EXHIBIT 13


















                         COMMUNITY FIRST BANCORPORATION

                            Portions of Registrant's
                              2004 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2004 Form 10-KSB




<PAGE>
                           FORWARD-LOOKING STATEMENTS

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


Market for Common Stock and Dividends

         During the first quarter of 2004, trading in the Company's common stock
began being reported on the OTC Bulletin Board under the ticker symbol CFOK. The
following  table  summarizes  the range of high and low prices for the Company's
common stock as reported on the OTC Bulletin Board for each quarterly  period of
2004.  Per share  prices in the table have been  adjusted to reflect a 10% stock
dividend effective November 30, 2004.

                   Quarter Ended                    High           Low
                   -------------                    ----           ---
                     March 31, 2004               $ 15.45        $ 14.77
                      June 30, 2004               $ 17.27        $ 14.77
                 September 30, 2004               $ 20.27        $ 16.36
                  December 31, 2004               $ 19.14        $ 16.61


         During 2003,  management was aware of a few  transactions  in which the
Company's  common  stock traded in a price range from $14.72 to $18.18 per share
(per share  prices  have been  adjusted  to reflect  10% and 5% stock  dividends
effective  November  30, 2004 and November  28,  2003,  respectively).  However,
management  has not  ascertained  that these  transactions  resulted  from arm's
length  negotiations  between the parties  involved,  and because of the limited
number of shares  involved,  these  prices may not be  indicative  of the market
value of the common stock.

         As of February 28, 2005, there were approximately 812 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         There have been no cash dividends  declared or paid 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 2005.

         The Board of Directors declared a 10% stock dividend effective November
30, 2004 and 5% stock  dividends  effective  November  28, 2003 and November 28,
2002.

         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.


<PAGE>

Management's Discussion and Analysis

         This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of Community First  Bancorporation
and its wholly-owned  subsidiary,  Community First Bank (the "Bank"),  which are
collectively  referred to as the "Company".  This information should be reviewed
in  conjunction  with the  consolidated  financial  statements and related notes
contained  elsewhere  in this  report.  Per share  net  income  and net  income,
assuming dilution,  have been adjusted to reflect a 10% stock dividend effective
November  30,  2004 and 5%  stock  dividends  effective  November  28,  2003 and
November 28, 2002.


Earnings Performance

2004 Compared with 2003

         For the year ended December 31, 2004,  the Company  recorded net income
of $3,437,000, an increase of $432,000, or 14.4%, above net income of $3,005,000
for 2003.  Net income per share for 2004 was $1.30 compared with $1.16 for 2003.
Per share net income,  assuming dilution for unexercised stock options was $1.24
for 2004 and  $1.10  for  2003.  Return  on  average  assets  was 1.17% for 2004
compared with 1.12% for 2003. Return on average  shareholders' equity was 14.20%
for 2004 and 14.03% for 2003.

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

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

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

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

2003 Compared with 2002

         For the year ended December 31, 2003,  the Company  recorded net income
of $3,005,000,  an increase of $243,000, or 8.8%, above net income of $2,762,000
for 2002.  Net income per share for 2003 was $1.16 compared with $1.07 for 2002.
Per share net income,  assuming dilution for unexercised stock options was $1.10
for 2003  compared with $1.02 for 2002.  Return on average  assets was 1.12% for
2003 compared with 1.24% for 2002.  Return on average  shareholders'  equity was
14.03% for 2003 compared with 14.89% for 2002.

         Net  income  increased  significantly  in 2003  primarily  due to lower
provisions for loan losses and higher noninterest  income. The $769,000 decrease
in the provision for loan losses was  attributable to several factors  including
lower loan charge-offs and a slower rate of loan growth.  The $620,000  increase
in noninterest  income was  attributable to higher fee income  generated from an
automatic  overdraft  protection  product and gains from the sale of residential
home  mortgage  loans,  both products  first  introduced by the Company in 2002.
Also, net gains from the sale of a few securities added to noninterest income in
2003.

         Partially  offsetting these positive net income factors were a $289,000
decrease in net interest income and a $717,000 increase in noninterest  overhead
expenses. The Company aggressively competed for deposits during 2003 by offering
attractive  interest rates in its local markets in Oconee and Anderson  Counties
of South Carolina. This effort succeeded in increasing average total deposits by
$41,703,000  or 20.5%.  Net  interest  margin  narrowed  because  the demand for
quality  loans did not keep pace with deposit  growth and most of the funds were
employed in the  lower-yielding  securities  and  overnight  federal  funds sold
categories. The average loan to deposit ratio for 2003 dropped to 58.2% from the
2002 ratio of 64.1%.  Noninterest expenses increased in part due to the expenses
of staffing and  promoting the  Company's  new office  location in  Westminster,


                                       2
<PAGE>

South  Carolina,  which opened for  operations in May,  2003.  Also, the Company
acquired and  implemented a new imaging  technology for customer  statements and
other purposes in 2003.


Comprehensive Income

         Comprehensive   income  for  2004,   2003  and  2002  was   $3,137,000,
$2,427,000,  and  $2,978,000,  respectively.   Accounting  principles  generally
require that recognized revenue,  expenses,  gains and losses be included in net
income.  Other elements of  comprehensive  income for the Company are correlated
directly to the effects that changing  market rates of interest have on the fair
values of the Company's holdings of available-for-sale securities. The resulting
changes in unrealized  holding gains and losses on such  securities are reported
as a separate  component of shareholders'  equity.  Those changes in fair value,
net of income tax  effects,  combined  with net income,  comprise  comprehensive
income.


Net Interest Income

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

         Net interest income was $8,871,000, $7,575,000 and $7,864,000 for 2004,
2003 and 2002, respectively.  Interest income for 2004 was $1,284,000, or 10.1%,
more than in 2003. Interest expense for 2004 decreased $12,000, or .2%, from the
prior year  amount.  The  $1,296,000  increase in net  interest  income for 2004
resulted from the effects of larger average amounts of interest  earning assets.
Lower rates associated with interest bearing  liabilities  substantially  offset
the effects of higher volumes of those funding sources. Management expects that,
if market interest rates rise as expected in 2005, the main challenge will be to
manage net interest margin and net interest income effectively.

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

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

         During 2004, the Federal  Reserve Bank's Open Market  Committee began a
series of measured interest rate increases affecting primarily the federal funds
rate and loans made by Federal Reserve Banks to their member banks. As a result,
interest rates on a broad array of generally short-term  financial  instruments,
including the prime rate, a key  determinant of rates charged to the Bank's most
credit-worthy  customers and a factor considered in all loan-pricing  decisions,
also rose.  Longer term rates,  however,  remained  mostly  stable  during 2004.
Market rates of interest were relatively  stable in 2003.  During the year ended
December 31, 2003, the Open Market  Committee  lowered key target interest rates
on one  occasion,  resulting  in a reduction  of 25 basis points in those target
rates. Consequently, the prime rate was similarly reduced.

         As  of  December  31,  2004  and   December  31,  2003,   approximately
$48,000,000 and $48,000,000,  respectively, or 30.4% and 32.5%, respectively, of


                                       3
<PAGE>

the  Company's  loan  portfolio  was  composed of variable  rate loans  directly
indexed to movements in the prime rate.  The average rate earned on loans during
2004 was 6.73%, compared with 6.98% for 2003.

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

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

         The table, "Average Balances,  Yields and Rates",  provides an analysis
of the average amounts of the Company's assets and liabilities and the effective
yields  and rates on the  categories  of  average  interest  earning  assets and
interest  bearing  liabilities  for the years ended December 31, 2004,  2003 and
2002.



                                       4
<PAGE>


                       Average Balances, Yields and Rates

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                              ------------------------
                                                            2004                        2003                        2002
                                                            ----                        ----                        ----
                                                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 ...    $     29  $     1   3.45%   $     25  $     -   0.00%   $     26   $     1     3.85%
Taxable securities .........................     103,973    3,285   3.16%     75,069    2,270   3.02%     59,246     2,613     4.41%
Tax-exempt securities(2) ...................       2,076       73   3.52%        697       26   3.73%        198        10     5.05%
Federal funds sold .........................      24,126      295   1.22%     38,465      403   1.05%     23,656       381     1.61%
Other investments ..........................         866       29   3.35%        706       27   3.82%        538        21     3.90%
Loans(2)(3) ................................     152,546   10,265   6.73%    142,322    9,938   6.98%    130,104     9,554     7.34%
                                                --------  -------           --------   ------           --------   -------
        Total interest earning assets ......     283,616   13,948   4.92%    257,284   12,664   4.92%    213,768    12,580     5.88%
Cash and due from banks ....................       4,786                       4,194                       3,931
Allowance for loan losses ..................      (2,268)                     (2,188)                     (1,621)
Unrealized securities gains (losses) .......        (684)                        265                         441
Premises and equipment .....................       4,365                       4,352                       3,395
Other assets ...............................       3,943                       3,752                       2,692
                                                --------                    --------                    --------
        Total assets .......................    $293,758                    $267,659                    $222,606
                                                ========                    ========                    ========

Liabilities and shareholders' equity
Interest bearing deposits
     Interest bearing transaction accounts .    $ 35,707  $   244   0.68%   $ 32,985  $   251   0.76%   $ 28,945   $   363     1.25%
     Savings ...............................      31,052      154   0.50%     28,255      161   0.57%     25,470       266     1.04%
     Time deposits $100M and over ..........      60,301    1,481   2.46%     63,106    1,609   2.55%     54,650     1,573     2.88%
     Other time deposits ...................     103,923    3,012   2.90%     93,588    3,068   3.28%     69,272     2,514     3.63%
                                                --------  -------           --------   ------           --------   -------
        Total interest bearing
          deposits .........................     230,983    4,891   2.12%    217,934    5,089   2.34%    178,337     4,716     2.64%
Short-term borrowings ......................       1,352       27   2.00%          -        -   0.00%          -         -     0.00%
Long-term debt .............................       4,057      159   3.92%          -        -   0.00%          -         -     0.00%
                                                --------  -------           --------   ------           --------   -------
        Total interest bearing liabilities .     236,392    5,077   2.15%    217,934    5,089   2.34%    178,337     4,716     2.64%
Noninterest bearing demand deposits ........      31,435                      26,778                      24,672
Other liabilities ..........................       1,735                       1,529                       1,044
Shareholders' equity .......................      24,196                      21,418                      18,553
                                                --------                    --------                    --------
        Total liabilities and shareholders'
           equity ..........................    $293,758                    $267,659                    $222,606
                                                ========                    ========                    ========
Interest rate spread(4) ....................                        2.77%                       2.58%                          3.24%
Net interest income and net yield
     on earning assets(5) ..................              $ 8,871   3.13%              $7,575   2.94%               $7,864     3.68%
Interest free funds supporting earning
     assets(6) .............................    $ 47,224                    $ 39,350                    $ 35,431
</TABLE>
--------------------------
(1)  Average balances are computed on a daily basis.
(2)  Income and yields on tax-exempt  securities 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)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets less total interest bearing liabilities.



                                       5
<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>
                                                                2004 Compared with 2003                   2003 Compared with 2002
                                                                -----------------------                   -----------------------
                                                             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 ..............      $    -        $   1       $    1       $    -     $    (1)       $  (1)
Taxable securities ....................................         909          106        1,015          597        (940)        (343)
Tax-exempt securities .................................          48           (1)          47           19          (3)          16
Federal funds sold ....................................        (168)          60         (108)         185        (163)          22
Other investments .....................................           5           (3)           2            7          (1)           6
Loans .................................................         697         (370)         327          868        (484)         384
                                                             ------        -----       ------       ------     -------        -----
             Total interest income ....................       1,491         (207)       1,284        1,676      (1,592)          84
                                                             ------        -----       ------       ------     -------        -----
Interest bearing deposits
     Interest bearing transaction accounts ............          20          (27)          (7)          45        (157)        (112)
     Savings ..........................................          15          (22)          (7)          27        (132)        (105)
     Time deposits $100M and over .....................         (70)         (58)        (128)         227        (191)          36
     Other time deposits ..............................         320         (376)         (56)         816        (262)         554
Short-term borrowings .................................          27            -           27            -           -            -
Long-term debt ........................................         159            -          159            -           -            -
                                                             ------        -----       ------       ------     -------        -----
             Total interest expense ...................         471         (483)         (12)       1,115        (742)         373
                                                             ------        -----       ------       ------     -------        -----
             Net interest income ......................      $1,020        $ 276       $1,296       $  561     $  (850)       $(289)
                                                             ======        =====       ======       ======     =======        =====
</TABLE>
---------------
(1)  The  rate/volume  variance  for  each  category  has  been  allocated  on a
     consistent  basis between rate and volume variances based on the percentage
     of rate or volume variance to the sum of the two absolute  variances except
     in categories having balances in only one period. In such cases, the entire
     variance is attributed to volume variances.

