566,455)    (11,670,099)    (10,509,396)
      Purchases of premises and equipment ..........................................     (1,506,718)     (2,695,756)       (179,551)
      Proceeds from sale of foreclosed assets ......................................        167,942          57,768         489,139
      Proceeds from sale of real estate held for sale ..............................              -               -         741,522
                                                                                       ------------    ------------    ------------
                  Net cash used by investing activities ............................    (33,301,500)    (24,288,995)    (26,425,507)
                                                                                       ------------    ------------    ------------
Financing activities
      Net increase (decrease) in demand deposits, interest
          bearing transaction accounts and savings accounts ........................     25,163,011      (1,966,994)      7,330,419
      Net increase in certificates of deposit and other
          time deposits ............................................................      2,801,699      13,811,368       4,267,084
      Net increase in short-term borrowings ........................................      1,000,000       1,000,000       2,500,000
      Proceeds of issuing long-term debt ...........................................              -               -       7,500,000
      Repayment of long-term debt ..................................................     (1,000,000)     (1,000,000)              -
      Payment of cash in lieu of fractional shares
          for stock dividend .......................................................         (6,803)         (6,349)         (6,478)
      Exercise of employee stock options ...........................................         83,197          92,059         268,835
                                                                                       ------------    ------------    ------------
                  Net cash provided by financing activities ........................     28,041,104      11,930,084      21,859,860
                                                                                       ------------    ------------    ------------
(Decrease) increase in cash and cash equivalents ...................................     (1,305,512)     (7,451,808)        397,078
Cash and cash equivalents, beginning ...............................................     32,450,387      39,902,195      39,505,117
                                                                                       ------------    ------------    ------------
Cash and cash equivalents, ending ..................................................   $ 31,144,875    $ 32,450,387    $ 39,902,195
                                                                                       ============    ============    ============

Supplemental  Disclosure  of Cash Flow  Information  Cash paid during the period for:
          Interest (net of amount capitalized) .....................................   $  9,499,568    $  6,025,797    $  5,211,722
          Income taxes .............................................................      1,851,154       1,980,856       1,922,666
      Noncash investing and financing activities:
          Transfer of loans to foreclosed assets ...................................         54,235               -         141,364
          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 ...................................      3,022,534       2,647,600       4,327,578
          Other comprehensive income (loss) ........................................        673,179        (897,693)       (299,913)
</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 offices in Walhalla,
Seneca, Anderson,  Williamston and Westminster, South Carolina. The Company is a
South  Carolina  corporation  and its banking  subsidiary  is a state  chartered
commercial  bank with its  deposits  insured by the  Federal  Deposit  Insurance
Corporation (the "FDIC"). Therefore, the Company and its bank subsidiary operate
under the supervision,  rules and regulations of the Federal Reserve Board, FDIC
and South Carolina State Board of Financial  Institutions.  The holding  company
was  incorporated  on May 23, 1997 and  Community  First Bank was  organized  on
December 1, 1988, and received its charter and commenced operations on March 12,
1990.

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

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

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

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

Securities - Equity  securities that have readily  determinable  fair values and
all debt securities are classified generally at the time of purchase into one of
three  categories:   held-to-maturity,   trading  or  available-for-sale.   Debt
securities  which the  Company  has the  positive  intent and ability to hold to
ultimate  maturity are  classified  as  held-to-maturity  and  accounted  for at
amortized  cost.  Debt and equity  securities that are bought and held primarily
for sale in the near term are  classified as trading and are accounted for on an
estimated fair value basis,  with unrealized  gains and losses included in other
income. However, the Company has never held any securities for trading purposes.


                                       33
<PAGE>

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  probable  losses  incurred  in the loan  portfolio  based on factors
discussed  below and their  potential  effects  based on  judgments  applied  to
currently known facts and circumstances.  Changes in the estimated allowance for
loan losses necessitated as new events occur or more information is obtained are
accounted for as changes in  accounting  estimates in the  accounting  period in
which the change occurs.

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

                                       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 external credit reviewer who is
independent of the lending function.

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

Foreclosed  Assets  - Assets  (primarily  real  estate  and  vehicles)  acquired
through, or in lieu of, foreclosure are held for sale and are initially recorded
at fair  value,  less  estimated  costs  to sell,  at the  date of  foreclosure,
establishing a new cost basis.  Loan losses arising from the acquisition of such
property as of that date are  charged  against the  allowance  for loan  losses.
Subsequent to foreclosure,  valuations are periodically  performed by management
and the  assets are  carried  at the lower of the new cost basis or fair  value,
less estimated costs to sell.  Revenues and expenses from operations and changes
in any  subsequent  valuation  allowance are included in net  foreclosed  assets
costs and  expenses.  The carrying  value of foreclosed  assets  included in the
balance  sheets was  $54,235  and  $137,321  as of  December  31, 2006 and 2005,
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,  2006,  the  Company  has  two
stock-based employee  compensation plans, which are described more fully in Note
I.  Effective  January 1, 2006,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  No.  123  (revised  2004)  ("SFAS  123(R)")"  Share-Based
Payment."  Prior to adoption of SFAS  123(R),  the Company  accounted  for those
plans under the recognition and measurement  principles of Accounting Principles
Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
related  interpretations.  Accordingly,  prior to  adoption of SFAS  123(R),  no
stock-based  employee  compensation  cost was  reflected  in net income,  as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the underlying common stock on the date of grant.

