| ** UNITED STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| **SECURITIES AND EXCHANGE  COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **Washington, D.C. 20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **[X]          Annual Report Pursuant To Section 13 Or  15(d) of The Securities Exchange Act Of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                 For  The Fiscal Year December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| **[  ]           Transition Report Pursuant To Section  13 Or 15 (D) Of The Securities Exchange Act Of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 For the Transition Period from  ___________ to ________________                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Commission file number 000-27719                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Greenville First  Bancshares, Inc.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (Exact name of  registrant as specified in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **South  Carolina**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **           58-2459561               ** |
| (State of  Incorporation)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (I.R.S. Employer  Identification No.) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **100  Verdae Boulevard, Greenville, SC**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **                       29607             ** |
| (Address of  principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (Zip Code) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **864-679-9000**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (Telephone Number)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Securities  registered pursuant to Section 12(b) of the Act:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Title of class**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | **Name of each exchange on  which registered** |
| **Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | **The NASDAQ Global Market** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Securities  registered pursuant to Section 12(g) of the Act:  None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| Indicate by check mark if the registrant is a  well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                Yes  [   ]    No [ X ]                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Indicate by check mark  if the registrant is not required to file reports pursuant to Section 13 or  Section 15(d) of the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                 Yes  [   ]    No [ X ]           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Indicate by  check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Exchange Act  of 1934 during the preceding 12 months (or for such shorter period that the  registrant was required to file such                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| reports), and  (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                 Yes  [X ]    No [   ]  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Indicate by  check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation  S-K is not contained herein, and will                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| not be  contained, to the best of registrant's knowledge, in definitive proxy or  information statements incorporated by reference in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Part III of this Form  10-K or any amendment to this Form 10-K.  [X]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark  whether the registrant is a large accelerated filer, an accelerated filer, or  a non-accelerated filer.  See                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| definition of  "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange  Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Large accelerated filer [    ]                    Accelerated filer [   ]                           Non-accelerated  filer [ X ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark whether the  registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                 Yes  [   ]    No [ X ] |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| The aggregate  market value of the voting common stock held by non-affiliates of the  registrant (computed by reference to the price                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| at which the  common stock was recently sold) was $50,985,434 as of the last business day  of the****registrant's most recently                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| completed second fiscal quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                 2,933,868 shares of the registrant's  common stock were outstanding as of March 20, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **DOCUMENTS  INCORPORATED BY REFERENCE**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Proxy  Statement for the Annual Meeting of Shareholders                           Part  III (Portions of Items 10-14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| to  be held on May 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

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**CAUTIONARY STATEMENTREGARDING**

**FORWARD-LOOKINGSTATEMENTS**

 

                This Report contains statementswhich constitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934. These statements are based on many assumptions and estimates and are notguarantees of future performance.  Our actual results may differ materiallyfrom those anticipated in any forward-looking statements, as they will dependon many factors about which we are unsure, including many factors which arebeyond our control.  The words "may,"  "would," "could," "will," "expect,""anticipate," "believe," "intend," "plan," and "estimate," as well as similarexpressions, are meant to identify such forward-looking statements.  Potentialrisks and uncertainties that could cause our actual results to differ fromthose anticipated in any forward-looking statements include, but are notlimited to, those described below under Item 1A- Risk Factors and thefollowing:

 

                •        significantincreases in competitive pressure in the banking and financial servicesindustries;

        •         changesin the interest rate environment which could reduce anticipated or actualmargins;

        •         changesin political conditions or the legislative or regulatory environment; 

        •         generaleconomic conditions, either nationally or regionally and especially in ourprimary service area, becoming less favorable than expected resulting in, amongother things,

                   a deterioration in credit quality;

        •        changesoccurring in business conditions and inflation;

        •         changesin technology;

        •         changesin monetary and tax policies;

        •        thelevel of allowance for loan loss;

        •         therate of delinquencies and amounts of charge-offs; 

        •         therates of loan growth and the lack of seasoning of our loan portfolio;

        •        adversechanges in asset quality and resulting credit risk-related losses and expenses;

        •         lossof consumer confidence and economic disruptions resulting from terroristactivities;

        •         changesin the securities markets; and

        •        otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.

 

                We undertake no obligation topublicly update or otherwise revise any forward-looking statements, whether asa result of new information, future events, or otherwise.

* *

**PART I**

 

**Item 1. Business**

** **

**General**

        

***                GreenvilleFirst Bancshares, Inc.*** (the "company") is a South Carolina corporationthat owns all of the capital stock of Greenville First Bank, N.A. (the "bank")and all of the stock of Greenville First Statutory Trust I and II (collectively(the "Trusts")).  The bank is a national bank organized under the laws of theUnited States located in Greenville County, South Carolina.  The bank isprimarily engaged in the business of accepting demand deposits and savingsdeposits insured by the Federal Deposit Insurance Corporation, and providingcommercial, consumer and mortgage loans to the general public.  The bank owns all of thecapital stock of JB Properties.  This subsidiary is for the purpose of owningreal estate acquired in loan foreclosures.  The Trusts are special purposesubsidiaries organized for the sole purpose of issuing trust preferredsecurities.  

 

                OnOctober 26, 1999, the company sold 1,100,000 shares of its common stock at $10per share and on November 30, 1999 sold 50,000 additional shares for a total of1,150,000 shares (1,897,493 after adjustment for our 3 for 2 stock split in2003 and subsequent 10 percent stock dividend in 2006). The offering raisedapproximately $10.6 million, net of underwriting discounts, commissions andoffering expenses.  

 

                OnJune 26, 2003, the Trust offered and sold $6.0 million of floating ratesecurities.  The company received the proceeds from the issuance of thesesecurities and has reflected the obligation resulting from the receipt of theproceeds as junior subordinated debentures in the balance sheets.  The companyinvested $186,000 in the Trust.

 

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On November17, 2003, shareholders of record as of November 3, 2003, received oneadditional share of stock for every two shares of stock owned prior to the 3for 2 stock split.  All fractional shares were paid in cash.  On June 20, 2006, the company'sBoard of Directors approved a 10 percent stock dividend to the company'sshareholders.  The record date was July 24, 2006 and the distribution date wasAugust 14, 2006.  All fractional shares were paid in cash.  Earnings per shareand average shares outstanding have been adjusted to reflect the 3 for 2 stocksplit and the subsequent 10 percent stock dividend for all periods shown.