         Management  currently  expects that  interest  rates will move slightly
higher during 2005.  Management has not presently identified any factors that it
believes  might cause  interest  rates to increase  sharply 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 2005 are expected to result primarily from changes in
the volumes of interest earning assets and liabilities.


Interest Rate Sensitivity

         Interest  rate  sensitivity  measures  the timing and  magnitude of the
repricing  of  assets  compared  with the  repricing  of  liabilities  and is an
important  part of  asset/liability  management.  The objective of interest rate
sensitivity  management is to generate stable growth in net interest income, and
to  control  the risks  associated  with  interest  rate  movements.  Management
constantly  monitors interest rate risk exposures and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive  assets at the end of 2004 by  $97,325,000,  resulting in a cumulative
gap ratio of .47.  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 2004 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


                                       6
<PAGE>

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, 2004
                                                                                          -----------------
                                                                   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 ............      $     36       $      -       $      -        $     -      $     36
      Securities ..........................................           331            900         50,533         49,688       101,452
      Other investments ...................................         1,011              -              -              -         1,011
      Federal funds sold ..................................        34,214              -              -              -        34,214
      Loans (1) ...........................................        38,373         12,253         93,332         12,352       156,310
                                                                 --------       --------       --------        -------      --------
              Total interest earning assets ...............        73,965         13,153        143,865         62,040      $293,023
                                                                 --------       --------       --------        -------      ========

Interest bearing liabilities
      Interest bearing deposits
          Interest bearing transaction accounts ...........      $ 34,055       $      -       $      -        $     -      $ 34,055
          Savings .........................................        31,698              -              -              -        31,698
          Time deposits $100M and over ....................        18,071         29,969         13,633              -        61,673
          Other time deposits .............................        18,429         48,721         38,669              -       105,819
      Short-term borrowings ...............................         1,500          1,000              -              -         2,500
      Long-term debt ......................................             -          1,000          3,000          3,500         7,500
                                                                 --------       --------       --------        -------      --------
              Total interest bearing liabilities ..........       103,753         80,690         55,302          3,500      $243,245
                                                                 --------       --------       --------        -------      ========

Interest sensitivity gap ..................................      $(29,788)      $(67,537)       $88,563        $58,540
Cumulative interest sensitivity gap .......................      $(29,788)      $(97,325)       $(8,762)       $49,778
Gap ratio .................................................          0.71          0.16
Cumulative gap ratio ......................................          0.71          0.47
</TABLE>
--------------------------
(1) Loans are net of nonaccruing loans totaling $1,465,000.

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  $380,000,  $522,000 and  $1,291,000 for the years ended December 31, 2004,
2003 and 2002,  respectively.  The  decreased  provisions  in 2004 and 2003 were
largely the result of  decreasing  amounts of net loan  charge-offs  as compared
with 2002 and lower rates of loan growth  during 2004 and 2003 as compared  with
2002.  The  allowance for loan losses as a percentage of total loans at year-end
was 1.42% for 2004  compared with 1.49% as of the end of 2003.  Net  charge-offs
for 2004 were  $337,000,  an increase of $62,000  from the amount for 2003.  Net
charge-offs for 2003 were $275,000, a decrease of $266,000 from the 2002 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.


                                       7
<PAGE>


Other Income

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

         Noninterest  income for 2003  increased by $620,000 or 43.9% over 2002.
Service charges on deposit accounts  accounted for $358,000 of this increase due
primarily to charges associated with a pre-arranged overdraft protection product
first introduced in 2002. Income from mortgage  brokerage  activities  increased
$127,000 in 2003 over 2002.  In 2002,  the Company  began  originating  mortgage
loans with the intent to sell,  principally to a regional  mortgage banker.  The
Company has since  changed the nature of this part of its business and no longer
originates  such loans for its own account.  In 2003,  the Company  realized net
gains from the sale of a few available-for-sale  securities of $80,000, compared
with a loss of $2,000 in 2002.

Other Expenses

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

         As of December  31,  2004,  the Company  has two  stock-based  employee
compensation  plans.  The Company accounts for those plans under the recognition
and measurement  principles of Accounting  Principles  Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.  No
stock-based  employee  compensation  cost is  reflected  in net  income,  as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the  underlying  common  stock on the date of grant.  The  Company  has
adopted the  disclosure  provisions  of  Financial  Accounting  Standards  Board
("FASB")  Statement  No. 123,  "Accounting  for  Stock-Based  Compensation,"  as
amended.  Refer  to  "Stock-Based  Compensation"  in Note A to the  consolidated
financial  statements  included in this report for the pro-forma  effects on net
income and net  income  per share if the  Company  had  applied  such fair value
method recognition.

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

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

         Noninterest  expenses  increased  $717,000  or 19.4%  for 2003 over the
amount for 2002. Salaries and employee benefits increased $364,000 or 17.7% over
the amount for 2002. This increase was caused  primarily by the cost of staffing
the  Company's  Westminster  office which opened for  commercial  operations  in
temporary  facilities in May, 2003.  The 2003 increase in personnel  expense was
also due to normal  salary and wage  adjustments.  In addition,  employee  group
insurance  expense  was up $43,000 or 36.1% in 2003 due to  significant  premium
increases as well as more participants.

         Net occupancy and furniture and equipment  expenses for 2003  increased
$106,000 or 24.9%.  Depreciation  expense increased $34,000,  largely due to the
approximately  $300,000 purchase of check imaging equipment primarily during the
third quarter.  Building and equipment maintenance and repair expenses increased
$39,000.  Property taxes,  utilities and other related  expenses also increased.
The new branch office in Westminster contributed to a portion of the increase in
these expenses.

         Other  noninterest  expenses  increased  $246,000  or 20.2% for 2003 as
compared with 2002. Stationery,  printing and postage expense was $45,000 higher
in 2003 largely due to the costs of implementing the new imaging  technology for


                                       8
<PAGE>

customers'  statements and increases in account  volumes from a larger  customer
base.  Advertising and promotion  expenses were up $33,000  primarily because of
increased  advertising  to attract  deposits  and  promote  the new  Westminster
office.  Other  expenses  increased  primarily due to the branch  expansion into
Westminster, increased costs of computer software, and higher costs of corporate
governance compliance resulting from recent regulatory changes.

         Noninterest  expenses  are expected to continue to increase in 2005 due
to  continued   market  expansion  and  technology   investment.   Increases  in
noninterest  expenses are closely monitored and cost control will continue to be
emphasized  by  management  where  possible  in order to  achieve  profitability
objectives and attain the goal of growth in the Company's market share in Oconee
and Anderson counties.


Income Taxes

         For 2004,  federal and state income tax expenses  increased by $290,000
to  $1,957,000.  For 2003,  federal and state income tax  expenses  increased by
$140,000 to $1,667,000 from  $1,527,000 in 2002. The  fluctuations in income tax
expense are due to increasing amounts of earnings. The effective income tax rate
(income tax expense  divided by income  before income taxes) was 36.3% for 2004,
35.7% for 2003, and 35.6% for 2002. The Company's nominal income from nontaxable
sources, such as nontaxable investment securities or loans to local governments,
is not a significant factor in the determination of its effective tax rate.


Securities

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

                                                          December 31,
                                                          ------------
                                                 2004         2003          2002
                                                 ----         ----          ----
                                                     (Dollars in thousands)
Available-for-sale
  U. S. Government agencies .............      $46,768      $53,171      $43,334
  State, county and municipal ...........        2,101        2,021          210
  Mortgage-backed securities ............       43,214       30,831       19,424
                                              --------      -------      -------
         Total available-for-sale .......       92,083       86,023       62,968
                                              --------      -------      -------
Held-to-maturity
  Mortgage-backed securities ............        9,369            -            -
                                              --------      -------      -------
         Total securities ...............     $101,452      $86,023      $62,968
                                              ========      =======      =======




                                       9
<PAGE>

         The following table presents  maturities and weighted average yields of
securities  at  December  31,  2004.  Yields on  tax-exempt  state,  county  and
municipal obligations have not been computed on a taxable-equivalent basis.

                   Securities Portfolio Maturities and Yields
<TABLE>
<CAPTION>
                                                                              December 31, 2004
                                                                              -----------------
                                                               After               After
                                                             One Year           Five Years
                                              Within          Through             Through            After
                                             One Year        Five Years          Ten Years          Ten Years           Total
                                             --------        ----------          ---------          ---------           -----
                                         Amount   Yield    Amount   Yield    Amount     Yield    Amount   Yield    Amount     Yield
                                         ------   -----    ------   -----    ------     -----    ------   -----    ------     -----
                                                                         (Dollars in thousands)
<S>                                        <C>    <C>     <C>        <C>     <C>        <C>     <C>        <C>    <C>         <C>
U. S. Government agencies ...........      $ -    0.00%   $41,167    2.78%   $ 5,601    2.93%   $     -    0.00%  $ 46,768    2.80%
State, county and municipal .........        -    0.00%         -    0.00%     1,335    3.22%       766    3.75%     2,101    3.41%
Mortgage-backed securities (1) ......       70    5.35%     6,244    3.33%    20,422    3.42%    25,847    4.20%    52,583    3.80%
                                           ---            -------            -------            -------           --------
         Total ......................      $70    5.35%   $47,411    2.85%   $27,358    3.31%   $26,613    4.19%  $101,452    3.33%
                                           ===            =======            =======            =======           ========
</TABLE>
----------------------------
(1)  Maturity  categories  based  upon  final  stated  maturity  dates.  Average
     maturity  is  substantially  shorter  because  of  the  monthly  return  of
     principal on certain securities.

         On an ongoing basis,  management  assigns securities upon purchase into
one of three categories (trading,  available-for-sale or held-to-maturity) based
on intent,  taking into consideration  other factors including  expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements.  The Company has never held securities for
trading purposes. During 2004, the Company realized net losses of $10,000 on the
sale of  securities  available-for-sale.  During 2003,  the Company sold several
available-for-sale securities resulting in net realized gains of $80,000. During
2002,  securities  were sold  resulting in the  recognition of a $2,000 loss. No
transfers  of  available-for-sale   or  held-to-maturity   securities  to  other
categories were made in any of the years 2002 through 2004.

         The  investment  portfolio  grew by  $15,429,000  in 2004 over the 2003
year-end  amount.  Late in the second  quarter  of 2004,  the  Company  borrowed
approximately  $10,000,000  from the  Federal  Home  Loan  Bank of  Atlanta  and
invested   the   proceeds   in   mortgage-backed    securities   classified   as
held-to-maturity which had maturities at purchase ranging from fifteen to twenty
years. Generally, the Company invests in pass-through mortgage backed securities
issued by U. S. Government  agencies.  Those pass-through  securities supply the
Company with a source of liquidity  since  payments  made on the mortgage  loans
underlying  the   securities   are  passed  through  to  the  Company   monthly.
Available-for-sale  securities  grew by  $6,060,000  over the 2003  amount,  due
primarily to slower  growth in loan demand in the Company's  market area.  Also,
the Company has a significant amount of local governmental deposits for which it
is required by law to pledge  securities as collateral.  The Company had pledged
securities  with a carrying value of $47,286,000 to secure public deposits as of
December 31, 2004. The investment portfolio grew by $23,055,000 in 2003 over the
amount  at  the  end  of  2002.  This  increase  was  primarily  the  result  of
insufficient demand for quality loans to more profitably employ the large volume
of new time deposits obtained in 2003. As of December 31, 2003,  securities with
a carrying value of $40,898,000 were pledged to secure public deposits.

         Short-term  market  rates  of  interest  increased  during  2004  while
longer-term interest rates decreased slightly. Interest rates decreased slightly
during 2003 from the levels existing at the end of 2002.  These external factors
contribute  significantly  to the Company's  pricing  structure for its loan and
deposit  products  and, to a large  extent,  determine  the rates  available  on
investment  securities.  In 2004,  securities issuers continued to exercise call
options in order to refinance their debts at interest rates lower than the rates
existing  at the  time  the  securities  were  issued  originally.  However,  as
short-term  interest  rates  increased  during  the  latter  half of  2004,  the
frequency of those call exercises  decreased.  In 2004, more than $36,000,000 of
the Company's  investment  securities were called. In 2003, the Company was also
subject to early call  redemptions  of  securities.  Such  early  calls  totaled
$54,300,000 in 2003,  representing a turnover rate of  approximately  86% of the
year end 2002  investment  portfolio.  In order  to  maintain  the net  interest
margin,  the Company in 2004 and 2003 invested  larger amounts in longer-term U.
S. Government  agencies and  mortgage-backed  securities.  However,  the average
expected life of the securities  portfolio as of December 31, 2004 was 12 months
shorter than the average  expected  life as of December  31, 2003.  The expected
life of the  securities  portfolio  includes  adjustments  for the rate at which
mortgage-backed  securities  are currently  being paid. As of December 31, 2004,
approximately  26% of the Company's  investments have contractual  maturities of
more than 10 years,  with the majority of those  investments in  mortgage-backed
instruments.