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


                                       35
<PAGE>

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

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

Net income per share, basic
      As reported .........................................     $         1.28
      Pro forma ...........................................               1.19
Net income per share, assuming dilution
      As reported .........................................     $         1.21
      Pro forma ...........................................               1.13

Prior to 2005,  the Company was a "non-public  company"  under the definition of
SFAS No.  123  because  its common  stock was not traded in a public  securities
market,  and the Company  therefore  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
$1.20 and pro forma net income per share, diluted would have been $1.13.

The fair values of options granted during 2006, 2005 and 2004 were $9.90, $8.06,
and  $8.94  per  share,  respectively.  For 2006 and  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 rates of 5.08% and 4.38% and stock price  volatility of 25.35% and
25.71%,  respectively.  Because of the limited time during  which the  Company's
stock has traded in a public  market,  the  Company  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,  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:  dividend yield of 0%, expected life of 10 years,  and risk-free
interest rate of 4.36%.

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, 2006 and 2005 were approximately $2,403,000 and
$1,953,000, 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,
                                                                          ------------
                                                    2006                                               2005
                                                    ----                                               ----
                                            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>
      Government sponsored
          enterprises ....   $ 56,616,368   $125,758   $  537,843   $ 56,204,283   $ 58,978,413  $20,696   $  995,563   $ 58,003,546
      Mortgage-backed
          securities .....     28,135,834      3,299      795,252     27,343,881     35,250,267    1,462    1,145,702     34,106,027
      State, county and
          municipal ......     18,864,918    122,074       47,761     18,939,231     10,020,953   28,767       89,587      9,960,133
                             ------------   --------   ----------   ------------   ------------  -------   ----------   ------------
             Total .......   $103,617,120   $251,131   $1,380,856   $102,487,395   $104,249,633  $50,925   $2,230,852   $102,069,706
                             ============   ========   ==========   ============   ============  =======   ==========   ============

Held-to-maturity
      Government sponsored
          enterprises ....   $          -   $      -   $        -   $          -   $          -  $     -   $        -   $          -
      Mortgage-backed
          securities .....      6,595,026          -       65,335      6,529,691      7,750,610        -       79,517      7,671,093
      State, county and
          municipal ......              -          -            -              -              -        -            -              -
                             ------------   --------   ----------   ------------   ------------  -------   ----------   ------------
             Total .......   $  6,595,026   $      -   $   65,335   $  6,529,691   $  7,750,610  $     -   $   79,517   $  7,671,093
                             ============   ========   ==========   ============   ============  =======   ==========   ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                    December 31, 2006
                                                                                    -----------------
                                                                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 ............................         $ 10,299,801         $ 10,243,474         $          -         $          -
Due after one through five years ...............           37,990,235           37,554,090                    -                    -
Due after five through ten years ...............            8,987,635            9,050,896                    -                    -
Due after ten years ............................           18,203,615           18,295,054                    -                    -
                                                         ------------         ------------         ------------         ------------
                                                           75,481,286           75,143,514                    -                    -
Mortgage-backed securities .....................           28,135,834           27,343,881            6,595,026            6,529,691
                                                         ------------         ------------         ------------         ------------
    Total ......................................         $103,617,120         $102,487,395         $  6,595,026         $  6,529,691
                                                         ============         ============         ============         ============
</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,  2006  and  2005  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, 2006
                                                                             -----------------
                                                        Continuously in Unrealized Loss Position for a Period of
                                                        --------------------------------------------------------
                                              Less than 12 Months             12 Months or more                     Total
                                              -------------------             -----------------                     -----
Available-for-sale                         Estimated      Unrealized      Estimated      Unrealized       Estimated       Unrealized
                                           Fair Value        Loss         Fair Value        Loss         Fair Value         Loss
                                           ----------        ----         ----------        ----         ----------         ----
  Government-sponsored
<S>                                      <C>             <C>             <C>             <C>             <C>             <C>
    enterprises ....................     $ 7,977,500     $    18,329     $34,233,795     $   519,514     $42,211,295     $   537,843
  Federal agency mortgage-
    backed securities ..............         617,351          20,299      26,253,632         774,953      26,870,983         795,252
  State, county and
    municipal securities ...........       4,783,660          30,100       2,422,828          17,661       7,206,488          47,761
                                         -----------     -----------     -----------     -----------     -----------     -----------
                     Total .........     $13,378,511     $    68,728     $62,910,255     $ 1,312,128     $76,288,766     $ 1,380,856
                                         ===========     ===========     ===========     ===========     ===========     ===========

Held-to-maturity
  Federal agency mortgage-
    backed securities ..............     $ 2,463,645     $    19,498     $ 4,066,046     $    45,837     $ 6,529,691     $    65,335
                                         -----------     -----------     -----------     -----------     -----------     -----------
                     Total .........     $ 2,463,645     $    19,498     $ 4,066,046     $    45,837     $ 6,529,691     $    65,335
                                         ===========     ===========     ===========     ===========     ===========     ===========