On September24, 2004, the company received $14.3 million from the sale of800,000 shares of common stock at a price of$17.875 (880,000 shares at a price of $16.25 after adjustment forthe 10 percent stock dividend in 2006).  On October 15, 2004, the company'sunderwriter exercised its option to purchase an additional 120,000 shares atthe same price (132,000 shares after adjustment for the 10 percent stockdividend in 2006).  The total gross proceeds were approximately $16.4 million. The net proceeds to the company after offering costs and underwriter's discountwere approximately $14.9 million

                On December 22,2005, the Trust offered and sold $7.0 million of floating rate securities.  Thecompany received the proceeds from the issuance of these securities and hasreflected the obligation resulting from the receipt of the proceeds as juniorsubordinated debentures in the company's balance sheets.  The company invested$217,000 in the Trust.

**Non-GAAP Financial Information**

This reportalso contains financial information determined by methods other than inaccordance with Generally Accepted Accounting Principles ("GAAP").  Managementuses these non-GAAP measures to analyze the company's performance in comparisonto prior years.   The company incurred a one-time impairment charge of $1.5million during 2005 which is discussed further in "Income Statement Review -Noninterest expenses."  Management uses operating measures, which exclude theimpairment charge, in the calculation of certain of the company's ratios toanalyze on a consistent basis and over a longer period of time, the performanceof which it considers to be its core banking operations.   These disclosuresshould not be viewed as a substitute for GAAP measures, and furthermore, the company'snon-GAAP measures may not necessarily be comparable to non-GAAP performancemeasures of other companies.  (See Item 6. Selected Financial Data.)

**MarketingFocus**

                GreenvilleFirst Bank commenced operations in January 2000 and at that time was the first community bankorganized in the city of Greenville,South Carolina in over 10 years.  During the 1990s, several community banks operating in the Greenville market were acquired bylarger regional financial institutions.  We formed Greenville First to takeadvantage of market opportunities resulting from this continued consolidationof the financial services industry.  Responding to this opportunity, we createda marketing plan focusing on the professional market in Greenville, includingdoctors, dentists, and small business owners.  We serve this market with aclient-focused structure called relationship teams, which provides each clientwith a specific banker contact and support team responsible for all of theclient's banking needs.  The purpose of this structure is to provide aconsistent and superior level of professional service, and we believe itprovides us with a distinct competitive advantage.  We consider exceptionalclient service to be a critical part of our culture, which we refer to as"Client FIRST."  We emphasize this Client FIRST culture in the training that weprovide our employees, and we strive to reflect this Client FIRST culture inall aspects of our business.  

**Location andService Area**

Our primary market is Greenville County, South Carolina. Greenville County is located in the upstate region of South Carolina,approximately midway between Atlanta and Charlotte on the heavily traveled I-85business corridor.  It is South Carolina's most populous county with over 407,000residents.  Greenville is also one of the state's wealthiest counties, withaverage household income of $61,023 in 2004.  In the past decade, GreenvilleCounty has attracted more than $6 billion in new business investments and43,000 new jobs and is now considered the "economic engine of South Carolina." During the same period, Greenville County was rated first in the United Statesby Site Selection Magazine for both new and expanding international firms and,in 2002, was ranked fifth out of America's top 50 cities for European businessexpansion.  Greenville was also recognized by Expansion Management Magazine inDecember 2000 for having the best worker training program in the UnitedStates.  

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We opened our first branch office, located on The Parkway nearThornblade Country Club in Greenville, on March 14, 2005 and our second branch office,located in the mature and historic Augusta Road area of Greenville, on November4, 2005.  We believe that the demographics and growth characteristics of theselocations will provide us with significant opportunities to further developexisting client relationships and expand our client base.  

In January2007, we opened a loan production office in Columbia, South Carolina.  Columbiais the State capital, the largest city in the State, and the county seat of RichlandCounty, which is the 2nd largest county in the State with apopulation of over 340,000 residents.  Columbia is also home to Fort Jackson,the largest and most active initial entry training center of the United StatesArmy.  From 2000 to 2006, the combined estimated population of Richland andneighboring Lexington counties grew 10.1% to approximately 591,000 with FDICdeposits increasing 80.3% to $10.3 billion for the same period.** **

**LendingActivities**

*General.*  We emphasize a range of lending services, including real estate,commercial, and equity-line consumer loans to individuals and small- tomedium-sized businesses and professional firms that are located in or conduct asubstantial portion of their business in our market area.  Our underwritingstandards vary for each type of loan, as described below.  Since loanstypically provide higher interest yields than other types of interest-earningassets, we invest a substantial percentage of our earning assets in our loanportfolio.  At December 31, 2006, we had net loans of $397.2 million,representing 78.0% of our total assets.  

We have focused our lending activities primarily on theprofessional market in Greenville, including doctors, dentists, and smallbusiness owners.  By focusing on this client base and by serving each clientwith a consistent relationship team of bankers, we have generated a loanportfolio with larger average loan amounts than we believe is typical for acommunity bank.  As of December 31, 2006, our averageloan size was approximately $178,000.  Excluding home equity lines of credit,the average loan size was approximately $238,000.  At the same time, we havestrived to maintain a diversified loan portfolio and limit the amount of ourloans to any single client.  As of December 31, 2006, our 10 largest clientloan relationships represented approximately $54.7 million, or 13.6% of ourloan portfolio.

*Loan Approval.*  Certain credit risks are inherent in makingloans.  These include prepayment risks, risks resulting from uncertainties inthe future value of collateral, risks resulting from changes in economic andindustry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit policiesand procedures.  These policies and procedures include officer and clientlending limits, a multi-layered approval process for larger loans,documentation examination, and follow-up procedures for any exceptions tocredit policies.  Our loan approval policies provide for various levels of officerlending authority.  When the amount of aggregate loans to a single borrowerexceeds an individual officer's lending authority, the loan request will beconsidered by an officer with a higher lending limit or by the officers' loancommittee, which is comprised of our four most senior lenders and our chiefcredit officer.  The officers' loan committee has pre-determined lendinglimits, and any loans in excess of this lending limit will be submitted forapproval by the finance committee of our board or by the full board.  We do notmake any loans to any director or executive officer of the bank unless the loanis approved by the board of directors of the bank and all loans to directors,officers and employees are on terms not more favorable to such person thanwould be available to a person not affiliated with the bank.  