                                       10
<PAGE>

         In  addition  to buying  longer-term  securities,  the Company has also
decreased  significantly the proportion of its securities  investments in direct
debt  issuances  of U. S.  Government  agencies  and  increased  the  proportion
invested in mortgage-backed securities.  These actions were taken in recognition
of the fact that the calls  exercised on longer-term  callable U. S.  Government
agencies  securities had made those  investments  less desirable  because of the
associated  reinvestment risk.  Pass-through  mortgage-backed issues became more
desirable in management's  opinion  because,  even in the case of extremely high
prepayment  experience,  only rarely  would the entire  issue be paid off at one
time.  Consequently,  management  believes  that the monthly cash flows from the
pass-through  mortgage-backed  issues are  generally  more  predictable,  change
gradually over time and are, therefore, more manageable.

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

         All  mortgage-backed  securities held by the Company 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  at December 31, 2004,  2003 and 2002
are shown in the following  table  according to type of loan, and the percentage
of each category to total loans:

             Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                          ------------
                                                                       2004                   2003                      2002
                                                                       ----                   ----                      ----
                                                             Amount          %        Amount          %        Amount           %
                                                             ------          -        ------          -        ------           -
                                                                                     (Dollars in thousands)
Commercial, financial and industrial
<S>                                                         <C>            <C>       <C>            <C>       <C>            <C>
     Commercial and industrial .......................      $ 21,907        13.9%    $ 20,592        13.9%    $ 19,124        13.9%
     Purchasing or carrying securities ...............         2,372         1.5%       2,323         1.6%       2,547         1.9%
Real estate - construction ...........................           338          .2%         436          .3%         822          .6%
Real estate - mortgage
     1-4 family residential ..........................        65,360        41.4%      58,762        39.8%      54,471        39.7%
     Multifamily (5 or more) residential .............         1,036          .7%       2,095         1.4%       2,311         1.7%
     Nonfarm, nonresidential .........................        43,589        27.6%      40,834        27.7%      36,122        26.3%
Consumer installment
     Credit card and checking credit .................         1,036          .7%         998          .7%       1,033          .7%
     Other ...........................................        22,137        14.0%      21,610        14.6%      20,929        15.2%
                                                            --------       -----     --------       -----     --------       -----
                       Total loans ...................      $157,775       100.0%    $147,650       100.0%    $137,359       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.

                                       11
<PAGE>

         Total loans grew $10,125,000 or 6.9% in 2004, compared with $10,291,000
or 7.5% in 2003.  The ratio of total loans to total  deposits at the end of 2004
was 58.8% compared with 57.6% at the end of 2003. The percentage  composition of
the loan  portfolio as to type of loan did not change  significantly  in 2004 as
compared with 2003 and 2002.

         Commercial  and  industrial  loans  primarily  represent  loans made to
businesses,  and may be made on either a secured  or an  unsecured  basis.  When
taken,   collateral  usually  consists  of  liens  on  receivables,   equipment,
inventories,  furniture and  fixtures.  Unsecured  business  loans are generally
short-term with emphasis on repayment  strengths and low  debt-to-worth  ratios.
During 2004, total commercial and industrial loans increased $1,315,000 or 6.4%,
compared with an increase of  $1,468,000  or 7.7% during 2003.  Loans mainly for
business  and  investment  purposes  that are secured by real  estate  (nonfarm,
nonresidential)  increased by $2,755,000  or 6.7%,  compared with an increase of
$4,712,000  or 13.0% in  2003.  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 70% and
69% of the Company's loan  portfolio at the end of 2004 and 2003,  respectively.
Real  estate  mortgage  loans of all types grew  $8,294,000  during  2004 and by
$8,787,000  during 2003.  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.


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,  2004,  as well as the type of
interest requirement on such loans.

<TABLE>
<CAPTION>
                                                                                               December 31, 2004
                                                                                               -----------------
                                                                             One Year         One to       Five Years
                                                                             or Less        Five Years       or More        Total
                                                                             -------        ----------       -------        -----
                                                                                              (Dollars in thousands)

<S>                                                                         <C>             <C>             <C>             <C>
Commercial, financial and industrial ...............................        $ 10,190        $ 13,962        $    127        $ 24,279
Real estate - construction .........................................             166             144              28             338
Real estate - mortgage .............................................          19,610          56,371          34,004         109,985
Consumer installment ...............................................           4,405          17,106           1,662          23,173
                                                                            --------        --------        --------        --------
                    Total loans ....................................        $ 34,371        $ 87,583        $ 35,821        $157,775
                                                                            ========        ========        ========        ========


Predetermined rate, maturity greater than one year .................                        $ 80,136        $ 12,484        $ 92,620
                                                                                            ========        ========        ========

Variable rate or maturity within one year ..........................        $ 34,371        $  7,447        $ 23,337        $ 65,155
                                                                            ========        ========        ========        ========
</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 has no loans
accounted  for as troubled  debt  restructurings.  Following is a summary of the
Company's impaired loans:

                                       12
<PAGE>

                               Nonaccrual and Past Due Loans

                                                            December 31,
                                                            ------------
                                                     2004       2003       2002
                                                     ----       ----       ----
                                                     (Dollars in thousands)

  Nonaccrual loans ............................    $1,465       $997       $866
  Accruing loans 90 days or more past due .....         9          -          -
                                                   ------     ------     ------
             Total ............................    $1,474       $997       $866
                                                   ======     ======     ======

  Percent of total loans ......................       0.9%       0.7%       0.6%


         When an  impaired  loan is 90 days or more past due as to  interest  or
principal or there is serious doubt as to ultimate  collectibility,  the accrual
of interest income is generally  discontinued.  Previously  accrued  interest on
loans placed in a nonaccrual  status is reversed  against  current  income,  and
subsequent interest income is recognized on a cash basis when received. When the
collectibility  of a  significant  amount  of  principal  is in  serious  doubt,
collections  are credited  first to the  remaining  principal  balance on a cost
recovery  basis.  An impaired  nonaccrual loan is not returned to accrual status
unless  principal and interest are current and the borrower has demonstrated the
ability to continue  making  payments as agreed.  The amount of interest  income
that would have been included in income if nonaccrual  loans had been current in
accordance with their terms, and the amounts of interest income actually accrued
and collected, was immaterial to the consolidated financial statements for 2004,
2003 and 2002.

         As of December 31, 2004,  there were no 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, 2004  determined by  management  to be potential  problem loans was
$1,403,000, an increase of $350,000 over the amount of such loans as of December
31,  2003.  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, 2004
                                                            -----------------
                                                         Amount              %
                                                         ------              -
                                                          (Dollars in thousands)

         Real estate mortgage .......................   $  751             53.5%
         Vehicles ...................................      174             12.4%
         Mobile homes ...............................       50              3.6%
         Other ......................................      299             21.3%
         Unsecured ..................................      129              9.2%
                                                        ------            -----
                       Total ........................   $1,403            100.0%
                                                        ======            =====


Allowance for Loan Losses

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

         Management  believes  that  an  aggregate  evaluation  that  emphasizes
individual  loan risk  grades and  specific  problem  loan  allocations  is more
meaningful than an allocation by loan categories. Management is not aware of any


                                       13
<PAGE>

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,
                                                                                         ------------------------
                                                                          2004        2003         2002         2001          2000
                                                                          ----        ----         ----         ----          ----
                                                                                          (Dollars in thousands)
<S>                                                                    <C>          <C>          <C>          <C>          <C>
Total loans outstanding at end of period ..........................    $157,775     $147,650     $137,359     $119,744     $ 97,562
Average amount of loans outstanding ...............................     152,546      142,322      130,104      106,480       86,262

Balance of allowance for loan losses - beginning ..................    $  2,197     $  1,950     $  1,200     $  1,000     $    943
                                                                       --------     --------     --------     --------     --------
Loans charged off
     Commercial and industrial ....................................          31          305          193          249           97
     Real estate - mortgage .......................................         104            -          131            -           40
     Consumer installment .........................................         226            -          223          126          121
                                                                       --------     --------     --------     --------     --------
           Total charge-offs ......................................         361          305          547          375          258
                                                                       --------     --------     --------     --------     --------
Recoveries of loans previously charged off
     Commercial and industrial ....................................           6           30            1            -            -
     Consumer installment .........................................          18            -            5            8           10
                                                                       --------     --------     --------     --------     --------
           Total recoveries .......................................          24           30            6            8           10
                                                                       --------     --------     --------     --------     --------
Net charge-offs ...................................................         337          275          541          367          248
                                                                       --------     --------     --------     --------     --------
Additions to allowance charged to expense .........................         380          522        1,291          567          305
                                                                       --------     --------     --------     --------     --------
Balance of allowance for loan losses - ending .....................    $  2,240     $  2,197     $  1,950     $  1,200     $  1,000
                                                                       ========     ========     ========     ========     ========

Ratios
     Net charge-offs to average loans .............................        0.22%        0.19%        0.42%        0.34%        0.29%
     Net charge-offs to loans at end of period ....................        0.21%        0.19%        0.39%        0.31%        0.25%
     Allowance for loan losses to average loans ...................        1.47%        1.54%        1.50%        1.13%        1.16%
     Allowance for loan losses to loans at end of period ..........        1.42%        1.49%        1.42%        1.00%        1.02%
     Net charge-offs to allowance for loan losses .................       15.04%       12.52%       27.74%       30.58%       24.80%
     Net charge-offs to provision for loan losses .................       88.68%       52.68%       41.91%       64.73%       81.31%
</TABLE>


Deposits

         The average amounts and percentage  composition of deposits held by the
Company for the years ended  December 31, 2004,  2003 and 2002,  are  summarized
below:

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

<S>                                                    <C>            <C>          <C>            <C>          <C>            <C>
Noninterest bearing demand .....................       $ 31,435        12.0%       $ 26,778        10.9%       $ 24,672        12.2%
Interest bearing transaction accounts ..........         35,707        13.6%         32,985        13.6%         28,945        14.3%
Savings ........................................         31,052        11.8%         28,255        11.5%         25,470        12.5%
Time deposits $100M and over ...................         60,301        23.0%         63,106        25.8%         54,650        26.9%
Other time deposits ............................        103,923        39.6%         93,588        38.2%         69,272        34.1%
                                                       --------       -----        --------       -----        --------       -----
               Total deposits ..................       $262,418       100.0%       $244,712       100.0%       $203,009       100.0%
                                                       ========       =====        ========       =====        ========       =====
</TABLE>


                                       14
<PAGE>

         As of December 31, 2004,  there were  $61,673,000  in time  deposits of
$100,000  or  more.  Approximately   $18,071,000  mature  within  three  months,
$11,588,000  mature over three through six months,  $18,381,000  mature over six
through twelve months and $13,633,000 mature after one year. This level of large
time  deposits,  as well as the growth in other  deposits,  can be attributed to
growth  planned by management.  The vast majority of time deposits  $100,000 and
over are acquired  within the Company's  market areas in the ordinary  course of
business from customers with standing banking relationships.  As of December 31,
2004, approximately $16,073,000 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.


Short-term Borrowings

         The following  table  summarizes  the Company's  short-term  borrowings
consisting of advances payable to the Federal Home Loan Bank of Atlanta.

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

<S>                                                                                      <C>                <C>               <C>
Maximum oustanding at any month end during the period .......................            $2,500             $   -             $   -
Balance outstanding at end of year ..........................................            $2,500             $   -             $   -
Average outstanding during the period .......................................            $1,352             $   -             $   -
Weighted average interest rate during the period ............................              2.00%             0.00%             0.00%
Weighted average interest rate at end of the period .........................              2.44%             0.00%             0.00%
</TABLE>


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,
                                                   ------------------------
                                               2004          2003          2002
                                               ----          ----          ----

       Return on assets ..............         1.17%         1.12%         1.24%
       Return on equity ..............        14.20%        14.03%        14.89%
       Dividend payout ratio .........         0.00%         0.00%         0.00%
       Equity to assets ratio ........         8.24%         8.00%         8.33%


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  68.8% of average
total assets during 2004  compared  with 67.8% during 2003.  Deposits of several


                                       15
<PAGE>

local  governmental  entities  comprised  approximately  15%  and  17% of  total
deposits at the end of 2004 and 2003,  respectively.  Because of the potentially
volatile  nature  of  this  funding  source,  management  maintains  the  Bank's
membership  in the Federal  Home Loan Bank of Atlanta  (the  "FHLB") in order to
gain access to its credit programs. During 2004, the banking subsidiary obtained
approximately  $10,000,000 of short-term  borrowings and long-term debt from the
FHLB. As of December 31, 2004,  the banking  subsidiary is eligible to borrow up
to an additional  $31,960,000  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  $55,610,000  as of December 31, 2004.  In addition,  the
banking subsidiary has available an unused short-term line of credit to purchase
up to $6,900,000 of federal funds from an unrelated  correspondent  institution.
The line is generally  available on a one-day  basis for up to 14 days in any 30
day period,  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  ($3,463,000 at December 31, 2004) 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 2004 and 2003, the parent company received no cash
dividends from its banking subsidiary.  Under Federal Reserve Board regulations,
the  amounts of loans or  advances  from the  banking  subsidiary  to the parent
company are also restricted.