<CAPTION>
                                                                             December 31, 2005
                                                                             -----------------
                                                        Continuously in Unrealized Loss Position for a Period of
                                                        --------------------------------------------------------
                                              Less than 12 Months             12 Months or more                     Total
                                              -------------------             -----------------                     -----
Available-for-sale                         Estimated      Unrealized      Estimated      Unrealized      Estimated       Unrealized
                                           Fair Value        Loss         Fair Value        Loss        Fair Value         Loss
                                           ----------        ----         ----------        ----        ----------         ----
  Government-sponsored
<S>                                       <C>            <C>              <C>            <C>           <C>              <C>
    enterprises ....................      $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
  Government-sponsored
    enterprises ....................      $ 7,750,610    $    79,517      $         -    $         -   $ 7,750,610      $    79,517
                                          -----------    -----------      -----------    -----------   -----------      -----------
                                          $ 7,750,610    $    79,517      $         -    $         -   $ 7,750,610      $    79,517
                                          ===========    ===========      ===========    ===========   ===========      ===========
</TABLE>

At December 31, 2006, 24 securities had been  continuously in an unrealized loss
position for less than 12 months and 96 securities had been  continuously  in an
unrealized  loss  position for 12 months or more.  The Company does not consider
these investments to be  other-than-temporarily  impaired because the unrealized
losses resulted  primarily from higher interest rates and the securities consist
primarily of issuances of  government-sponsored  enterprises such as the Federal
Home Loan Banks,  Federal  National  Mortgage  Association and Federal Home Loan
Mortgage   Corporation.   The   contractual   terms  of  securities   issued  by
government-sponsored  enterprises  do  not  permit  the  issuer  to  settle  the
securities at a price less than the face amount of the securities. The principal
and    interest    payments   of    mortgage-backed    securities    issued   by
government-sponsored  enterprises  are  guaranteed by that  enterprise and it is
expected  that  those  securities  would not be settled at a price less than the
face amount of the securities. Although the Company classifies a majority of its
investment securities as available-for-sale,  management has not determined that
any specific  securities will be disposed of prior to maturity and believes that
the Company has both the ability and the intent to hold those  investments until
a recovery of fair value,  including  until maturity.  Also,  there have been no
significant adverse changes in the credit ratings of any of the security issuers
that would indicate that the Company will be unable to collect all principal and
interest  amounts  according  to  contractual  terms.  Substantially  all of the
issuers  of state,  county  and  municipal  securities  held were rated at least
"investment grade" as of December 31, 2006 and 2005.

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


                                       38
<PAGE>

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

During  2006  and  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. There were no transfers of  available-for-sale  securities to
other categories in 2006, 2005 or 2004.

At December 31, 2006 and 2005,  securities  with a carrying value of $72,203,027
and  $68,819,737,  respectively,  were pledged as  collateral  to secure  public
deposits.


NOTE D - LOANS

Loans consisted of the following:

                                                         December 31,
                                                         ------------
                                                   2006                2005
                                                   ----                ----
Commercial, financial and industrial .....     $  24,268,227      $  23,008,656
Real estate- construction ................         1,982,035            674,269
Real estate - mortgage ...................       147,944,221        120,547,171
Consumer installment .....................        28,771,217         25,087,579
                                               -------------      -------------
      Total ..............................       202,965,700        169,317,675
Allowance for loan losses ................        (2,241,947)        (2,266,086)
                                               -------------      -------------
      Loans - net ........................     $ 200,723,753      $ 167,051,589
                                               =============      =============

Net deferred  loan fees of $308,944 and $204,231  were  allocated to the various
loan categories as of December 31, 2006 and 2005, 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:

                                                               December 31,
                                                               ------------
                                                           2006           2005
                                                           ----           ----
Investment in impaired loans
      Nonaccrual .................................     $   50,384     $  900,044
      Accruing 90 days and over past due .........              -          5,000
                                                       ----------     ----------
          Total ..................................     $   50,384     $  905,044
                                                       ==========     ==========
Average total investment in impaired
 loans during the year ...........................     $  399,000     $1,052,000
Allowance for loan losses on impaired
 loans at year end ...............................         19,976        311,163

The average total investment in impaired loans during 2004 was $1,039,000. There
were no  irrevocable  commitments  to lend  additional  funds to  debtors  owing
amounts on impaired loans at December 31, 2006.

As of December 31, 2006 and 2005,  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.



                                       39
<PAGE>

Transactions in the allowance for loan losses are summarized below:

                                                 Years Ended December 31,
                                                 ------------------------
                                          2006           2005            2004
                                          ----           ----            ----

Balance at January 1 ..............   $ 2,266,086    $ 2,239,873    $ 2,196,500
Provision charged to expense ......        65,000        250,000        380,000
Recoveries ........................        44,981         79,374         24,662
Charge-offs .......................      (134,120)      (303,161)      (361,289)
                                      -----------    -----------    -----------
Balance at December 31 ............   $ 2,241,947    $ 2,266,086    $ 2,239,873
                                      ===========    ===========    ===========

Certain  officers  and  directors  of the  Company  and  its  subsidiary,  their
immediate  families and business interests were loan customers of, and had other
transactions  with,  the banking  subsidiary  in the normal  course of business.
Related party loans are made on substantially the same terms, including interest
rates  and   collateral,   and  do  not   involve   more  than  normal  risk  of
collectibility.  The aggregate  dollar amount of these loans was  $6,238,430 and
$7,839,433 at December 31, 2006 and 2005, respectively.  During 2006, $1,119,779
of new loans were made and repayments totaled $2,720,782.