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                Management monitors exposure tocredit risk from potential concentrations of loans to particular borrowers orgroups of borrowers, industries and geographic regions, as well as concentrationsof lending products and practices such as loans that subject borrowers tosubstantial payment increases (e.g. principal deferral periods, loans withinitial interest-only periods, etc.), and loans with high loan-to-valueratios.  As of December 31, 2006, approximately $34.2 million, or 8.5% of ourloans had loan-to-value ratios which exceeded regulatory supervisory limits, ofwhich fifteen loans totaling approximately $8.2 million had loan-to-valueratios of 100% or more.  These types of loans are subject to strictunderwriting standards and are more closely monitored than a loan with a lowloan-to-value ratio.  In addition, our allowance for loan loss model considersand allocates a higher reserve for these types of loans.  Furthermore, thereare industry practices that could subject the company to increased credit riskshould economic conditions change over the course of a loan's life.  Forexample, the company makes variable rate loans and fixed rateprincipal-amortizing loans with maturities prior to the loan being fully paid(i.e. balloon payment loans).  The various types of loans are individuallyunderwritten and monitored to manage the associated risks.  

*Credit Administration and Loan Review.*  Wemaintain a continuous loan review system.  We also apply a credit gradingsystem to each loan, and we use an independent consultant to review the loanfiles on a test basis to assess the grading of each loan.  The bank has a chiefcredit officer that reviews performance benchmarks established by management inthe areas of nonperforming assets, charge-offs, past dues, and loandocumentation.  Each loan officer is responsible for each loan he or she makes,regardless of whether other individuals or committees joined in the approval. This responsibility continues until the loan is repaid or until the loan isofficially assigned to another officer.  

***              ****Lending Limits.*  Our lending activities are subjectto a variety of lending limits imposed by federal law.  In general, the bank issubject to a legal limit on loans to a single borrower equal to 15% of thebank's capital and unimpaired surplus.   Based upon the capitalization of thebank at December 31, 2006, we self-imposed a loan limit of $5.0 million perborrower, which represented approximately 75% of our legal lending limit atDecember 31, 2006.  These limits will increase or decrease in response toincreases or decreases in the bank's level of capital.  We are able to sellparticipations in our larger loans to other financial institutions, which allowus to manage the risk involved in these loans and to meet the lending needs ofour clients requiring extensions of credit in excess of these limits.

*Real EstateMortgage Loans*.  The principal component of our loan portfolio is loans securedby real estate mortgages.  We obtain a security interest in real estatewhenever possible, in addition to any other available collateral, in order toincrease the likelihood of the ultimate repayment of the loan.  At December 31,2006, loans secured by first or second mortgages on real estate made upapproximately 81.5% of our loan portfolio.  

These loans will generally fall into one of four categories:commercial real estate loans, construction and development loans, residentialreal estate loans, or home equity loans.  Most of our real estate loans aresecured by residential or commercial property.  Interest rates for allcategories may be fixed or adjustable, and will more likely be fixed forshorter-term loans.  We generally charge an origination fee for each loan whichis taken into income over the life of the loan as an adjustment to the loanyield.  Other loan fees consist primarily of late charge fees.  Real estateloans are subject to the same general risks as other loans and are particularlysensitive to fluctuations in the value of real estate.  Fluctuations in thevalue of real estate, as well as other factors arising after a loan has beenmade, could negatively affect a borrower's cash flow, creditworthiness, andability to repay the loan.

•     *Commercial Real Estate Loans*.  At December 31, 2006, ourindividual commercial real estate loans ranged in size from approximately $12,000 to $3.2million, with an average loan size of approximately $404,000.  These loansgenerally have terms of five years or less, although payments may be structuredon a longer amortization basis.  We evaluate each borrower on an individualbasis and attempt to determine the business risks and credit profile of eachborrower.  We attempt to reduce credit risk in the commercial real estate portfolioby emphasizing loans on owner-occupied office and retail buildings where theloan-to-value ratio, established by independent appraisals, does not exceed85%.  We also generally require that a borrower's cash flow exceeds 115% ofmonthly debt service obligations.  In order to ensure secondary sources ofpayment and liquidity to support a loan request, we typically review all of thepersonal financial statements of the principal owners and require theirpersonal guarantees.  At December 31, 2006, commercial real estate loans (otherthan construction loans) amounted to $203.7 million, or approximately 50.6% ofour loan portfolio.  Of our commercial real estate loan portfolio, $126.0million in loans were not owner-occupied properties, representing 61.9% of ourcommercial real estate portfolio and 31.3% of our total loan portfolio.  Theremainder of our commercial real estate loan portfolio, $77.7 million in loansor 38.1% of the commercial loan portfolio, were owner-occupied.  Owner-occupiedloans represented 19.3% of our total loan portfolio.  

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•      *Construction and Development Real Estate Loans. *We offeradjustable and fixed rate residential and commercial construction loans tobuilders and developers and to consumers who wish to build their own homes.  AtDecember 31, 2006, our commercial construction and development real estateloans ranged in size from approximately $18,000 to $3.5 million, with anaverage loan size of approximately $481,000.  At December 31, 2006, ourindividual residential construction and development real estate loans ranged insize from approximately $15,000 to $2.1 million, with an average loan size ofapproximately $358,000.  The duration of our construction and development loansgenerally is limited to 18 months, although payments may be structured on alonger amortization basis.  Construction and development loans generally carrya higher degree of risk than long-term financing of existing properties becauserepayment depends on the ultimate completion of the project and usually on thesale of the property.  Specific risks include:

•        cost overruns;

•       mismanaged construction;

•       inferior or improper construction techniques;

•       economic changes or downturns during construction;

•       a downturn in the real estate market;

•       rising interest rates which may prevent sale of the property; and

•       failure to sell completed projects in a timely manner.