         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 $3,399,000 and $2,452,000 during 2004
and 2003,  respectively.  During 2004, net income increased shareholders' equity
by $3,437,000 and the exercise of employee stock options provided an increase of
$269,000.  Other comprehensive  income or loss, which consisted primarily of the
change in unrealized holding gains or losses on  available-for-sale  securities,
net of deferred tax effects, decreased shareholders' equity by $300,000. In lieu
of  fractional  shares,  $7,000 was paid with respect to the 10% stock  dividend
declared in 2004.  During 2003,  net income  increased  shareholders'  equity by
$3,005,000  and the exercise of employee  stock options  provided an increase of
$32,000.  Other comprehensive income or loss, consisting primarily of the change
in unrealized holding gains or losses on available-for-sale  securities,  net of
deferred tax effects,  decreased  shareholders'  equity by $578,000.  In lieu of
fractional shares,  $7,000 was paid with respect to the 5% stock dividend issued
in 2003.

         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, 2004 and 2003,  that the Company and the Bank exceeded all capital  adequacy
minimum requirements to which they were subject.

         To be  categorized as well  capitalized,  the Company and 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
Company or the Bank as less than well capitalized based on subjective  criteria.
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.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Minimum for             Minimum to be
                                                                    Actual            Capital Adequacy          Well Capitalized
                                                                    ------            ----------------          ----------------
                                                              Amount     Ratio      Amount         Ratio     Amount         Ratio
                                                              ------     -----      ------         -----     ------         -----
December 31, 2004                                                                  (Dollars in thousands)
<S>                                                          <C>         <C>       <C>              <C>     <C>              <C>
     The Company
         Total Capital to risk weighted assets               $28,176     13.9%     $16,182          8.0%    $20,227          10.0%
         Tier 1 Capital to risk weighted assets              $25,936     12.8%     $ 8,091          4.0%    $12,136           6.0%
         Tier 1 Capital to average assets (leverage)         $25,936      8.7%     $11,884          4.0%    $17,825           6.0%
     Community First Bank
         Total Capital to risk weighted assets               $27,610     13.7%     $16,182          8.0%    $20,227          10.0%
         Tier 1 Capital to risk weighted assets              $25,370     12.5%     $ 8,092          4.0%    $12,136           6.0%
         Tier 1 Capital to average assets (leverage)         $25,370      8.5%     $11,884          4.0%    $17,825           6.0%

December 31, 2003
     The Company
         Total Capital to risk weighted assets               $24,770     15.2%     $13,001          8.0%    $16,251          10.0%
         Tier 1 Capital to risk weighted assets              $22,737     14.0%     $ 6,500          4.0%    $ 9,751           6.0%
         Tier 1 Capital to average assets (leverage)         $22,737      8.3%     $10,959          4.0%    $16,439           6.0%
     Community First Bank
         Total Capital to risk weighted assets               $23,940     14.7%     $13,001          8.0%    $16,251          10.0%
         Tier 1 Capital to risk weighted assets              $21,907     13.5%     $ 6,500          4.0%    $ 9,751           6.0%
         Tier 1 Capital to average assets (leverage)         $21,907      8.0%     $10,959          4.0%    $16,439           6.0%
</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:

                                       17
<PAGE>

                                                            December 31,
                                                            ------------
                                                       2004             2003
                                                       ----             ----
                                                       (Dollars in thousands)

              Loan commitments ..................   $ 19,771           $ 14,482
              Standby letters of credit .........        884                449


         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.

         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
its 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
it to assess the appropriateness of management's procedures and conclusions, and
its disclosures about this accounting policy.

Provision and Allowance for Loan Losses

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

         A  considerable  amount of  judgment is required in order to compute an
estimate of the amount of the allowance for loan losses.  Management's judgments
must be applied in  assessing  the  current  creditworthiness  of the  Company's
borrowers and in estimating  uncertain future events and their potential effects
based on  currently  known  facts and  circumstances.  Changes in the  estimated
allowance  for loan losses  arising as new events occur or more  information  is
obtained are accounted for as changes in accounting  estimates in the accounting
period in which such a change occurs.

         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


                                       18
<PAGE>

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 the  Company's  internal  auditor,  who is
independent of the lending function.

         The   provision   for  loan   losses   charged  to  expense   decreased
significantly in 2004 to $380,000  compared with $522,000 and $1,291,000 in 2003
and 2002,  respectively.  The  allowance  for loan losses at the end of 2004 was
$2,240,000,  an increase of $43,000 over the $2,197,000  allowance as of the end
of 2003. As a percentage of total loans  outstanding  at year end, the allowance
for loan  losses  stood at 1.42%,  1.49%,  and 1.42% for 2004,  2003,  and 2002,
respectively.  In making its judgments  about the percentage  factors applied to
loan  risk  grade  categories  in  2002  and  2003,  management  was  relatively
pessimistic about local conditions.  Several key factors influenced management's
development  of its loan loss estimates in those years,  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,  but uncertainty  continues with
regard to the effects that the 2003 bankruptcy of a mortgage banking operation's
local funding  subsidiary  might have on the Company's  borrowers.  This 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.  Total year-end loans grew 6.9%,  7.5%, and 14.7% in
2004, 2003, and 2002,  respectively.  The Company entered into the new market of
Anderson  County,  South  Carolina  in 1999,  and has  continued  to expand  its
presence over the last several years.  Activities  within this market  initially
emphasized  the  acquisition  of deposit  liabilities  to fund loan growth.  The
Company's loan  origination  activities  increased  significantly in each of the
years since 2000.  Because the Anderson  County market was relatively new to the
Company, management in the past perceived a higher degree of risk in its lending
operations  there and,  consequently,  a higher provision and allowance for loan
losses was estimated until further experience was obtained. Loan growth has also
had an influence on the provisions  for loan losses in 2004,  2003 and 2002. Net
loan  charge-offs  increased to $337,000 in 2004 after decreasing to $275,000 in
2003  from  $541,000  in 2002.  As of the end of 2004,  impaired  loans  grew to
$1,474,000,  an increase of $477,000,  or 47.8%,  over the 2003 year-end amount.
Potential  problem  loans  were  $1,403,000  at the end of 2004,  compared  with
$1,053,000 at the end of 2003 and $1,279,000 at the end of 2002. As evidenced by
the  decreased  amounts of net  charge  offs  compared  to 2002,  loss  exposure
subsequent to 2002 has proved to be lower than management  originally estimated.
The result has been a reduction of the allowance for loan losses as a percentage
of  loans  as of  December  31,  2004 to the  same  level as at the end of 2002.
Collateral  values of real estate and vehicles taken on many of the impaired and
potential problem loans have so far helped keep charge-offs  relatively low when
considering the total exposure to such 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
$35,747,000  from  $74,238,000 at the end of 2001 to  $109,985,000 by the end of
2004.  Of this  increase,  $20,031,000  consisted of loans secured by 1-4 family
residential real estate mortgages, and $16,542,000 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


                                       19
<PAGE>

the level of impaired or  non-performing  loans and non-earning  foreclosed real
estate 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  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

Consolidation of Variable Interest - Entities FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51,"
provides a new framework for identifying variable interest entities ("VIEs") and
determining   when  a  company   should   include   the   assets,   liabilities,
noncontrolling  interests and results of activities of a VIE in its consolidated
financial  statements.  FIN 46  requires  that if a  business  enterprise  has a
controlling financial interest in a VIE, the assets,  liabilities and results of
the  activities  of the  VIE  must be  included  in the  consolidated  financial
statements of a business enterprise.  This interpretation also requires existing
unconsolidated  VIEs to be  consolidated by their primary  beneficiaries  if the
entities do not  effectively  disperse risks among parties  involved.  VIEs that
effectively  disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that  effectively  recombines risks that
were  previously  dispersed.  FIN 46 was effective  immediately for VIEs created
after January 31, 2003,  and to VIEs in which an enterprise  obtains an interest
after that date. It applied in the first fiscal year or interim period beginning
after June 15, 2003,  to VIEs in which an enterprise  holds a variable  interest
that it acquired before February 1, 2003. This  Interpretation does not apply to
securitization structures that are qualified special purpose entities as defined
within FASB Statement No. 140. Management does not believe that adoption of this
Interpretation  has had, or will have, any material adverse or beneficial effect
on the Company's consolidated financial position or results of operations.

Share-Based  Payment - SFAS No. 123 (revised 2004), "SFAS 123(R)," was issued in
December 2004 and requires that the cost resulting from all share-based  payment
transactions be recognized in the financial  statements.  The statement replaces
SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  and supersedes APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees."  Several  other
pronouncements are amended or superseded as well. SFAS 123(R) generally requires
use of a fair-value  measurement objective for such transactions and amends SFAS
No. 95 to require that excess tax benefits  resulting from such  transactions be
reported as financing cash flows rather than as a reduction of taxes paid.  SFAS
No. 123(R) is effective for public small business  filers as of the beginning of
the first  interim or annual  reporting  period that begins  after  December 31,
2005.  Various  transition  methods are available for the  restatement  of prior
period  information.  Management  has not yet  decided  which  of the  available
transition  methods  the  Company  will  employ,  and  accordingly  is unable to
estimate the effect of the  implementation  of this  statement on the  Company's
consolidated financial position or results of operations for any period.

Exchanges  of  Nonmonetary  Assets - SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of APB Opinion No. 29,"  eliminates  an exception to the
measurement  of such exchanges at fair value for similar  productive  assets and
replaces it with an exception  for such  exchanges  that do not have  commercial
substance.  The  provisions  of  this  Statement  are  required  to  be  applied
prospectively to exchanges  occurring in fiscal periods beginning after June 15,
2005.  Earlier  application is permitted for such exchanges  occurring in fiscal
periods  beginning after December 16, 2004. It is not expected that adoption and
application of the  provisions of this Statement will have any material  adverse
or beneficial effect on the Company's consolidated financial position or results
of operations.

EITF Issue No. 03-1 - Emerging  Issues  Task Force  ("EITF")  Issue  03-1,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investment,"  requires that companies report  information about certain debt and
equity  securities  when the estimated fair values of those  securities are less
than their costs.  Implementation of the guidance  contained in paragraphs 10-20
of EITF Issue No.  03-1was  delayed by the FASB and the effective date for those
paragraphs will be superseded concurrent with the final issuance of proposed FSP
EITF Issue No. 03-1-a.  Substantially all of the Company's investment securities
are  issued  by  the  U.S.  Government,  or  by  U.S.  Government  agencies  and
corporations,  and  generally  do not  contain  provisions  that would allow the
securities  to be  settled  in such a way that the  Company  would  not  recover
substantially all of its cost.  Management intends, and believes that it has the
ability,  to hold such securities until a forecasted recovery of the fair market
value, including until maturity. Management does not believe that implementation
of this  guidance  will have any material  adverse or  beneficial  effect on the
Company's consolidated financial position or results of operations.



                                       20
<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, 2004 and 2003, 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, 2004.
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,  2004  and  2003,  and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  2004,  in  conformity
with U. S. generally accepted accounting principles.