NOTE E - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                                            December 31,
                                                            ------------
                                                       2006              2005
                                                       ----              ----

Land .......................................       $ 2,916,997       $ 2,916,997
Buildings and land improvements ............         4,569,189         2,859,008
Furniture and equipment ....................         3,027,933         2,303,286
Construction in progress ...................                 -           950,042
                                                   -----------       -----------
      Total ................................        10,514,119         9,029,333
Accumulated depreciation ...................         2,576,637         2,224,686
                                                   -----------       -----------
      Premises and equipment - net .........       $ 7,937,482       $ 6,804,647
                                                   ===========       ===========

Depreciation  expense for the years ended  December 31, 2006,  2005 and 2004 was
$373,883,  $298,889,  and  $284,033,  respectively.  During  2006 and 2005,  the
Company   capitalized   interest  of  $18,128  and  13,176,   respectively,   to
construction in progress.

NOTE F - DEPOSITS

A summary of deposits follows:

                                                             December 31,
                                                             ------------
                                                        2006             2005
                                                        ----             ----
Noninterest bearing demand ...................     $ 40,576,371     $ 38,060,728
Interest bearing transaction accounts ........       52,619,354       33,148,225
Savings ......................................       30,656,176       27,479,937
Time deposits $100,000 and over ..............       68,276,913       69,342,755
Other time deposits ..........................      115,828,495      111,960,954
                                                   ------------     ------------
      Total deposits .........................     $307,957,309     $279,992,599
                                                   ============     ============

As of  December  31,  2006  and  2005,  local  governmental  deposits  comprised
approximately  13% and 13% of total deposits,  respectively.  As of December 31,
2006 and 2005, $141,405 and $137,031,  respectively, of overdrawn demand deposit
balances  have been  reclassified  as loans.  As of December  31, 2006 and 2005,
deposits of directors,  officers and their related  business  interests  totaled
approximately $12,039,000 and $7,511,000, respectively.



                                       40
<PAGE>

At December 31, 2006, the scheduled maturities of time deposits are as follows:

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

                    2007                                  $ 149,078,305
                    2008                                     31,266,305
                    2009                                      3,611,371
                    2010                                        126,527
                    2011                                         22,900


NOTE G - SHORT-TERM BORROWINGS

Short-term borrowings consisted of:

Long-term debt consisted of:

                                                           December 31,
                                                           ------------
                                                      2006               2005
                                                      ----               ----

Federal funds purchased ..................         $4,500,000         $3,500,000
                                                   ==========         ==========

As of December 31, 2006,  federal funds were purchased from a correspondent bank
at a rate of 5.63% and were  repayable  on January 3, 2007.  As of December  31,
2005,  federal funds were purchased from a correspondent bank at a rate of 4.60%
and were repayable on January 3, 2006.

As of December 31, 2006,  the banking  subsidiary had unused  short-term  credit
accommodations available from unrelated banks which allow the banking subsidiary
to purchase up to  $6,400,000 of federal  funds.  The  accommodations  limit the
Bank's ability to obtain funds to, in one case, seven  consecutive  days, or, in
the other case,  fourteen days in any calendar month. The counterparties may, in
their sole discretion,  allow the banking  subsidiary to borrow for time periods
longer  than  indicated  above,  but  higher  rates  would be  charged  for such
borrowings, if any are allowed.

NOTE H - LONG-TERM DEBT

Long-term debt consisted of:
                                                             December 31,
                                                             ------------
                                                        2006            2005
                                                        ----            ----
Fixed rate notes due to FHLB due in
   annual installments of $1,000,000
   beginning in 2006..........................       $2,000,000       $3,000,000
Variable rate note due to FHLB
   due June 18, 2014 .........................        3,500,000        3,500,000
                                                     ----------       ----------
                                                     $5,500,000       $6,500,000
                                                     ==========       ==========

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  $2,000,000 at rates ranging from 3.90% to
4.40%,  maturing  in  $1,000,000  increments  on June 18 of 2007 and  2008.  The
remaining  $3,500,000 is an FHLB Convertible  Advance bearing interest initially
at 3.92% and maturing  June 18,  2014.  The  interest  rate on this  Convertible
Advance  has  remained  at its  initial  value  subject to the FHLB's  option to
convert the advance to a variable  rate  instrument  on any  quarterly  interest
payment  date on or after June 18,  2005 if the  3-month  LIBOR rate is 7.00% or
greater.  In the event of such  conversion,  this advance  would  thereafter  be
subject to a variable interest rate until maturity. As of December 31, 2006, the
3-month LIBOR rate was 5.36%.  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, 2006
                                                   -----------------
                                         Fixed Rate  Variable Rate      Total
                                         ----------  -------------      -----

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 ........     $2,000,000     $3,500,000     $5,500,000
                                        ==========     ==========     ==========

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, 2006 was
approximately  $86,052,000.  The qualifying  collateral  instruments required to
secure the Company's short-term borrowings and long-term debt as of December 31,
2005 was approximately $7,007,000.

The banking  subsidiary had unused credit  availability under the FHLB's blanket
lien  agreement  of up to an  additional  $33,452,000  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, 2006 to
secure any additional FHLB borrowings totaled approximately $79,045,000.

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 ($3,041,578 at December
31, 2006) are subject to the prior approval of the South  Carolina  Commissioner
of Banking. Therefore,  $28,989,094 of the Company's equity in the net assets of
the bank was restricted as of December 31, 2006. In addition,  dividends paid by
the banking  subsidiary to the parent  company would be prohibited if the effect
thereof would cause the Bank's  capital to be reduced below  applicable  minimum
capital  requirements.  Under Federal Reserve Board regulations,  the amounts of
loans  or  advances  from the  banking  subsidiary  to the  parent  company  are
generally  limited to 10% of the Bank's  capital  stock and surplus on a secured
basis.