We attempt to reduce the risk associated with construction anddevelopment loans by obtaining personal guarantees where possible and bykeeping the loan-to-value ratio of the completed project at or below 80%.  AtDecember 31, 2006, total construction loans amounted to $28.7 million, or 7.1%of our loan portfolio.  Included in the $28.7 million was $20.5 million, or 5.1%of our loan portfolio, that were commercial construction, and $8.3 million, or 2.1%of our loan portfolio, that were consumer construction loans.

•     * Residential Real Estate Loans and Home Equity Loans. *We do notgenerally originate traditional long term residential mortgages, but we doissue traditional second mortgage residential real estate loans and home equitylines of credit.  At December 31, 2006, our individual residential real estateloans ranged in size from $7,500 to $1.5 million, with an average loan size of approximately$252,000.  Generally, we limit the loan-to-value ratio on our residential realestate loans to 85%.  We offer fixed and adjustable rate residential realestate loans with terms of up to 30 years.  We typically offer these fixed rateloans through a third party rather than originating and retaining these loansourselves.  We also offer home equity lines of credit.  At December 31, 2006,our individual home equity lines of credit ranged in size from $1,000 to $1.1million, with an average of approximately $89,000.  Our underwriting criteriaand the risks associated with home equity loans and lines of credit aregenerally the same as those for first mortgage loans.  Home equity lines ofcredit typically have terms of five years or less.  We generally limit theextension of credit to 90% of the available equity of each property, althoughwe may extend up to 100% of the available equity.  At December 31, 2006,residential real estate loans (other than construction loans) amounted to $95.2million, or 23.7% of our loan portfolio.  Included in the residential realestate loans was $59.2 million, or 14.7% of our loan portfolio, in first andsecond mortgages on individuals' homes, and $36.0 million, or 8.9% of our loanportfolio, in home equity loans.  

*Commercial Business Loans*.  We make loans for commercialpurposes in various lines of businesses, including the manufacturing, serviceindustry, and professional service areas.  At December 31, 2006, our individualcommercial business loans ranged in size from approximately $1,000 to $2.3million, with an average loan size of approximately $129,000.  Commercial loansare generally considered to have greater risk than first or second mortgages onreal estate because commercial loans may be unsecured, or if they are secured,the value of the collateral may be difficult to assess and more likely todecrease than real estate.  At December 31, 2006, commercial business loansamounted to $65.9 million, or 16.4% of our loan portfolio.

We are eligible to offer small business loans utilizing governmentenhancements such as the Small Business Administration's ("SBA") 7(a) programand SBA's 504 programs.  These loans typically are partially guaranteed by thegovernment, which helps to reduce their risk.  Government guarantees of SBAloans do not exceed, and are generally less than, 80% of the loan.  As ofDecember 31, 2006, we had not originated any small business loans utilizinggovernment enhancements.

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*ConsumerLoans*.  We make a variety of loans to individuals for personal andhousehold purposes, including secured and unsecured installment loans andrevolving lines of credit.  Consumer loans are underwritten based on the borrower'sincome, current debt level, past credit history, and the availability and valueof collateral.  Consumer rates are both fixed and variable, with termsnegotiable.  At December 31, 2006, our individual consumer loans ranged in sizefrom $100 to $1.6 million, with an average loan size of approximately $19,000. Our installment loans typically amortize over periods up to 60 months.  We willoffer consumer loans with a single maturity date when a specific source ofrepayment is available.  We typically require monthly payments of interest anda portion of the principal on our revolving loan products.  Consumer loans aregenerally considered to have greater risk than first or second mortgages onreal estate because they may be unsecured, or, if they are secured, the valueof the collateral may be difficult to assess and more likely to decrease invalue than real estate.  At December 31, 2006, consumer loans amounted to $9.5million, or 2.4% of our loan portfolio.

**DepositServices**

Our principal source of funds is core deposits.  We offer a fullrange of deposit services, including checking accounts, commercial checking accounts,savings accounts, and other time deposits of various types, ranging from dailymoney market accounts to long-term certificates of deposit.  Because of thehistorically low interest rate environment in the last three years, we havechosen to obtain a portion of our deposits from outside our local market.  Ourout-of-market, or wholesale, certificates of deposits represented 26.4% oftotal deposits at December 31, 2006.  The deposits obtained outside of ourmarket area generally have lower rates than rates being offered forcertificates of deposits in our local market.  This funding strategy allowed us to operate in only three locations, maintain asmaller staff, and not incur significant marketing costs to advertise depositrates, which in turn has allowed us to maintain our focus on growing our loan portfolio. In an effort to obtain lower costing deposits, we are focusing on expanding ourretail deposit program.  Accordingly, we opened two new retail deposit offices,one in the first quarter of 2005 and the other in the third quarter of 2005,which are assisting us in obtaining low cost transaction accounts that are lessaffected by rising rates.  Deposit rates are reviewed regularly by seniormanagement of the bank.  We believe that the rates we offer are competitivewith those offered by other financial institutions in our area.  We focus oncustomer service and our ClientFIRST culture to attract and retain deposits.

**Other Banking Services**

We offer other bank services including safe deposit boxes, traveler'schecks, direct deposit, United States Savings Bonds, and banking by mail.  Weearn fees for most of these services, including debit and credit cardtransactions, sales of checks, and wire transfers.  We also receive ATMtransaction fees from transactions performed by our clients.  We are associatedwith the Honor, Cirrus, and Master-Money ATM networks, which are available toour clients throughout the country.  Since we outsource our ATM services, weare charged related transaction fees from our ATM service provider.  We havecontracted with Fidelity Integrated Financial Solutions, an outside computerservice company, to provide our core data processing services and our ATMprocessing.  By outsourcing these services, we believe we are able to reduce ouroverhead by matching the expense in each period to the transaction volume thatoccurs during the period, as a significant portion of the fee charged isdirectly related to the number of loan and deposit accounts and the relatednumber of transactions we have during the period.  We believe that by beingassociated with a shared network of ATMs, we are better able to serve ourclients and are able to attract clients who are accustomed to the convenienceof using ATMs, although we do not believe that maintaining this association iscritical to our success.  We also offer Internet banking services, bill paymentservices, and cash management services.  We do not expect to exercise trustpowers during our next few years of operations.