                                        s/J. W. Hunt and Company, LLP

J. W. Hunt and Company, LLP
Columbia, South Carolina
January 27, 2005











                                       21
<PAGE>


Consolidated Balance Sheets
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                                               December 31,
                                                                                                               ------------
                                                                                                     2004                     2003
                                                                                                     ----                     ----
Assets
<S>                                                                                              <C>                  <C>
      Cash and due from banks (Note B) ...................................................       $   5,652,056        $   7,560,353
      Interest bearing deposits due from banks ...........................................              36,139               28,764
      Federal funds sold .................................................................          34,214,000           31,916,000
                                                                                                 -------------        -------------
          Cash and cash equivalents ......................................................          39,902,195           39,505,117
      Securities available-for-sale (Note C) .............................................          92,083,693           86,022,915
      Securities held-to-maturity (fair value of $9,560,157) (Note C) ....................           9,368,609                    -
      Other investments ..................................................................           1,011,100              750,200
      Loans (Note D) .....................................................................         157,774,989          147,649,915
          Allowance for loan losses ......................................................          (2,239,873)          (2,196,500)
                                                                                                 -------------        -------------
              Loans - net ................................................................         155,535,116          145,453,415
      Premises and equipment - net (Note E) ..............................................           4,412,780            4,453,781
      Accrued interest receivable ........................................................           1,331,458            1,424,305
      Real estate held for sale ..........................................................             175,000              980,003
      Other assets .......................................................................           1,527,686            1,936,543
                                                                                                 -------------        -------------

              Total assets ...............................................................       $ 305,347,637        $ 280,526,279
                                                                                                 =============        =============

Liabilities
      Deposits (Note F)
          Noninterest bearing ............................................................       $  34,903,113        $  32,272,829
          Interest bearing ...............................................................         233,245,112          224,277,893
                                                                                                 -------------        -------------
              Total deposits .............................................................         268,148,225          256,550,722
      Accrued interest payable ...........................................................           1,222,118            1,356,922
      Short-term borrowings (Note G) .....................................................           2,500,000                    -
      Long-term debt (Note G) ............................................................           7,500,000                    -
      Other liabilities ..................................................................              40,849               81,341
                                                                                                 -------------        -------------
              Total liabilities ..........................................................         279,411,192          257,988,985
                                                                                                 -------------        -------------

      Commitments and contingent liabilities (Note K)

Shareholders' equity (Note H)
      Common stock - no par value; 10,000,000 shares authorized; issued and
          outstanding - 2,648,230 for 2004 and
          2,362,057 for 2003 .............................................................          24,216,002           19,619,589
      Retained earnings ..................................................................           2,220,083            3,117,432
      Accumulated other comprehensive income (loss) ......................................            (499,640)            (199,727)
                                                                                                 -------------        -------------
              Total shareholders' equity .................................................          25,936,445           22,537,294
                                                                                                 -------------        -------------

              Total liabilities and shareholders' equity .................................       $ 305,347,637        $ 280,526,279
                                                                                                 =============        =============
</TABLE>







See accompanying notes to consolidated financial statements.



                                       22
<PAGE>


Consolidated Statements of Income
Community First Bancorporation and Subsidiary

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                             ------------------------
                                                                                 2004                 2003                 2002
                                                                                 ----                 ----                 ----
Interest income
<S>                                                                         <C>                   <C>                  <C>
     Loans, including fees ........................................         $ 10,265,563          $  9,938,187         $  9,554,406
     Securities
         Taxable ..................................................            3,285,186             2,269,718            2,612,877
         Tax-exempt ...............................................               73,013                26,427                9,820
     Federal funds sold ...........................................              295,000               402,559              380,691
     Other investments ............................................               28,888                26,961               21,484
     Interest bearing deposits due from banks .....................                  558                   276                  434
                                                                            ------------          ------------         ------------
         Total interest income ....................................           13,948,208            12,664,128           12,579,712
                                                                            ------------          ------------         ------------

Interest expense
     Time deposits $100,000 and over ..............................            1,481,410             1,608,789            1,572,554
     Other deposits ...............................................            3,409,058             3,480,591            3,142,899
     Short-term borrowings ........................................               26,975                     -                    -
     Long-term debt ...............................................              159,475                     -                    -
                                                                            ------------          ------------         ------------
         Total interest expense ...................................            5,076,918             5,089,380            4,715,453
                                                                            ------------          ------------         ------------

Net interest income ...............................................            8,871,290             7,574,748            7,864,259
Provision for loan losses (Note D) ................................              380,000               521,842            1,291,384
                                                                            ------------          ------------         ------------
Net interest income after provision ...............................            8,491,290             7,052,906            6,572,875
                                                                            ------------          ------------         ------------

Other income
     Service charges on deposit accounts ..........................            1,524,179             1,461,488            1,103,046
     Credit life insurance commissions ............................               35,481                45,814               35,586
     Gain (loss) on sale of securities (Note C) ...................               (9,580)               80,488               (2,475)
     Mortgage brokerage income ....................................              148,850               202,330               74,898
     Other income .................................................              354,883               242,859              202,227
                                                                            ------------          ------------         ------------
         Total other income .......................................            2,053,813             2,032,979            1,413,282
                                                                            ------------          ------------         ------------

Other expenses (Notes I and K)
     Salaries and employee benefits ...............................            2,779,863             2,420,268            2,055,809
     Net occupancy expense ........................................              255,004               243,826              189,768
     Furniture and equipment expense ..............................              320,217               288,229              236,000
     Other expense ................................................            1,796,249             1,461,175            1,215,223
                                                                            ------------          ------------         ------------
         Total other expenses .....................................            5,151,333             4,413,498            3,696,800
                                                                            ------------          ------------         ------------

Income before income taxes ........................................            5,393,770             4,672,387            4,289,357
Income tax expense (Note J) .......................................            1,957,063             1,667,418            1,527,561
                                                                            ------------          ------------         ------------
Net income ........................................................         $  3,436,707          $  3,004,969         $  2,761,796
                                                                            ============          ============         ============

Per share (Note H)
     Net income ...................................................         $       1.30          $       1.16         $       1.07
     Net income, assuming dilution ................................                 1.24                  1.10                 1.02
</TABLE>



See accompanying notes to consolidated financial statements.



                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Common Stock
                                                                 ------------                           Accumulated
                                                            Number of                    Retained   Other Comprehensive
                                                             Shares        Amount        Earnings       Income (Loss)      Total
                                                             ------        ------        --------       -------------      -----

<S>                                                         <C>         <C>            <C>             <C>             <C>
Balance, January 1, 2002 .............................      2,117,062   $ 15,734,004   $  1,120,413    $    162,358    $ 17,016,775

Comprehensive income:
    Net income .......................................              -              -      2,761,796               -       2,761,796
    Unrealized net holding gains arising
      during the period, net of
      income tax effects of $120,169 .................              -              -              -         214,564         214,564
    Reclassification adjustment,
      net of income tax effects of $889 ..............              -              -              -           1,586           1,586
                                                                                                                       ------------
        Total other comprehensive income .............              -              -              -               -         216,150
                                                                                                                       ------------
        Total comprehensive income ...................              -              -              -               -       2,977,946
                                                                                                                       ------------
Issuance of 5% stock dividend,
    including cash payment for
    fractional shares ................................        106,442      1,739,166     (1,745,106)              -          (5,940)
Exercise of employee stock options ...................         18,913         96,071              -               -          96,071
                                                            ---------   ------------   ------------    ------------    ------------
Balance, December 31, 2002 ...........................      2,242,417     17,569,241      2,137,103         378,508      20,084,852

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

Comprehensive income:
    Net income .......................................              -              -      3,436,707               -       3,436,707
    Unrealized net holding losses 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
                                                            =========   ============   ============    ============    ============
</TABLE>


See accompanying notes to consolidated financial statements.



                                       24
<PAGE>

Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiary
<TABLE>
<CAPTION>
                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                            2004             2003           2002
                                                                                            ----             ----           ----
Operating activities
<S>                                                                                    <C>               <C>           <C>
      Net income ...................................................................   $  3,436,707      $3,004,969    $  2,761,796
      Adjustments to reconcile net income to net
          cash provided by operating activities
              Provision for loan losses ............................................        380,000         521,842       1,291,384
              Writedowns of other real estate ......................................        125,000               -               -
              Depreciation .........................................................        284,033         245,281         210,892
              Deferred income taxes ................................................        (10,440)         31,625        (227,649)
              Amortization of net loan fees and costs ..............................        (93,669)        (69,999)        (13,103)
              Securities accretion and premium amortization ........................        799,472       1,045,958         195,436
              (Gain) loss on sale of available-for-sale securities .................          9,580         (80,488)          2,475
              Gain on sale of loans held for sale ..................................              -        (202,330)        (74,898)
              (Gain) loss on sale of other real estate .............................         34,758          (1,009)         24,443
              Decrease (increase) in interest receivable ...........................         92,847         (73,731)        115,891
              (Decrease) increase in interest payable ..............................       (134,804)        287,745        (237,919)
              Decrease (increase) in prepaid expenses ..............................         79,733        (290,503)       (153,310)
              (Decrease) increase in other accrued expenses ........................        (40,492)         19,434          13,545
              Proceeds of sales of loans held for sale .............................              -       4,631,235       5,011,803
              Originations of loans held for sale ..................................              -      (4,217,778)     (5,148,032)
                                                                                       ------------    ------------    ------------
                  Net cash provided by operating activities ........................      4,962,725       4,852,251       3,772,754
                                                                                       ------------    ------------    ------------

Investing activities
      Purchases of available-for-sale securities ...................................    (56,099,448)    (98,268,759)    (68,285,150)
      Purchases of held-to-maturity securities .....................................     (9,949,464)              -               -
      Maturities, calls and paydowns of available-for-sale securities ..............     43,485,333      69,275,918      73,798,110
      Short-term borrowings (Note G) ...............................................        584,492               -               -
      Proceeds from sale of available-for-sale securities ..........................      5,272,766       4,069,965       2,997,525
      Other liabilities ............................................................       (260,900)       (195,700)        (74,400)
      Net increase in loans made to customers ......................................    (10,509,396)    (11,293,567)    (18,167,859)
      Purchases of premises and equipment ..........................................       (179,551)       (550,982)     (1,126,836)
      Proceeds from sale of other real estate ......................................        489,139          61,009         169,377
      Proceeds from sale of real estate held for sale ..............................        741,522               -               -
                                                                                       ------------    ------------    ------------
                  Net cash used by investing activities ............................    (26,425,507)    (36,902,116)    (10,689,233)
                                                                                       ------------    ------------    ------------

Financing activities
      Net increase (decrease) in demand deposits, interest
          bearing transaction accounts and savings accounts ........................      7,330,419      20,240,116      (2,440,429)
      Net increase in certificates of deposit and other
          time deposits ............................................................      4,267,084      24,671,979      20,559,827
      Net increase in short-term borrowings ........................................      2,500,000               -               -
      Proceeds of issuing long-term debt ...........................................      7,500,000               -               -
      Payment of cash in lieu of fractional shares
          for stock dividend .......................................................         (6,478)         (6,534)        (12,281)
      Exercise of employee stock options ...........................................        268,835          32,242          96,071
                                                                                       ------------    ------------    ------------
                  Net cash provided by financing activities ........................     21,859,860      44,937,803      18,203,188
                                                                                       ------------    ------------    ------------
Increase in cash and cash equivalents ..............................................        397,078      12,887,938      11,286,709
Cash and cash equivalents, beginning ...............................................     39,505,117      26,617,179      15,330,470
                                                                                       ------------    ------------    ------------
Cash and cash equivalents, ending ..................................................   $ 39,902,195     $39,505,117    $ 26,617,179
                                                                                       ============    ============    ============

Supplemental  Disclosure  of Cash Flow  Information
  Cash paid during the period for:
          Interest .................................................................   $  5,211,712      $4,801,635    $  4,955,123
          Income taxes .............................................................      1,922,666       1,672,319       1,807,300
      Noncash investing and financing activities:
          Transfer of loans to other real estate ...................................        141,364         796,813          25,000
          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 ...................................      4,327,578       2,018,106       1,739,166
          Other comprehensive income (loss) ........................................       (299,913)       (578,235)        216,150
</TABLE>

See accompanying notes to consolidated financial statements.



                                       25
<PAGE>

Notes to Consolidated Financial Statements
Community First Bancorporation and Subsidiary

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

Other Investments - Other investments consist of restricted securities which are
carried  at  cost.  Management   periodically  evaluates  these  securities  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

                                       26
<PAGE>

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, which are loans past
due  according  to their  contractual  terms  90 days or more  with  respect  to
interest or principal payments.  Impaired loans, when not material,  are carried
in the balance sheet at a value not to exceed their  observable  market price or
the fair value of the  collateral if the repayment of the loan is expected to be
provided solely by the underlying collateral. The carrying value of any material
impaired  loan is measured  based on the present  value of expected  future cash
flows discounted at the loan's effective interest rate, which is the contractual
interest rate adjusted for any deferred loan fees or costs,  premium or discount
existing at the inception or acquisition of the loan. Generally,  the accrual of
interest is discontinued on impaired loans and any previously  accrued  interest
on such loans is reversed against current income. Any subsequent interest income
is  recognized  on  a  cash  basis  when  received  unless  collectibility  of a
significant amount of principal is in serious doubt. In such cases,  collections
are credited first to the remaining  principal balance on a cost recovery basis.
An impaired loan is not returned to accrual status unless principal and interest
are current and the borrower  has  demonstrated  the ability to continue  making
payments as agreed.