Stock Dividends - For stockholders of record on December 18, 2006,  November 30,
2005,  and November 30, 2004 the  Company's  Board of Directors  declared  stock
dividends of 5%, 5%, and 10%,  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, 2006 and
2005,  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
$(724,154) and $(1,397,333) respectively.



                                       42
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                      2006               2005                2004
                                                                                      ----               ----                ----
Net income per share, basic
<S>                                                                                 <C>                <C>                <C>
Numerator - net income ....................................................         $3,017,969         $3,729,926         $3,436,707
                                                                                    ==========         ==========         ==========
Denominator
Weighted average common shares issued and outstanding .....................          2,947,729          2,922,403          2,910,334
                                                                                    ==========         ==========         ==========
                  Net income per share, basic .............................         $     1.02         $     1.28         $     1.18
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution
Numerator - net income ....................................................         $3,017,969         $3,729,926         $3,436,707
                                                                                    ==========         ==========         ==========
Denominator
Weighted average common shares issued and outstanding .....................          2,947,729          2,922,403          2,910,334
Effect of dilutive stock options ..........................................            195,763            169,127            154,731
                                                                                    ----------         ----------         ----------
                  Total shares ............................................          3,143,492          3,091,530          3,065,065
                                                                                    ==========         ==========         ==========
                  Net income per share, assuming dilution .................         $      .96         $     1.21         $     1.12
                                                                                    ==========         ==========         ==========
</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,
2006 and 2005,  that the Company and its  subsidiary  bank  exceeded all capital
adequacy minimum requirements.

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

December 31, 2005
     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%
</TABLE>

Stock  Options - In 1998,  the  Company's  shareholders  approved the 1998 Stock
Option Plan under which an aggregate of 648,606 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  453,322 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 2006,  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.  During  2006,  the  Company's  Board of Directors
accelerated the vesting of all other previously awarded and outstanding  options
such that all options were vested by December 31, 2006. The  acceleration of the
options' vesting  resulted in pre-tax  expenses of approximately  $394,000 being
recognized in 2006 that would  otherwise have been  recognized in 2007, 2008 and
2009.

The  effects  of  recognizing  compensation  costs for stock  options  under the
provisions  of SFAS 123(R)  effective  January 1, 2006 were as  follows:  income
before income taxes decreased by $593,000 (including the effects of accelerating
vesting of options), net income decreased by $497,000,  basic earnings per share
decreased by $.17 and diluted earnings per share decreased by $.16.



                                       44
<PAGE>

Transactions under the plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                                  ------------------------
                                                            2006                           2005                   2004
                                                            ----                           ----                   ----
                                                              Wtd. Avg.  Intrinsic             Wtd. Avg.                Wtd. Avg.
                                                               Exercise   Value                 Exercise                 Exercise
                                                    Shares      Price    (000s)      Shares      Price       Shares       Price
                                                    ------      -----    ------      ------      -----       ------       -----
<S>                                                 <C>        <C>      <C>         <C>       <C>            <C>         <C>
Outstanding at beginning of year ..............     449,695    $10.89               433,352   $   10.09      420,505     $ 8.79
Granted .......................................      43,785     20.24                36,493       17.24       71,734      13.72
Exercised .....................................     (20,558)     4.05               (18,945)       4.83      (55,568)      4.84
Forfeited or expired ..........................          (2)     4.29                (1,205)      13.98       (3,319)     12.11
                                                    -------                         -------                  -------
Outstanding at end of year ....................     472,920     12.05   $3,970      449,695       10.89      433,352      10.09
                                                    =======                         =======                  =======
Options exercisable at year-end ...............     472,920    $12.05   $3,970      367,175   $    9.99      341,902     $ 9.24
                                                    =======                         =======                  =======
</TABLE>

Numbers of shares and exercise  prices have been adjusted in the table above for
5% stock dividends  effective December 18, 2006 and November 30, 2005, and a 10%
stock dividend effective November 30, 2004.


The aggregate  intrinsic  value of a stock option in the table above  represents
the pre-tax intrinsic value (the amount by which the current market value of the
underlying  stock exceeds the exercise price of the option) that would have been
received by the option holder had all option holders  exercised their options on
December 31, 2006.  This amount  changes based on changes in the market value of
the Company's  stock.  The fair value  (present  value of the  estimated  future
benefit to the option  holder) of each option  grant is  estimated  on the grant
date using the Black-Scholes option pricing model.

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

The following table summarizes information about the options outstanding:

<TABLE>
<CAPTION>
                                                             December 31, 2006
                                                             -----------------
                                         Options Outstanding                    Options Exercisable
                                         -------------------                    -------------------
                                               Weighted
                                               Average
                                              Remaining        Weighted                        Weighted
                                 Number       Contractual       Average        Number          Average
  Range of Exercise Prices     Outstanding    Life (Years)     Exercise      Outstanding       Exercise
  ------------------------     -----------    ------------     --------      -----------       --------
<S>  <C>           <C>          <C>             <C>             <C>              <C>            <C>
     $ 3.13   to   $ 5.71       108,793         1.22            $ 5.53           108,793        $ 5.53
      11.71   to    12.83       202,360         3.95             12.19           202,360         12.19
      13.31   to    20.49       161,767         8.01             16.24           161,767         16.24
                               --------                                         --------

                               472,920          4.71           $ 12.05           472,920        $12.05
                               ========                                         ========
</TABLE>


Of the 1,101,927  shares of the  Company's  authorized  common stock  originally
reserved for  issuance  upon the  exercise of options  under the plans,  159,831
shares  authorized  under the 1998 plan remain available for future grants as of
December 31, 2006. The Company  currently does not anticipate that it will grant
any future awards of options under the plans.