** ****Competition**

The banking business is highly competitive, and we experiencecompetition in our market from many other financial institutions.  Competitionamong financial institutions is based upon interest rates offered on depositaccounts, interest rates charged on loans, other credit and service chargesrelating to loans, the quality and scope of the services rendered, theconvenience of banking facilities, and, in the case of loans to commercialborrowers, relative lending limits.  We compete with commercial banks, creditunions, savings and loan associations, mortgage banking firms, consumer financecompanies, securities brokerage firms, insurance companies, money market funds,and other mutual funds, as well as other super-regional, national, andinternational financial institutions that operate offices in Greenville Countyand elsewhere. 

As of June 30, 2006, there were 28 financial institutions otherthan us in Greenville County.  We compete with these institutions both inattracting deposits and in making loans.  In addition, we have to attract ourcustomer base from other existing financial institutions and from newresidents.  Many of our competitors are well-established, larger financialinstitutions with substantially greater resources and lending limits, such asBB&T, Bank of America, Wachovia, and Carolina First Bank.  Theseinstitutions offer some services, such as extensive and established branchnetworks and trust services that we do not provide.  In addition, many of ournon-bank competitors are not subject to the same extensive federal regulationsthat govern bank holding companies and federally insured banks.

We believe our commitment to quality and personalized bankingservices through our Client FIRST culture is a factor that contributes to ourcompetitiveness and success.

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As of June 30, 2006, the most recent date for which market data isavailable, total deposits in the bank's primary service area were over $8.4 billion,which represented an 8.6% deposit increase from 2005.  At June 30, 2006, the bank represented 3.6% of the market. 

**Employees  **

**               **At March 20, 2007, weemployed a total of 68 full-time and 2 part-time employees.  We believethat our relations with our employees are good.****

**SUPERVISION ANDREGULATION**

Both the company and thebank are subject to extensive state and federal banking laws and regulationsthat impose specific requirements or restrictions on and provide for generalregulatory oversight of virtually all aspects of our operations.  These lawsand regulations are generally intended to protect depositors, notshareholders.  The following summary is qualified by reference to the statutoryand regulatory provisions discussed.  Changes in applicable laws or regulationsmay have a material effect on our business and prospects.  Our operations maybe affected by legislative changes and the policies of various regulatoryauthorities.  We cannot predict the effect that fiscal or monetary policies,economic control, or new federal or state legislation may have on our businessand earnings in the future.

The following discussionis not intended to be a complete list of all the activities regulated by thebanking laws or of the impact of such laws and regulations on our operations. It is intended only to briefly summarize some material provisions.

**Greenville FirstBancshares, Inc.**

We own 100% of theoutstanding capital stock of the bank, and therefore we are considered to be abank holding company under the federal Bank Holding Company Act of 1956, asamended (the "Bank Holding Company Act").  As a result, we are primarilysubject to the supervision, examination and reporting requirements of the Boardof Governors of the Federal Reserve (the "Federal Reserve") under theBank Holding Company Act and its regulations promulgated thereunder.  Moreover,as a bank holding company of a bank located in South Carolina, we also aresubject to the South Carolina Banking and Branching Efficiency Act.   

***Permitted Activities***. ** **Under the BankHolding Company Act, a bank holding company is generally permitted to engagein, or acquire direct or indirect control of more than 5% of the voting sharesof any company engaged in, the following activities:

•             bankingor managing or controlling banks; 

•             furnishingservices to or performing services for our subsidiaries; and

•             anyactivity that the Federal Reserve determines to be so closely related tobanking as to be a proper incident to the business of banking.

 

Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 

•              factoringaccounts receivable;

•             making,acquiring, brokering or servicing loans and usual related activities;

•             leasingpersonal or real property;

•              operatinga non-bank depository institution, such as a savings association;

•              trustcompany functions;

•              financialand investment advisory activities;

•              conductingdiscount securities brokerage activities;

•              underwritingand dealing in government obligations and money market instruments;

•              providingspecified management consulting and counseling activities;

•             performingselected data processing services and support services;

 

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•             actingas agent or broker in selling credit life insurance and other types ofinsurance in connection with credit transactions; and

•             performingselected insurance underwriting activities.

As abank holding company we also can elect to be treated as a "financial holdingcompany," which would allow us engage in a broader array of activities.  Insum, a financial holding company can engage in activities that are financial innature or incidental or complimentary to financial activities, includinginsurance underwriting, sales and brokerage activities, providing financial andinvestment advisory services, underwriting services and limited merchantbanking activities.  We have not sought financial holding company status, butmay elect such status in the future as our business matures.  If we were toelect in writing for financial holding company status, each insured depositoryinstitution we control would have to be well capitalized, well managed and haveat least a satisfactory rating under the CRA (discussed below).  

The Federal Reserve hasthe authority to order a bank holding company or its subsidiaries to terminateany of these activities or to terminate its ownership or control of anysubsidiary when it has reasonable cause to believe that the bank holdingcompany's continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.

***Change in Control.***  In addition, andsubject to certain exceptions, the Bank Holding Company Act and the Change inBank Control Act, together with regulations promulgated there under, requireFederal Reserve approval prior to any person or company acquiring "control" ofa bank holding company.  Control is conclusively presumed to exist if anindividual or company acquires 25% or more of any class of voting securities ofa bank holding company.  Control is rebuttably presumed to exist if a personacquires 10% or more, but less than 25%, of any class of voting securities andeither the company has registered securities under Section 12 of the SecuritiesExchange Act of 1934 or no other person owns a greater percentage of that classof voting securities immediately after the transaction.  Our common stock isregistered under Section 12 of the Securities Exchange Act.  The regulationsprovide a procedure for rebutting control when ownership of any class of votingsecurities is below 25%.