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

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

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

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

Other Real Estate and Real Estate Held for Sale - Other real estate  consists of
properties  acquired  through  foreclosure  or  acceptance  of a deed in lieu of
foreclosure  which were  carried in other  assets at a value of  $229,280  as of
December 31, 2004. The carrying value of such properties held as of December 31,
2003 was $736,813. These properties are initially  recorded at the lower of cost

                                       27
<PAGE>

or the estimated fair market value,  less estimated  selling costs.  Loan losses
arising from the  acquisition  of such property are charged to the allowance for
loan losses. An allowance for losses on foreclosed  properties is maintained for
subsequent downward valuation adjustments.

Real estate held for sale is carried in the  consolidated  balance  sheet at the
lower  of cost or  estimated  net  realizable  value.  This  remaining  property
consists  of a  commercial  lot that was  subdivided  and  developed  from  land
acquired to  construct  the banking  subsidiary's  Anderson  office.  Management
periodically  evaluates  real  estate  held for sale  for  impairment,  with any
appropriate downward valuation adjustments being made when necessary.

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 K. 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,  2004,  the  Company  has  two
stock-based employee  compensation plans, which are described more fully in Note
H. The Company  accounts for those plans under the  recognition  and measurement
principles of Accounting  Principles  Board ("APB") Opinion No. 25,  "Accounting
for Stock Issued to  Employees,"  and related  interpretations.  No  stock-based
employee  compensation  cost is reflected in net income,  as all options granted
under  those  plans  had an  exercise  price  equal to the  market  value of the
underlying  common stock on the date of grant.  The following table  illustrates
the effect on net income and net income per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123,  "Accounting  for  Stock-Based  Compensation,"  to stock-based
employee  compensation.  Per share  amounts  have been  adjusted  to reflect the
effects  of a 10%  stock  dividend  effective  November  30,  2004  and 5% stock
dividends effective November 28, 2003 and November 28, 2002.
<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                         ------------------------
                                                                             2004                    2003                  2002
                                                                             ----                    ----                  ----
<S>                                                                        <C>                    <C>                    <C>
Net income, as reported .......................................            $3,436,707             $3,004,969             $2,761,796
Deduct:  Total stock-based employee
      compensation expense determined under
      fair value based method for all awards,
      net of any related tax effects ..........................              (235,535)              (226,091)              (276,129)
                                                                           ----------             ----------             ----------
Pro forma net income ..........................................            $3,201,172             $2,778,878             $2,485,667
                                                                           ==========             ==========             ==========
Net income per share, basic
      As reported .............................................            $     1.30             $     1.16             $     1.07
      Pro forma ...............................................                  1.21                   1.07                   0.97
Net income per share, assuming dilution
      As reported .............................................            $     1.24             $     1.10             $     1.02
      Pro forma ...............................................                  1.15                   1.02                   0.92
</TABLE>

The fair  values of  options  granted  during  2004,  2003 and 2002 were  $9.86,
$10.07, and $9.15 per share,  respectively.  Such 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,  2003 and 2002:  dividend
yield of 0%, expected life of 10 years,  and risk-free  interest rates of 4.36%,
3.87%, and 4.06%, respectively.

Management  intends  to adopt the  provisions  of SFAS No. 123  (revised  2004),
"Share-Based  Payment," as of January 1, 2006, as required  under the provisions
of that  Statement.  Management  has  not yet  decided  which  of the  available
transition  methods  the  Company  will  employ,  and  accordingly  is unable to
estimate the effect of the  implementation  of this  statement on the  Company's
consolidated  financial  position or results of operations  for any period.  See
Note N.

                                       28
<PAGE>

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 H.

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 H.

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


NOTE B - CASH AND DUE FROM BANKS

Banks are  generally  required by regulation to maintain an average cash reserve
balance  based on a  percentage  of  deposits.  The average  amounts of the cash
reserve balances at December 31, 2004 and 2003 were approximately $1,500,000 and
$1,293,000, respectively.





                                       29
<PAGE>


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,
                                                                                  ------------
                                                         2004                                                         2003
                                                         ----                                                         ----
                                                  Gross         Gross                               Gross      Gross
                                                Unrealized  Unrealized   Estimated               Unrealized  Unrealized    Estimated
                                    Amortized    Holding      Holding      Fair      Amortized     Holding    Holding        Fair
                                       Cost       Gains       Losses       Value        Cost        Gains      Losses       Value
                                       ----       -----       ------       -----        ----        -----      ------       -----
Available-for-sale
<S>                                <C>          <C>        <C>         <C>           <C>           <C>        <C>        <C>
      U.S. Government
          agencies .............   $47,152,289  $   5,750  $ 389,675   $46,768,364   $53,162,008   $179,276   $170,342   $53,170,942
      Mortgage-backed
          securities ...........    43,644,218     58,518    488,214    43,214,522    31,088,557     55,853    313,364    30,831,046
      State, county and
          municipal ............     2,066,656     35,456      1,305     2,100,807     2,083,938     15,043     78,054     2,020,927
                                   -----------  ---------  ---------   -----------   -----------  ---------  ---------   -----------
             Total .............   $92,863,163  $  99,724  $ 879,194   $92,083,693   $86,334,503  $ 250,172   $561,760   $86,022,915
                                   ===========  =========  =========   ===========   ===========  =========  =========   ===========

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


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

<TABLE>
<CAPTION>
                                                                                       December 31, 2004
                                                                                       -----------------
                                                                     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 ................................         $         -         $         -         $         -         $         -
Due after one through five years ...................          41,540,433          41,166,795                   -                   -
Due after five through ten years ...................           6,915,959           6,936,796                   -                   -
Due after ten years ................................             762,553             765,580                   -                   -
                                                             -----------         -----------         -----------         -----------
                                                              49,218,945          48,869,171                   -                   -
Mortgage-backed securities .........................          43,644,218          43,214,522           9,368,609           9,560,157
                                                             -----------         -----------         -----------         -----------
    Total ..........................................         $92,863,163         $92,083,693          $9,368,609          $9,560,157
                                                             ===========         ===========         ===========         ===========
</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,  2004  and  2003  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.  As of December
31, 2004, none of the Company's investments categorized as held-to-maturity were
in  an  unrealized   loss   position.   The  Company  had  no   investments   in
held-to-maturity securities as of December 31, 2003.

                                       30
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                 December 31, 2003
                                                                                 -----------------
                                                               Continuously in Unrealized Loss Position for a Period of
                                                               --------------------------------------------------------
                                                       Less than 12 Months        12 Months or more                  Total
                                                       -------------------        -----------------                  -----
                                                   Estimated      Unrealized    Estimated    Unrealized    Estimated      Unrealized
                                                   Fair Value        Loss       Fair Value      Loss       Fair Value       Loss
                                                   ----------        ----       ----------      ----       ----------       ----
Available-for-sale
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
  U.S. Treasury obligations and
    direct obligations of U.S.
    government agencies ........................   $21,204,193   $   170,342   $         -   $         -   $21,204,193   $   170,342
  Federal agency mortgage-
    backed securities ..........................    22,981,498       310,696       511,618         2,668    23,493,116       313,364
  State, county and
    municipal securities .......................     1,491,493        78,054             -             -     1,491,493        78,054
                                                   -----------   -----------   -----------   -----------   -----------   -----------
                                  Total ........   $45,677,184   $   559,092   $   511,618   $     2,668   $46,188,802   $   561,760
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>


At  December  31,  2004,  fifty three  securities  had been  continuously  in an
unrealized  loss position for less than twelve  months and seventeen  securities
had been  continuously in an unrealized loss position for twelve months or more.
The Company does not consider  these  investments  to be  other-than-temporarily
impaired because the unrealized losses resulted primarily from the volatility of
interest  rates.  Although the Company  classifies a majority of its  investment
securities  as  available-for-sale,  management  has  not  determined  that  any
specific  securities will be disposed of prior to maturity.  In addition,  there
have been no  significant  adverse  changes in the credit  ratings of any of the
security  issuers that would  indicate the Company will be unable to collect all
principal and interest amounts according to contractual terms.

During 2004, the Company sold available for sale securities with amortized costs
totaling  $5,282,346  for proceeds of  $5,272,766,  resulting in gross  realized
gains of $41,974 and gross realized losses of $51,554.  The income tax provision
credited to expense  applicable to the net realized losses of $9,580 was $3,439.
During 2003, the Company sold available for sale securities with amortized costs
totaling  $3,989,477  for proceeds of  $4,069,965,  resulting in gross  realized
gains of $107,420 and gross realized losses of $26,932. The income tax provision
charged to expense  applicable  to the net realized gain of $80,488 was $28,895.
During 2002,  the Company sold an  available-for-sale  security  with a carrying
value of $3,000,000 for $2,997,525,  realizing a loss of $2,475 on the sale. The
income tax  provision  credited to expense  applicable to this realized loss was
$889.  There  were  no  transfers  of  available-for-sale  securities  to  other
categories in 2004, 2003 or 2002.

At December 31, 2004 and 2003,  securities  with a carrying value of $47,286,217
and  $40,897,919,  respectively,  were pledged as  collateral  to secure  public
deposits.




                                       31
<PAGE>

NOTE D - LOANS

Loans consisted of the following:

                                                           December 31,
                                                           ------------
                                                     2004               2003
                                                     ----               ----
Commercial, financial and industrial .....     $  24,278,799      $  22,915,250
Real estate- construction ................           338,073            435,712
Real estate - mortgage ...................       109,984,976        101,690,845
Consumer installment .....................        23,173,141         22,608,108
                                               -------------      -------------
     Total ...............................       157,774,989        147,649,915
Allowance for loan losses ................        (2,239,873)        (2,196,500)
                                               -------------      -------------
     Loans - net .........................     $ 155,535,116      $ 145,453,415
                                               =============      =============

Net deferred  loan fees of $190,335 and $180,322  were  allocated to the various
loan categories as of December 31, 2004 and 2003, 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,
                                                             ------------
                                                          2004           2003
                                                          ----           ----
Investment in impaired loans
     Nonaccrual ................................      $1,464,593        $997,165
     Accruing 90 days and over past due ........           8,677               -
                                                      ----------        --------
         Total .................................      $1,473,270        $997,165
                                                      ==========        ========

Average total investment in impaired
   loans during the year .......................      $1,039,000        $832,000
Allowance for loan losses on impaired
   loans at year end ...........................         620,662         518,213


The average total  investment in impaired loans during 2002 was $453,000.  There
were no  commitments  to lend  additional  funds to  debtors  owing  amounts  on
impaired loans at December 31, 2004.

As of December 31, 2004 and 2003,  there were no significant  concentrations  of
credit risk in any single  borrower or groups of borrowers.  The Company's  loan
portfolio   consists  primarily  of  extensions  of  credit  to  businesses  and
individuals in its Oconee and Anderson County,  South Carolina market areas. The
economy of these areas is diversified and does not depend on any one industry or
group of related  industries.  Management  has  established  loan  policies  and
practices that include set limitations on loan-to-collateral value for different
types of collateral,  requirements  for  appraisals,  obtaining and  maintaining
current credit and financial information on borrowers, and credit approvals.

Transactions in the allowance for loan losses are summarized below:

                                                 Years Ended December 31,
                                                 ------------------------
                                          2004          2003            2002
                                          ----          ----            ----

Balance at January 1 ..............    $2,196,500     $1,950,000     $1,200,000
Provision charged to expense ......       380,000        521,842      1,291,384
Recoveries ........................        24,662         29,626          6,113
Charge-offs .......................      (361,289)      (304,968)      (547,497)
                                       ----------     ----------     ----------
Balance at December 31 ............    $2,239,873     $2,196,500     $1,950,000
                                       ==========     ==========     ==========


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  $8,880,609 and
$8,072,649 at December 31, 2004 and 2003, respectively.  During 2004, $3,627,425
of new loans were made and repayments totaled $2,819,465.

                                       32
<PAGE>


NOTE E - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                                             December 31,
                                                             ------------
                                                        2004              2003
                                                        ----              ----

Land .........................................       $1,374,047       $1,290,567
Buildings and land improvements ..............        2,763,574        2,730,746
Furniture and equipment ......................        2,200,956        2,074,232
                                                     ----------       ----------
     Total ...................................        6,338,577        6,095,545
Accumulated depreciation .....................        1,925,797        1,641,764
                                                     ----------       ----------
     Premises and equipment - net ............       $4,412,780       $4,453,781
                                                     ==========       ==========


Depreciation  expense for the years ended  December 31, 2004,  2003 and 2002 was
$284,033, $245,281, and $210,892, respectively.

NOTE F - DEPOSITS

A summary of deposits follows:

                                                            December 31,
                                                            ------------
                                                        2004             2003
                                                        ----             ----
Noninterest bearing demand ...................     $ 34,903,113     $ 32,272,829
Interest bearing transaction accounts ........       34,055,022       32,633,295
Savings ......................................       31,697,749       28,419,341
Time deposits $100,000 and over ..............       61,673,173       60,746,736
Other time deposits ..........................      105,819,168      102,478,521
                                                   ------------     ------------
     Total deposits ..........................     $268,148,225     $256,550,722
                                                   ============     ============


As of  December  31,  2004  and  2003,  local  governmental  deposits  comprised
approximately  15% and 17% of total deposits,  respectively.  As of December 31,
2004 and 2003, $137,340 and $265,799,  respectively, of overdrawn demand deposit
balances have been reclassified as loans.