                                       45
<PAGE>

NOTE J - OTHER EXPENSES

Other expenses are summarized below:

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                             ------------------------
                                                                                  2006                  2005                  2004
                                                                                  ----                  ----                  ----

<S>                                                                             <C>                  <C>                  <C>
Salaries and employee benefits ......................................           $3,647,451           $2,902,693           $2,779,863
Net occupancy expense ...............................................              346,610              267,760              255,004
Furniture and equipment expense .....................................              431,078              344,687              320,217
Other expense
      Stationery, printing and postage ..............................              299,042              247,126              260,264
      Telephone .....................................................              143,422              102,249               96,223
      Advertising and promotion .....................................              124,968               97,258               82,135
      Professional services .........................................              202,278              169,465              150,837
      Insurance .....................................................               75,507               67,374               50,284
      FDIC insurance assessment .....................................               35,654               35,785               42,600
      Directors' compensation .......................................              392,471              100,800              112,400
      Foreclosed assets costs and expenses, net .....................                8,154               42,933              188,936
      Data processing expenses ......................................              272,867              236,445              192,262
      Other .........................................................              772,263              805,573              620,308
                                                                                ----------           ----------           ----------
          Total .....................................................           $6,751,765           $5,420,148           $5,151,333
                                                                                ==========           ==========           ==========
</TABLE>

NOTE K - INCOME TAXES

Income tax expense consisted of:


                                              Years Ended December 31,
                                              ------------------------
                                         2006            2005            2004
                                         ----            ----            ----
Current
    Federal .......................   $ 1,528,379    $ 1,915,653    $ 1,811,676
    State .........................       136,871        168,353        155,827
                                      -----------    -----------    -----------
        Total current .............     1,665,250      2,084,006      1,967,503
Deferred
    Federal .......................      (131,488)       (43,114)       (10,440)
                                      -----------    -----------    -----------
        Total income tax expense ..   $ 1,533,762    $ 2,040,892    $ 1,957,063
                                      ===========    ===========    ===========

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

                                                  Years Ended December 31,
                                                  ------------------------
                                             2006          2005           2004
                                             ----          ----           ----

Provision for loan losses ............    $   7,971     $  (8,656)    $  (9,872)
Accelerated depreciation .............      (18,701)      (29,869)       12,645
Deferred net loan costs and fees .....      (34,576)       (4,589)       (3,307)
Writedowns of other real estate ......        9,906             -        (9,906)
Non-qualified stock options ..........      (96,088)            -             -
                                          ---------     ---------     ---------
                 Total ...............    $(131,488)    $ (43,114)    $ (10,440)
                                          =========     =========     =========

                                       46
<PAGE>

Income before income taxes presented in the consolidated statement of income for
the years ended December 31, 2006, 2005 and 2004 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:

                                              Years Ended December 31,
                                              ------------------------
                                         2006           2005           2004
                                         ----           ----           ----

Tax expense at statutory rate .....   $ 1,547,589    $ 1,962,078    $ 1,833,882
State income tax, net of federal
      income tax benefit ..........        90,335        111,403        102,846
Tax-exempt interest income ........      (220,098)       (60,143)       (37,392)
Non-deductible interest expense to
      carry tax-exempt instruments         34,608          7,209          3,344
Other, net ........................        81,328         20,345         54,383
                                      -----------    -----------    -----------
                 Total ............   $ 1,533,762    $ 2,040,892    $ 1,957,063
                                      ===========    ===========    ===========

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


                                                               December 31,
                                                               ------------
                                                           2006           2005
                                                           ----           ----
Deferred tax assets
      Allowance for loan losses ....................    $  593,058    $  601,030
      Writedowns of other real estate ..............             -         9,906
      Deferred net loan fees .......................       102,013        67,438
      Non-qualified stock options ..................        96,088             -
      Unrealized net holding losses on
        available-for-sale securities ..............       405,571       782,594
                                                        ----------    ----------
                 Gross deferred tax assets .........     1,196,730     1,460,968
      Valuation allowance ..........................             -             -
                                                        ----------    ----------
                 Total .............................     1,196,730     1,460,968
                                                        ----------    ----------

Deferred tax liabilities
      Accelerated depreciation .....................       200,460       219,161
                                                        ----------    ----------
                 Gross deferred tax liabilities ....       200,460       219,161
                                                        ----------    ----------
Net deferred income tax assets .....................    $  996,270    $1,241,807
                                                        ==========    ==========

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 2006, 2005 and 2004,  $377,023 was charged,  $502,764 was
credited,  and  $167,970  was  credited to other  comprehensive  income or loss,
respectively.  In 2006,  $131,488 was  credited to income tax expense;  in 2005,
$43,114 was credited to income tax expense;  and, in 2004,  $10,440 was credited
to income tax expense.