***Source of Strength.***  In accordance withFederal Reserve Board policy, we are expected to act as a source of financialstrength to the bank and to commit resources to support the bank incircumstances in which we might not otherwise do so.  Under the Bank HoldingCompany Act, the Federal Reserve Board may require a bank holding company toterminate any activity or relinquish control of a non-bank subsidiary, otherthan a non-bank subsidiary of a bank, upon the Federal Reserve's determinationthat such activity or control constitutes a serious risk to the financialsoundness or stability of any depository institution subsidiary of a bankholding company.  Further, federal bank regulatory authorities have additionaldiscretion to require a bank holding company to divest itself of any bank ornon-bank subsidiaries if the agency determines that divestiture may aid thedepository institution's financial condition.

***Capital Requirements.***  The Federal ReserveBoard imposes certain capital requirements on the bank holding company underthe Bank Holding Company Act, including a minimum leverage ratio and a minimumratio of "qualifying" capital to risk-weighted assets.  These requirements aredescribed below under "Greenville First Bank - Capital Regulations."  Subjectto our capital requirements and certain other restrictions, we are able toborrow money to make a capital contribution to the bank, and these loans may berepaid from dividends paid from the bank to the company.  Our ability to paydividends is subject to regulatory restrictions as described below in"Greenville First Bank - Dividends."  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

***South Carolina StateRegulation.*** As a South Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions (the"S.C. Board").  We are not required to obtain the approval of theS.C. Board prior to acquiring the capital stock of a national bank, but we mustnotify them at least 15 days prior to doing so.  We must receive the Board's approvalprior to engaging in the acquisition of a South Carolina state chartered bankor another South Carolina bank holding company.

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**Greenville First Bank,N.A.**

The bank operates as anational banking association incorporated under the laws of the United Statesand subject to examination by the Office of the Comptroller of the Currency(the "Comptroller") .  Deposits in the bank are insured by theFederal Deposit Insurance Corporation ("FDIC") up to a maximum amount, which is currently $100,000 for each non-retirement depositor and $250,000 forcertain retirement-account depositors.  The Comptroller and the FDIC regulateor monitor virtually all areas of the bank's operations, including

•             securitydevices and procedures;

•              adequacyof capitalization and loss reserves; 

•              loans;

•             investments;

•             borrowings;

•             deposits;

•              mergers;

•             issuancesof securities; 

•             paymentof dividends;

•             interestrates payable on deposits;

•             interestrates or fees chargeable on loans;

•             establishmentof branches;

•             corporatereorganizations;

•              maintenanceof books and records; and 

•             adequacyof staff training to carry on safe lending and deposit gathering practices. 

The Comptroller requiresthe bank to maintain specified capital ratios and imposes limitations on thebank's aggregate investment in real estate, bank premises, and furniture andfixtures.  The Comptroller of the Currency also requires the bank to prepareannual reports on the bank's financial condition and to conduct an annual auditof its financial affairs in compliance with its minimum standards andprocedures.

All insured institutionsmust undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliatesmay be assessed by the appropriate federal banking agency against eachinstitution or affiliate as it deems necessary or appropriate.  Insuredinstitutions are required to submit annual reports to the FDIC, their federalregulatory agency, and state supervisor when applicable.  The FDIC hasdeveloped a method for insured depository institutions to provide supplementaldisclosure of the estimated fair market value of assets and liabilities, to theextent feasible and practicable, in any balance sheet, financial statement,report of condition or any other report of any insured depository institution. The federal banking regulatory agencies to prescribe, by regulation, standardsfor all insured depository institutions and depository institution holdingcompanies relating, among other things, to the following:

•             internalcontrols;

•              informationsystems and audit systems;

•              loandocumentation;

•              creditunderwriting;

•              interestrate risk exposure; and

•              assetquality.

***Prompt CorrectiveAction.*** As an insured depository institution, the bank is required to comply with thecapital requirements promulgated under the Federal Deposit Insurance Act andthe Comptroller's prompt corrective action regulations thereunder, which setforth****five capital categories, each with specific regulatoryconsequences.  Under these regulations, the categories are: 

•             WellCapitalized - The institution exceeds the required minimum level for eachrelevant capital measure.  A well capitalized institution is one(i) having a total capital ratio of 10% or greater, (ii) having atier 1 capital ratio of 6% or greater, (iii) having a leverage capitalratio of 5% or greater and (iv) that is not subject to any order orwritten directive to meet and maintain a specific capital level for any capitalmeasure.

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•              AdequatelyCapitalized - The institution meets the required minimum level for eachrelevant capital measure.  No capital distribution may be made that wouldresult in the institution becoming undercapitalized.  An adequately capitalizedinstitution is one (i) having a total capital ratio of 8% or greater,(ii) having a tier 1 capital ratio of 4% or greater and (iii) havinga leverage capital ratio of 4% or greater or a leverage capital ratio of 3% orgreater if the institution is rated composite 1 under the CAMELS (Capital,Assets, Management, Earnings, Liquidity and Sensitivity to market risk) ratingsystem.

•              Undercapitalized- The institution fails to meet the required minimum level for any relevantcapital measure.  An undercapitalized institution is one (i) having atotal capital ratio of less than 8% or (ii) having a tier 1 capital ratioof less than 4% or (iii) having a leverage capital ratio of less than 4%, or ifthe institution is rated a composite 1 under the CAMEL rating system, a leveragecapital ratio of less than 3%.

•              SignificantlyUndercapitalized - The institution is significantly below the required minimumlevel for any relevant capital measure.  A significantly undercapitalizedinstitution is one (i) having a total capital ratio of less than 6% or(ii) having a tier 1 capital ratio of less than 3% or (iii) having aleverage capital ratio of less than 3%.

•              CriticallyUndercapitalized - The institution fails to meet a critical capital level setby the appropriate federal banking agency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%. 

If theComptroller determines, after notice and an opportunity for hearing, that thebank is in an unsafe or unsound condition, the regulator is authorized toreclassify the bank to the next lower capital category (other than criticallyundercapitalized) and require the submission of a plan to correct the unsafe orunsound condition. 