At December 31, 2004, the scheduled maturities of time deposits are as follows:

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

                     2005                           $ 107,263,271
                     2006                              27,579,057
                     2007                               7,456,029
                     2008                              24,833,474
                     2009 and thereafter                  360,510


NOTE G - SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-term  borrowings  consist  of  $1,500,000  of Daily  Rate  Advances  and a
$1,000,000  one-year Fixed Rate Credit Advance due June 18, 2005,  each obtained
from the Federal  Home Loan Bank of Atlanta  ("FHLB").  As of December 31, 2004,
the variable  interest  rate payable on the Daily Rate Advances was 2.44% and on
the one year Fixed Rate  Credit  Advance  was 2.43%.  The  Company may repay the
Daily Rate  Advance  at any time and may  prepay the one year Fixed Rate  Credit
Advance on any quarterly interest payment date, subject to a prepayment penalty.

As of December 31, 2004, the banking  subsidiary had an unused short-term credit
accommodation  from an  unrelated  bank which allows the banking  subsidiary  to
purchase up to $6,900,000 of federal funds. The banking subsidiary  generally is


                                       33
<PAGE>

limited to obtaining  funds under this line of credit for  fourteen  days in any
calendar month. The counterparty may, in its sole discretion,  allow the banking
subsidiary  to borrow for more than  fourteen  days in a calendar  month,  but a
higher rate will be charged for such borrowings, if any are allowed.

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  $4,000,000 at rates ranging from 2.90% to
4.40%,  maturing in  $1,000,000  increments  on December 18, 2005 and June 18 of
each  year  from  2006  through  2008.  The  remaining  $3,500,000  is  an  FHLB
Convertible  Advance bearing  interest  initially at 3.92% and maturing June 18,
2014. The interest rate on this  Convertible  Advance will remain at its initial
value  subject to the  FHLB's  option to convert  the  Convertible  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 Convertible  Advance would thereafter be subject to a variable
interest rate until  maturity.  As of December 31, 2004,  the 3-month LIBOR rate
was 2.56%. 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.

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 short-term  borrowings and long-term debt due to the
FHLB  under a  blanket  lien  agreement.  The  amount of  qualifying  collateral
instruments  as  of  December  31,  2004  was  approximately  $55,610,000.   The
qualifying  collateral  instruments  required to secure the Company's short-term
borrowings  and  long-term  debt  as of  December  31,  2004  was  approximately
$12,996,000.

The banking  subsidiary had unused credit  availability under the FHLB's blanket
lien  agreement  of up to an  additional  $31,960,000  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, 2004 to
secure any additional FHLB borrowings totaled approximately $41,603,000.

NOTE H - 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 ($3,462,817 at December
31, 2004) are subject to the prior approval of the South  Carolina  Commissioner
of Banking. Therefore,  $21,406,753 of the Company's equity in the net assets of
the Bank was restricted as of December 31, 2004. 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 - Effective  November 30, 2004,  November 28, 2003 and November
28, 2002 the Company's  Board of Directors  declared stock  dividends of 10%, 5%
and 5%, respectively.  All per share information has been retroactively adjusted
to give effect to the stock dividends.

Accumulated  Other  Comprehensive  Income  (Loss) - As of December  31, 2004 and
2003,  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
$(499,640) and $(199,727) respectively.

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



                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                       2004               2003               2002
                                                                                       ----               ----               ----
Net income per share, basic
<S>                                                                                 <C>                <C>                <C>
  Numerator - net income ..................................................         $3,436,707         $3,004,969         $2,761,796
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          2,639,759          2,597,013          2,574,586
                                                                                    ==========         ==========         ==========
                Net income per share, basic ...............................              $1.30              $1.16              $1.07
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution
  Numerator - net income ..................................................         $3,436,707         $3,004,969         $2,761,796
                                                                                    ==========         ==========         ==========
  Denominator
    Weighted average common shares issued and outstanding .................          2,639,759          2,597,013          2,574,586
    Effect of dilutive stock options ......................................            140,346            132,527            141,059
                                                                                    ----------         ----------         ----------
                Total shares ..............................................          2,780,105          2,729,540          2,715,645
                                                                                    ==========         ==========         ==========
                Net income per share, assuming dilution ...................         $     1.24         $     1.10         $     1.02
                                                                                    ==========         ==========         ==========
</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,
2004 and 2003,  that the Company and its  subsidiary  bank  exceeded all capital
adequacy minimum requirements.

As of December 31, 2004, 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, the Company and
its  banking   subsidiary  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.  The Company's  and Community  First
Bank's actual capital amounts and ratios are also presented in the table.

                                       35
<PAGE>


<TABLE>
<CAPTION>
                                                                                               Minimum for           Minimum to be
                                                                          Actual            Capital Adequacy       Well Capitalized
                                                                          ------            ----------------       ----------------
                                                                    Amount     Ratio        Amount     Ratio       Amount      Ratio
                                                                    ------     -----        ------     -----       ------      -----
December 31, 2004                                                                         (Dollars in thousands)
<S>                                                                <C>         <C>         <C>          <C>        <C>         <C>
  The Company
     Total Capital to risk weighted assets ..................      $28,176     13.9%       $16,182      8.0%       $20,227     10.0%
     Tier 1 Capital to risk weighted assets .................      $25,936     12.8%        $8,091      4.0%       $12,136      6.0%
     Tier 1 Capital to average assets (leverage) ............      $25,936      8.7%       $11,884      4.0%       $17,825      6.0%
  Community First Bank
     Total Capital to risk weighted assets ..................      $27,610     13.7%       $16,182      8.0%       $20,227     10.0%
     Tier 1 Capital to risk weighted assets .................      $25,370     12.5%        $8,092      4.0%       $12,136      6.0%
     Tier 1 Capital to average assets (leverage) ............      $25,370      8.5%       $11,884      4.0%       $17,825      6.0%

December 31, 2003
  The Company
     Total Capital to risk weighted assets ..................      $24,770     15.2%       $13,001      8.0%       $16,251     10.0%
     Tier 1 Capital to risk weighted assets .................      $22,737     14.0%        $6,500      4.0%        $9,751      6.0%
     Tier 1 Capital to average assets (leverage) ............      $22,737      8.3%       $10,959      4.0%       $16,439      6.0%
  Community First Bank
     Total Capital to risk weighted assets ..................      $23,940     14.7%       $13,001      8.0%       $16,251     10.0%
     Tier 1 Capital to risk weighted assets .................      $21,907     13.5%        $6,500      4.0%        $9,751      6.0%
     Tier 1 Capital to average assets (leverage) ............      $21,907      8.0%       $10,959      4.0%       $16,439      6.0%

</TABLE>

Stock  Options - In 1998,  the  Company's  shareholders  approved the 1998 Stock
Option Plan under which an aggregate of 588,305 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  411,176 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 2004,  the exercise  price was the fair market value of the Company's
common  stock on the date the option was granted as  determined  by the Board of
Directors.  Options  terminate  according to the conditions of the grant, not to
exceed  10  years  from  the  date  of  grant.  The  expiration  of the  options
accelerates  upon the optionee's  termination of employment  with the Company or
death, or if there is a change in control of the Company, in accordance with the
provisions of the two plans. Options awarded during 2004, 2003 and 2002 provided
for 20% vesting immediately upon award, with 20% vesting on the anniversary date
of the  award for each of the four  subsequent  years,  and ten year  expiration
dates.



                                       36
<PAGE>

Transactions under the plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                       Years Ended December 31
                                                                       -----------------------
                                                            2004                   2003               2002
                                                            ----                   ----               ----
                                                                  Wtd. Avg.                Wtd. Avg.                Wtd. Avg.
                                                                  Exercise                 Exercise                 Exercise
                                                     Shares         Price     Shares         Price     Shares         Price
                                                     ------         -----     ------         -----     ------         -----
<S>                                                  <C>           <C>       <C>            <C>        <C>           <C>
Outstanding at beginning of year ............        381,410       $ 9.69     379,349       $ 9.41     376,413       $ 8.65
Granted .....................................         65,065        15.13      10,742        14.72      32,866        12.95
Exercised ...................................        (50,402)        5.33      (8,669)        3.72     (22,937)        4.20
Forfeited or expired ........................         (3,010)       13.36         (12)        3.42      (6,993)        5.66
                                                     -------                  -------                  -------
Outstanding at end of year ..................        393,063        11.12     381,410         9.69     379,349         9.41
                                                     =======                  =======                  =======
Options exercisable at year-end .............        310,115       $10.19     317,379       $ 8.90     284,991       $ 8.09
                                                     =======                  =======                  =======
</TABLE>
--------------------
Numbers of shares and exercise  prices have been adjusted in the table above for
a 10% stock  dividend  effective  November  30, 2004 and for 5% stock  dividends
effective November 28, 2003 and November 28, 2002.

The following table summarizes information about the options outstanding:

<TABLE>
<CAPTION>
                                                                                December 31, 2004
                                                                                -----------------
                                                        Options Outstanding                         Options Exercisable
                                                        -------------------                         -------------------
                                                              Weighted
                                                              Average
                                                             Remaining         Weighted                               Weighted
                                              Number         Contractual        Average             Number            Average
        Range of Exercise Prices            Outstanding      Life (Years)     Exercise Price      Outstanding      Exercise Price
        ------------------------            -----------      ------------     --------------      -----------      --------------
<S>         <C>                               <C>               <C>             <C>                 <C>                <C>
            $ 3.40   to  $ 4.73                40,943           1.54            $  4.46              40,943            $  4.46
              6.20   to    6.29                92,768           3.36               6.26              92,768               6.26
             12.91   to   15.45               259,352           6.89              13.91             176,404              13.58
                                              -------                                               -------
                                              393,063           5.50            $ 11.12             310,115            $ 10.19
                                              =======                                               =======

</TABLE>

Of the  999,481  shares of the  Company's  authorized  common  stock  originally
reserved for  issuance  upon the  exercise of options  under the plans,  217,780
shares  authorized  under the 1998 plan remain available for future grants as of
December 31, 2004.

NOTE I - OTHER EXPENSES

Other expenses are summarized below:

<TABLE>
<CAPTION>
                                                                                                 Years Ended December 31,
                                                                                                 ------------------------
                                                                                   2004                 2003                 2002
                                                                                   ----                 ----                 ----
<S>                                                                             <C>                  <C>                  <C>
Salaries and employee benefits ......................................           $2,779,863           $2,420,268           $2,055,809
Net occupancy expense ...............................................              255,004              243,826              189,768
Furniture and equipment expense .....................................              320,217              288,229              236,000
Other expense
     Stationery, printing and postage ...............................              260,264              275,898              231,164
     Telephone ......................................................               96,223               76,000               67,720
     Advertising and promotion ......................................               82,135              100,522               67,835
     Professional services ..........................................              150,837              133,130              124,755
     Insurance ......................................................               50,284               36,769               24,486
     FDIC insurance assessment ......................................               42,600               30,439               33,750
     Directors' fees ................................................              112,400              113,700               73,700
     Other real estate costs and expenses, net ......................              188,936               30,255               41,612
     Data processing expenses .......................................              192,262              130,229              125,387
     Other ..........................................................              620,308              534,233              424,814
                                                                                ----------           ----------           ----------
         Total ......................................................           $5,151,333           $4,413,498           $3,696,800
                                                                                ==========           ==========           ==========
</TABLE>

                                       37
<PAGE>


NOTE J - INCOME TAXES

Income tax expense consisted of:

                                               Years Ended December 31,
                                               ------------------------
                                          2004            2003           2002
                                          ----            ----           ----
Current
     Federal .......................    $1,811,676     $1,498,380    $1,640,594
     State .........................       155,827        137,413       114,616
                                       -----------    -----------   -----------
            Total current ..........     1,967,503      1,635,793     1,755,210
                                       -----------    -----------   -----------
Deferred
     Federal .......................       (10,440)        31,625      (227,649)
     State .........................             -              -             -
                                       -----------    -----------   -----------
           Total deferred ..........       (10,440)        31,625      (227,649)
                                       -----------    -----------   -----------
           Total income tax expense     $1,957,063     $1,667,418    $1,527,561
                                       ===========    ===========   ===========


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

                                                Years Ended December 31,
                                                ------------------------
                                              2004         2003          2002
                                              ----         ----          ----