Management  believes that the Company will fully realize the deferred tax assets
as of December 31, 2006 and 2005 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 2006, 2005 and 2004 totaled $66,764,
$58,983, and $62,284, respectively.


                                       47
<PAGE>

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.

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

                                                           December 31,
                                                           ------------
                                                    2006                 2005
                                                    ----                 ----

Loan commitments .......................         $33,764,489         $23,653,192
Standby letters of credit ..............           1,113,600             873,880

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, 2006.  Management is not aware of any pending or
threatened litigation,  or unasserted claims or assessments that are expected to
result in losses,  if any, that would be material to the consolidated  financial
statements.

New  Offices  -  The  Bank  has  received  regulatory  approval  to  open  a new
full-service  banking office in the City of Anderson,  SC.  Construction of this
office is expected  to begin  during the first  quarter of 2007 with  completion
expected during the fourth quarter of 2007.  Construction and furnishing of this
office is expected to cost  approximately  $1,050,000.  Land intended to be used
for the Bank's future expansion has been obtained near Powdersville, SC.

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.

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


                                       48
<PAGE>

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,
                                                                                           ------------
                                                                             2006                                  2005
                                                                             ----                                  ----
                                                                  Carrying          Estimated          Carrying          Estimated
                                                                   Amount           Fair Value          Amount           Fair Value
                                                                   ------           ----------          ------           ----------
Financial assets
<S>                                                            <C>                <C>                <C>                <C>
Cash and due from banks ................................       $  6,951,934       $  6,951,934       $ 10,063,495       $ 10,063,495
Interest bearing deposits due from banks ...............             66,941             66,941            181,892            181,892
Federal funds sold .....................................         24,126,000         24,126,000         22,205,000         22,205,000
Securities available-for-sale ..........................        102,487,395        102,487,395        102,069,706        102,069,706
Securities held-to-maturity ............................          6,595,026          6,529,691          7,750,610          7,671,093
Federal Home Loan Bank stock ...........................            980,200            980,200            948,400            948,400
Loans ..................................................        200,723,753        200,447,000        167,051,589        165,856,000
Accrued interest receivable ............................          2,181,572          2,181,572          1,628,754          1,628,754
Financial liabilities
Deposits ...............................................        307,957,309        307,326,000        279,992,599        280,060,000
Accrued interest payable ...............................          2,702,946          2,702,946          1,817,133          1,817,133
Short-term borrowings ..................................          4,500,000          4,500,000          3,500,000          3,500,000
Long-term debt .........................................          5,500,000          5,497,000          6,500,000          6,532,000
</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,
                                                                                            ------------
                                                                              2006                                2005
                                                                              ----                                ----
                                                                 Notional/          Estimated          Notional/          Estimated
                                                                 Contract             Fair              Contract             Fair
                                                                  Amount              Value             Amount              Value
                                                                  ------              -----             ------              -----
Off-balance sheet commitments
<S>                                                           <C>                    <C>            <C>                    <C>
Loan commitments .......................................      $33,764,489            $ -            $23,653,192            $ -
Standby letters of credit ..............................        1,113,600              -                873,880              -
</TABLE>

NOTE O - ACCOUNTING CHANGES

Hybrid  Financial  Instruments  -  The  provisions  of  Statement  of  Financial
Accounting  Standards No. 155 ("SFAS No. 155"),  "Accounting  for Certain Hybrid
Financial  Instruments,  an amendment of FASB  Statements  No. 133 and 140," are
effective  January 1, 2007.  SFAS No. 155  simplifies the accounting for certain
financial instruments containing embedded derivatives.  Issued in February 2006,
SFAS No. 155 allows fair value  measurement for any hybrid financial  instrument
that contains an embedded  derivative that otherwise  would require  bifurcation
under  SFAS  No.  133,  "Accounting  for  Derivative   Instruments  and  Hedging
Activities." In addition,  it amends SFAS No. 140, "Accounting for Transfers and
Servicing of Financial  Assets and  Extinguishments  of  Liabilities" to allow a
qualifying special-purpose entity to hold a derivative financial instrument that
pertains  to a  beneficial  interest  other than  another  derivative  financial
instrument.  The  adoption of the  Statement  is not expected to have a material
effect on the Company's consolidated financial statements.

Servicing  of  Financial  Assets - The  provisions  of  Statement  of  Financial
Accounting  Standards  No. 156 ("SFAS No.  156"),  "Accounting  for Servicing of
Financial  Assets, an amendment of FASB Statement No. 140" are effective January
1,  2007.  Issued in March  2006,  this  Statement  potentially  simplifies  the
accounting for separately  recognized loan servicing  assets and liabilities and
any financial  instruments  used to hedge risks associated with those assets and
liabilities.   Under  SFAS  156,  separately  recognized  servicing  assets  and
liabilities  are  accounted  for initially at fair value,  if  practicable,  and
subsequently  are  accounted  for  either at fair  value or  amortized  over the
economic  lives of the related  loans.  If the fair value  method of  subsequent
valuation is elected,  SFAS No. 156 permits income statement  recognition of the
potential  offsetting  changes  in the fair  values of the  financial  servicing
rights and liabilities and the derivative  instruments used to hedge them in the
same accounting period. The Company currently has no separately  recognized loan
servicing rights or liabilities and adoption in 2007 is not expected to have any
effect on the Company's consolidated financial statements.