If thebank is not well capitalized, it cannot accept brokered deposits without priorFDIC approval and, if approval is granted, cannot offer an effective yield inexcess of 75 basis points on interests paid on deposits of comparable size andmaturity in such institution's normal market area for deposits accepted fromwithin its normal market area, or national rate paid on deposits of comparablesize and maturity for deposits accepted outside the bank's normal market area. Moreover, if the bank becomes less than adequately capitalized, it must adopt acapital restoration plan acceptable to the Comptroller that is subject to alimited performance guarantee by the corporation.  The bank also would becomesubject to increased regulatory oversight, and is increasingly restricted inthe scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except underlimited circumstances consistent with an accepted capital restoration plan, anundercapitalized institution may not grow.  An undercapitalized institution maynot acquire another institution, establish additional branch offices or engagein any new line of business unless determined by the appropriate Federalbanking agency to be consistent with an accepted capital restoration plan, orunless the FDIC determines that the proposed action will further the purpose ofprompt corrective action.  The appropriate federal banking agency may take anyaction authorized for a significantly undercapitalized institution if anundercapitalized institution fails to submit an acceptable capital restorationplan or fails in any material respect to implement a plan accepted by theagency.  A critically undercapitalized institution is subject to having areceiver or conservator appointed to manage its affairs and for loss of itscharter to conduct banking activities.  

Aninsured depository institution may not pay a management fee to a bank holdingcompany controlling that institution or any other person having control of theinstitution if, after making the payment, the institution, would beundercapitalized.  In addition, an institution cannot make a capitaldistribution, such as a dividend or other distribution that is in substance adistribution of capital to the owners of the institution if following such adistribution the institution would be undercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

As of December 31, 2006,the bank was deemed to be "well capitalized."  

***Deposit Insurance andAssessments***. Deposits at the bank are insured by the Deposit Insurance Fund (the"DIF") as administered by the FDIC, up to the applicable limitsestablished by law - generally $100,000 per accountholder and $250,000 forcertain retirement accountholders.  In accordance with regulations adopted toimplement the Federal Deposit Insurance Reform Act of 2005 ("FDIRA"), depositinsurance premium assessments are based upon perceived risks to the DIF, byevaluating an institution's supervisory ratios and other financial ratios andthen determining insurance premiums based upon the likelihood an institutioncould be downgraded to a CAMELS 3 or worse in the succeeding year.  As aresult, institutions deemed to pose less risk,  pay lower premiums than thoseinstitutions deemed to pose more risk, which  pay more.  

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FDIRA caps the amount ofthe DIF at 1.50% of domestic deposits.  The FDIC must issue cash dividends,awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, theFDIC is required to issue cash dividends, awarded on a historical basis, forhalf of the amount of the excess.  Pursuant to the FDIIRA, the FDIC will beginto indexing deposit insurance coverage levels for inflation beginning in 2012. Moreover, if we become undercapitalized we cannot accept employee benefit plandeposits.

***Transactions withAffiliates and Insiders.***  The bank is subject to the provisions ofSection 23A of the Federal Reserve Act, which places limits on the amount ofloans or extensions of credit to, or investments in, or certain other transactionswith, affiliates and on the amount of advances to third parties collateralizedby the securities or obligations of affiliates.  The aggregate of all coveredtransactions is limited in amount, as to any one affiliate, to 10% of thebank's capital and surplus and, as to all affiliates combined, to 20% of thebank's capital and surplus.  Furthermore, within the foregoing limitations asto amount, each covered transaction must meet specified collateralrequirements.  Compliance is also required with certain provisions designed toavoid the taking of low quality assets.

The bank also is subjectto the provisions of Section 23B of the Federal Reserve Act which, among otherthings, prohibits an institution from engaging in certain transactions withcertain affiliates unless the transactions are on terms substantially the same,or at least as favorable to such institution or its subsidiaries, as thoseprevailing at the time for comparable transactions with nonaffiliatedcompanies.  The bank is subject to certain restrictions on extensions of creditto executive officers, directors, certain principal shareholders, and theirrelated interests.  Such extensions of credit (i) must be made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with third parties and (ii) must notinvolve more than the normal risk of repayment or present other unfavorablefeatures.

The Federal ReserveBoard has issued Regulation W, which codifies prior regulations under Sections23A and 23B of the Federal Reserve Act and interpretative guidance with respectto affiliate transactions.  Regulation W incorporates the exemption from theaffiliate transaction rules but expands the exemption to cover the purchase ofany type of loan or extension of credit from an affiliate.  In addition, underRegulation W: 

•             abank and its subsidiaries may not purchase a low-quality asset from anaffiliate;

•             coveredtransactions and other specified transactions between a bank or itssubsidiaries and an affiliate must be on terms and conditions that areconsistent with safe and sound banking practices; and 

•             withsome exceptions, each loan or extension of credit by a bank to an affiliatemust be secured by collateral with a market value ranging from 100% to 130%,depending on the type of collateral, of the amount of the loan or extension ofcredit. 

Regulation W generallyexcludes all non-bank and non-savings association subsidiaries of banks fromtreatment as affiliates, except to the extent that the Federal Reserve Boarddecides to treat these subsidiaries as affiliates.  The regulation also limitsthe amount of loans that can be purchased by a bank from an affiliate to notmore than 100% of the bank's capital and surplus.  

***Dividends.***  A national bank maynot pay cash dividends from its permanent capital.  All cash dividends must bepaid out of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  In addition, a national bank is prohibitedfrom declaring a cash dividend on its shares of common stock until its surplusequals its stated capital, unless there has been transferred to surplus no lessthan one-tenth of the bank's net profits of the preceding two consecutivehalf-year periods (in the case of an annual dividend).  The approval of theComptroller is required if the total of all cash dividends declared by anational bank in any calendar year exceeds the total of its net profits forthat year combined with its retained net profits for the preceding two years,less any required transfers to surplus.

***Branching.***  National banks arerequired by the National Bank Act to adhere to branch office banking lawsapplicable to state banks in the states in which they are located.  Undercurrent South Carolina law, the bank may open branch offices throughout SouthCarolina with the prior approval of the Comptroller.  In addition, with priorregulatory approval, the bank is able to acquire existing banking operations inSouth Carolina.  Furthermore, federal legislation permits interstate branching,including out-of-state acquisitions by bank holding companies, interstatebranching by banks if allowed by state law, and interstate merging by banks. South Carolina law, with limited exceptions, currently permits branching acrossstate lines through interstate mergers.