Provision for loan losses ............    $  (9,872)    $ (78,965)    $(213,868)
Accelerated depreciation .............       12,645       129,972        13,972
Deferred net loan costs and fees .....       (3,307)      (19,382)      (27,753)
Writedowns of other real estate ......       (9,906)            -             -
                                          ---------     ---------     ---------
               Total .................    $ (10,440)    $  31,625     $(227,649)
                                          =========     =========     =========


Income before income taxes presented in the consolidated statement of income for
the years ended December 31, 2004, 2003 and 2002 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,
                                              ------------------------
                                          2004           2003            2002
                                          ----           ----            ----

Tax expense at statutory rate .....    $1,833,882     $1,588,612     $1,458,382
State income tax, net of federal
     income tax benefit ...........       102,846         90,693         75,647
Tax-exempt interest income ........       (37,392)       (22,089)       (20,277)
Non-deductible interest expense to
     carry tax-exempt instruments .         3,344          1,932          1,771
Other, net ........................        54,383          8,270         12,038
                                       ----------     ----------     ----------
               Total ..............    $1,957,063     $1,667,418     $1,527,561
                                       ==========     ==========     ==========



                                       38
<PAGE>

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

                                                               December 31,
                                                               ------------
                                                             2004         2003
                                                             ----         ----
Deferred tax assets
     Allowance for loan losses .......................     $592,374     $582,502
     Writedowns of other real estate .................        9,906            -
     Deferred net loan fees ..........................       62,849       59,542
     Unrealized net holding losses on
       available-for-sale securities .................      279,830      111,860
                                                           --------     --------
               Gross deferred tax assets .............      944,959      753,904
     Valuation allowance .............................            -            -
                                                           --------     --------
               Total .................................      944,959      753,904
                                                           --------     --------

Deferred tax liabilities
     Accelerated depreciation ........................      249,030      236,385
                                                           --------     --------
               Gross deferred tax liabilities ........      249,030      236,385
                                                           --------     --------
Net deferred income tax assets .......................     $695,929     $517,519
                                                           ========     ========


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 2004, 2003 and 2002, $167,970 was credited,  $323,848 was
credited,  and  $121,058  was  charged  to other  comprehensive  income or loss,
respectively.  In 2004,  $10,440 was  credited to income tax  expense;  in 2003,
$31,625 was charged to income tax expense;  and, in 2002,  $227,649 was credited
to income tax expense.

Management  believes that the Company will fully realize the deferred tax assets
as of December 31, 2004 and 2003 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.


NOTE K - 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 2004, 2003 and 2002 totaled $62,284,
$44,848, and $38,996, respectively.


NOTE L - 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.



                                       39
<PAGE>

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

                                                          December 31,
                                                          ------------
                                                    2004                 2003
                                                    ----                 ----

       Loan commitments ..................     $ 19,771,069         $ 14,482,135
       Standby letters of credit .........          883,600              449,100


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, 2004.  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.

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


NOTE M - 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
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,


                                       40
<PAGE>

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 other investments,  consisting of FHLB stock, approximates the
carrying amount.

Fair values are estimated for loans using  discounted cash flow analyses,  using
interest rates  currently  being offered for loans with similar terms and credit
quality.

The fair value of deposits with no stated maturity  (noninterest bearing demand,
interest  bearing  transaction  accounts  and  savings)  is equal to 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  long-term  debt are  estimated  using  discounted  cash flow
analyses,  based  on  the  borrowing  rates  currently  in  effect  for  similar
borrowings.

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.

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,
                                                                                             ------------
                                                                              2004                               2003
                                                                              ----                               ----
                                                                  Carrying          Estimated          Carrying           Estimated
                                                                   Amount           Fair Value          Amount            Fair Value
                                                                   ------           ----------          ------            ----------
Financial assets
<S>                                                            <C>                <C>                <C>                <C>
   Cash and due from banks ................................    $  5,652,056       $  5,652,056       $  7,560,353       $  7,560,353
   Interest bearing deposits due from banks ...............          36,139             36,139             28,764             28,764
   Federal funds sold .....................................      34,214,000         34,214,000         31,916,000         31,916,000
   Securities available-for-sale ..........................      92,083,693         92,083,693         86,022,915         86,022,915
   Securities held-to-maturity ............................       9,368,609          9,560,157                  -                  -
   Other investments ......................................       1,011,100          1,011,100            750,200            750,200
   Loans ..................................................     155,535,116        155,961,000        145,453,415        146,198,000
   Accrued interest receivable ............................       1,331,458          1,331,458          1,424,305          1,424,305
Financial liabilities
   Deposits ...............................................     268,148,225        269,244,000        256,550,722        256,843,000
   Accrued interest payable ...............................       1,222,118          1,222,118          1,356,922          1,356,922
   Short-term borrowings ..................................       2,500,000          2,500,000                  -                  -
   Long-term debt .........................................       7,500,000          7,694,000                  -                  -
</TABLE>


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



                                       41
<PAGE>
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                               2004                                2003
                                                                               ----                                ----
                                                                     Notional/         Estimated         Notional/         Estimated
                                                                     Contract            Fair            Contract            Fair
                                                                      Amount             Value            Amount             Value
                                                                      ------             -----            ------             -----
<S>                                                                <C>                   <C>           <C>                    <C>
Off-balance sheet commitments
  Loan commitments .....................................           $19,771,069           $ -           $14,482,135            $ -
  Standby letters of credit ............................               883,600             -               449,100              -
</TABLE>

NOTE N - ACCOUNTING CHANGES

Consolidation of Variable Interest Entities - FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51,"
provides a new framework for identifying variable interest entities ("VIEs") and
determining   when  a  company   should   include   the   assets,   liabilities,
noncontrolling  interests and results of activities of a VIE in its consolidated
financial  statements.  FIN 46  requires  that if a  business  enterprise  has a
controlling financial interest in a VIE, the assets,  liabilities and results of
the  activities  of the  VIE  must be  included  in the  consolidated  financial
statements of a business enterprise.  This interpretation also requires existing
unconsolidated  VIEs to be  consolidated by their primary  beneficiaries  if the
entities do not  effectively  disperse risks among parties  involved.  VIEs that
effectively  disperse risks will not be consolidated unless a single party holds
an interest or combination of interests that  effectively  recombines risks that
were  previously  dispersed.  FIN 46 was effective  immediately for VIEs created
after January 31, 2003,  and to VIEs in which an enterprise  obtains an interest
after that date. It applied in the first fiscal year or interim period beginning
after June 15, 2003,  to VIEs in which an enterprise  holds a variable  interest
that it acquired before February 1, 2003. This  Interpretation does not apply to
securitization structures that are qualified special purpose entities as defined
within FASB Statement No. 140. Management does not believe that adoption of this
Interpretation  has had, or will have, any material adverse or beneficial effect
on the Company's consolidated financial position or results of operations.

Share-Based  Payment - SFAS No. 123 (revised 2004), "SFAS 123(R)," was issued in
December 2004 and requires that the cost resulting from all share-based  payment
transactions be recognized in the financial  statements.  The statement replaces
SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  and supersedes APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees."  Several  other
pronouncements are amended or superseded as well. SFAS 123(R) generally requires
use of a fair-value  measurement objective for such transactions and amends SFAS
No. 95 to require that excess tax benefits  resulting from such  transactions be
reported as financing cash flows rather than as a reduction of taxes paid.  SFAS
No. 123(R) is effective for public small business  filers as of the beginning of
the first  interim or annual  reporting  period that begins  after  December 31,
2005.  Various  transition  methods are available for the  restatement  of prior
period  information.  Management  has not yet  decided  which  of the  available
transition  methods  the  Company  will  employ,  and  accordingly  is unable to
estimate the effect of the  implementation  of this  statement on the  Company's
financial position or results of operations for any period.

Exchanges  of  Nonmonetary  Assets - SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of APB Opinion No. 29,"  eliminates  an exception to the
measurement  of such exchanges at fair value for similar  productive  assets and
replaces it with an exception  for such  exchanges  that do not have  commercial
substance.  The  provisions  of  this  Statement  are  required  to  be  applied
prospectively to exchanges  occurring in fiscal periods beginning after June 15,
2005.  Earlier  application is permitted for such exchanges  occurring in fiscal
periods  beginning after December 16, 2004. It is not expected that adoption and
application of the  provisions of this Statement will have any material  adverse
or beneficial effect on the Company's consolidated financial position or results
of operations.

EITF Issue No. 03-1 - Emerging  Issues  Task Force  ("EITF")  Issue  03-1,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investment,"  requires that companies report  information about certain debt and
equity  securities  when the estimated fair values of those  securities are less
than their cost. Implementation of the guidance contained in paragraphs 10-20 of
EITF  Issue No.  03-1was  delayed by the FASB and the  effective  date for those
paragraphs will be superseded concurrent with the final issuance of proposed FSP
EITF Issue No. 03-1-a.  Substantially all of the Company's investment securities
are  issued  by  the  U.S.  Government,  or  by  U.S.  Government  agencies  and
corporations,  and  generally  do not  contain  provisions  that would allow the
securities  to be  settled  in such a way that the  Company  would  not  recover
substantially all of its cost.  Management intends, and believes that it has the
ability,  to hold such securities until a forecasted recovery of the fair market
value, including until maturity. Management does not believe that implementation
of this  guidance  will have any material  adverse or  beneficial  effect on the
Company's consolidated financial position or results of operations.

                                       42
<PAGE>



NOTE O - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                     2004                   2003
                                                                                                     ----                   ----
Condensed Balance Sheets
      Assets
<S>                                                                                              <C>                     <C>
           Cash ....................................................................             $ 1,053,425             $   821,852
           Investment in banking subsidiary ........................................              24,869,570              21,706,666
           Other assets ............................................................                  13,450                   8,776
                                                                                                 -----------             -----------
                Total assets .......................................................             $25,936,445             $22,537,294
                                                                                                 ===========             ===========
      Liabilities
           Other liabilities .......................................................             $         -             $         -
      Shareholders' equity .........................................................              25,936,445              22,537,294
                                                                                                 -----------             -----------
                Total liabilities and shareholders' equity .........................             $25,936,445             $22,537,294
                                                                                                 ===========             ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                             ------------------------
                                                                                   2004                2003                 2002
                                                                                   ----                ----                 ----
Condensed Statements of Income
      Income
<S>                                                                           <C>                  <C>                  <C>
           Interest income ..........................................         $     8,973          $    13,093          $    15,285
           Other income .............................................               6,149                2,875                8,297
                                                                              -----------          -----------          -----------
                Total income ........................................              15,122               15,968               23,582
                                                                              -----------          -----------          -----------
      Expenses
           Other expenses ...........................................              54,682               41,779               43,281
                                                                              -----------          -----------          -----------
                Total expenses ......................................              54,682               41,779               43,281
                                                                              -----------          -----------          -----------
      Income (loss) before income taxes and equity in
           undistributed earnings of banking subsidiary .............             (39,560)             (25,811)             (19,699)
      Income tax expense (credit) ...................................             (13,450)              (8,776)              (6,697)
      Equity in undistributed earnings
           of banking subsidiary ....................................           3,462,817            3,022,004            2,774,798
                                                                              -----------          -----------          -----------
      Net income ....................................................         $ 3,436,707          $ 3,004,969          $ 2,761,796
                                                                              ===========          ===========          ===========
</TABLE>


                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              ------------------------
                                                                                   2004                2003                 2002
                                                                                   ----                ----                 ----
Condensed Statements of Cash Flows
Operating activities
<S>                                                                               <C>                <C>                <C>
     Net income ...........................................................       $ 3,436,707        $ 3,004,969        $ 2,761,796
          Adjustments to reconcile net income to net
               cash used by operating activities
                    Equity in undistributed earnings
                      of banking subsidiary ...............................        (3,462,817)        (3,022,004)        (2,774,798)
                    Increase in other assets ..............................            (4,674)            (2,079)            (6,697)
                    Decrease in other liabilities .........................                 -                  -             (4,942)
                                                                                  -----------        -----------        -----------
                      Net cash used by operating activities ...............           (30,784)           (19,114)           (24,641)
                                                                                  -----------        -----------        -----------
Financing activities
     Exercise of employee stock options ...................................           268,835             32,242             96,071
     Payment of cash in lieu of fractional
          shares for stock dividend .......................................            (6,478)            (6,534)           (12,281)
                                                                                  -----------        -----------        -----------
                      Net cash provided by financing activities ...........           262,357             25,708             83,790
                                                                                  -----------        -----------        -----------
Increase in cash and cash equivalents .....................................           231,573              6,594             59,149
Cash and cash equivalents, beginning ......................................           821,852            815,258            756,109
                                                                                  -----------        -----------        -----------
Cash and cash equivalents, ending .........................................       $ 1,053,425        $   821,852        $   815,258
                                                                                  ===========        ===========        ===========
</TABLE>


                                       44