                                       50
<PAGE>

Fair Value  Measurements - The  provisions of Statement of Financial  Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
fiscal  years  beginning  after  November  15,  2007  (January  1,  2008 for the
Company).  Issued  in  September  2006,  SFAS No.  157  defines  fair  value and
establishes  a  framework  for  measuring  fair  value  in GAAP.  The  Statement
describes  fair value as being based on a  hypothetical  transaction  to sell an
asset or transfer a liability at a specific measurement date, as considered from
the  perspective  of a  market  participant  who  holds  the  asset  or owes the
liability (an exit price perspective).  In addition, fair value should be viewed
as a  market-based  measurement,  rather  than an  entity-specific  measurement.
Therefore,  fair value should be determined based on the assumptions that market
participants would use in pricing an asset or liability, including all risks and
restrictions  that may be associated with that asset or liability.  SFAS No. 157
does not amend the definition of fair value used in conjunction with Share-Based
Payments  accounted for under SFAS No.  123(R).  The adoption of SFAS No. 157 in
2008 is not  expected to have a material  effect on the  Company's  consolidated
financial statements.

Accounting  for  Uncertainty  in  Income  Taxes - The  provisions  of  Financial
Accounting  Standards Board  Interpretation  No. 48 ("FIN 48"),  "Accounting for
Uncertainty  in Income  Taxes,  an  interpretation  of FASB  Statement No. 109,"
clarify  the  accounting  for  uncertainty  in  income  tax  positions.  FIN  48
prescribes  a two-step  evaluation  process  that  includes  both a  recognition
threshold and a measurement  attribute for tax positions taken or expected to be
taken  in a tax  return.  Issued  in June  2006,  the  provisions  of FIN 48 are
effective  for the Company as of January 1, 2007.  The adoption of FIN 48 is not
expected  to have a  material  effect on the  Company's  consolidated  financial
statements.


                                       51
<PAGE>


NOTE P - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                    2006                    2005
                                                                                                    ----                    ----
Condensed Balance Sheets
       Assets
<S>                                                                                               <C>                    <C>
             Cash ....................................................................            $ 1,172,196            $ 1,120,748
             Investment in banking subsidiary ........................................             32,030,672             27,722,815
             Other assets ............................................................                 12,162                 10,825
                                                                                                  -----------            -----------
                  Total assets .......................................................            $33,215,030            $28,854,388
                                                                                                  ===========            ===========
       Liabilities
             Other liabilities .......................................................            $         -            $         -
       Shareholders' equity ..........................................................             33,215,030             28,854,388
                                                                                                  -----------            -----------
                  Total liabilities and shareholders' equity .........................            $33,215,030            $28,854,388
                                                                                                  ===========            ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                   2006                 2005                 2004
                                                                                   ----                 ----                 ----
Condensed Statements of Income
       Income
<S>                                                                             <C>                 <C>                 <C>
             Interest income ...........................................        $    38,182         $    15,191         $     8,973
             Other income ..............................................                  -               6,070               6,149
                                                                                -----------         -----------         -----------
                  Total income .........................................             38,182              21,261              15,122
                                                                                -----------         -----------         -----------
       Expenses
             Other expenses ............................................             73,953              53,098              54,682
                                                                                -----------         -----------         -----------
                  Total expenses .......................................             73,953              53,098              54,682
                                                                                -----------         -----------         -----------
       Income (loss) before income taxes and equity in
             undistributed earnings of banking subsidiary ..............            (35,771)            (31,837)            (39,560)
       Income tax expense (credit) .....................................            (12,162)            (10,825)            (13,450)
       Equity in undistributed earnings
             of banking subsidiary .....................................          3,041,578           3,750,938           3,462,817
                                                                                -----------         -----------         -----------
       Net income ......................................................        $ 3,017,969         $ 3,729,926         $ 3,436,707
                                                                                ===========         ===========         ===========
</TABLE>


                                       52
<PAGE>

<TABLE>
<CAPTION>
                                                                                                Years Ended December 31,
                                                                                                ------------------------
                                                                                         2006             2005              2004
                                                                                         ----             ----              ----
Condensed Statements of Cash Flows
       Operating activities
<S>                                                                                   <C>              <C>              <C>
             Net income .........................................................     $ 3,017,969      $ 3,729,926      $ 3,436,707
                  Adjustments to reconcile net income to net
                        cash used by operating activities
                              Equity in undistributed earnings
                                of banking subsidiary ...........................      (3,041,578)      (3,750,938)      (3,462,817)
                              (Increase) decrease in other assets ...............          (1,337)           2,625           (4,674)
                                                                                      -----------      -----------      -----------
                                Net cash used by operating activities ...........         (24,946)         (18,387)         (30,784)
                                                                                      -----------      -----------      -----------
       Financing activities
             Exercise of employee stock options .................................          83,197           92,059          268,835
             Payment of cash in lieu of fractional
                  shares for stock dividend .....................................          (6,803)          (6,349)          (6,478)
                                                                                      -----------      -----------      -----------
                                Net cash provided by financing activities .......          76,394           85,710          262,357
                                                                                      -----------      -----------      -----------
       Increase in cash and cash equivalents ....................................          51,448           67,323          231,573
       Cash and cash equivalents, beginning .....................................       1,120,748        1,053,425          821,852
                                                                                      -----------      -----------      -----------
       Cash and cash equivalents, ending ........................................     $ 1,172,196      $ 1,120,748      $ 1,053,425
                                                                                      ===========      ===========      ===========
</TABLE>

                                       53