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***Finance Subsidiaries.***  Under theGramm-Leach-Bliley Act (the "GLBA"), subject to certain conditionsimposed by their respective banking regulators, national and state-charteredbanks are permitted to form "financial subsidiaries" that may conduct financialor incidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposesseveral safeguards and restrictions on financial subsidiaries, including thatthe parent bank's equity investment in the financial subsidiary be deductedfrom the bank's assets and tangible equity for purposes of calculating thebank's capital adequacy.  In addition, the GLBA imposes new restrictions ontransactions between a bank and its financial subsidiaries similar torestrictions applicable to transactions between banks and non-bank affiliates.

***Other Regulations.***  Interest and othercharges collected or contracted for by the bank are subject to state usury lawsand federal laws concerning interest rates.  The bank's loan operations arealso subject to federal laws applicable to credit transactions, such as:

•             thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers; 

•              theHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determinewhether a financial

                institution is fulfilling its obligation to help meet thehousing needs of the community it serves; 

•             theEqual Credit Opportunity Act, prohibiting discrimination on the basis of race,creed or other prohibited factors in extending credit; 

•              theFair Credit Reporting Act of 1978, governing the use and provision ofinformation to credit reporting agencies; 

•             theFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and 

•              therules and regulations of the various federal agencies charged with theresponsibility of implementing such federal laws.  

The depositoperations of the bank also are subject to:

•              theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and 

•              theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers' rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

* ****Enforcement Powers.***  The bank and its"institution-affiliated parties," including its management, employees agentsindependent contractors and consultants such as attorneys and accountants andothers who participate in the conduct of the financial institution's affairs,are subject to potential civil and criminal penalties for violations of law,regulations or written orders of a government agency. These practices caninclude the failure of an institution to timely file required reports or thefiling of false or misleading information or the submission of inaccuratereports.  Civil penalties may be as high as $1,000,000 a day for suchviolations.  Criminal penalties for some financial institution crimes have beenincreased to twenty years.  In addition, regulators are provided with greaterflexibility to commence enforcement actions against institutions andinstitution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance.  Furthermore, banking agencies' power toissue cease-and-desist orders were expanded.  Such orders may, among otherthings, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financial institution may also be ordered torestrict its growth, dispose of certain assets, rescind agreements orcontracts, or take other actions as determined by the ordering agency to be appropriate.* *

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Underthe USA PATRIOT Act, the Federal Bureau of Investigation ("FBI") can send ourbanking regulatory agencies lists of the names of persons suspected ofinvolvement in terrorist activities.  The bank can be requested, to search itsrecords for any relationships or transactions with persons on those lists.  Ifthe bank finds any relationships or transactions, it must file a suspiciousactivity report and contact the FBI.  

TheOffice of Foreign Assets Control ("OFAC"), which is a division of the U.S.Department of the Treasury, is responsible for helping to insure that UnitedStates entities do not engage in transactions with "enemies" of the UnitedStates, as defined by various Executive Orders and Acts of Congress.  OFAC hassent, and will send, our banking regulatory agencies lists of names of personsand organizations suspected of aiding, harboring or engaging in terroristacts.  If the bank finds a name on any transaction, account or wire transferthat is on an OFAC list, it must freeze such account, file a suspiciousactivity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checks high-risk OFAC areas such as newaccounts, wire transfers and customer files.  The bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.  

***Privacy and CreditReporting.**** *Financialinstitutions are required to disclose their policies for collecting andprotecting confidential information.  Customers generally may prevent financialinstitutions from sharing nonpublic personal financial information withnonaffiliated third parties except under narrow circumstances, such as theprocessing of transactions requested by the consumer.  Additionally, financialinstitutions generally may not disclose consumer account numbers to anynonaffiliated third party for use in telemarketing, direct mail marketing orother marketing to consumers.  It is the bank's policy not to disclose anypersonal information unless required by law.

Like other lendinginstitutions, the bank utilizes credit bureau data in its underwritingactivities.  Use of such data is regulated under the Federal Credit ReportingAct on a uniform, nationwide basis, including credit reporting, prescreening,sharing of information between affiliates, and the use of credit data.  TheFair and Accurate Credit Transactions Act of 2003 (the "FACT Act") authorizesstates to enact identity theft laws that are not inconsistent with the conductrequired by the provisions of the FACT Act.  

** *Check 21.***  The Check Clearing forthe 21st Century Act gives "substitute checks," such as a digital image of acheck and copies made from that image, the same legal standing as the originalpaper check.  Some of the major provisions include:

•             allowingcheck truncation without making it mandatory; 

•              demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

•              legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

•              retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

•             requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

•             requiringthe re-crediting of funds to an individual's account on the next business dayafter a consumer proves that the financial institution has erred. 

 

| 14 |
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***Effect of GovernmentalMonetary Policies*****.** Our earnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The FederalReserve Bank's monetary policies have had, and are likely to continue to have,an important impact on the operating results of commercial banks through itspower to implement national monetary policy in order, among other things, tocurb inflation or combat a recession.  The monetary policies of the FederalReserve Board have major effects upon the levels of bank loans, investments anddeposits through its open market operations in United States governmentsecurities and through its regulation of the discount rate on borrowings ofmember banks and the reserve requirements against member bank deposits.  It isnot possible to predict the nature or impact of future changes in monetary andfiscal policies.

***Proposed Legislation andRegulatory Action*****.** New regulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitiverelationships of the nation's financial institutions.  We cannot predictwhether or in what form any proposed regulation or statute will be adopted orthe extent to which our business may be affected by any new regulation orstatute.

**Item 1A.     Risk Factors****.**

***Our recent operating resultsmay not be indicative of our future operating results.***

We may notbe able to sustain our historical rate of growth and may not even be able togrow our business at all.  Because of our relatively small size and shortoperating history, it will be difficult for us to generate similar earningsgrowth as we continue to expand, and consequently our historical results ofoperations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislativeconsiderations, and competition, may also impede our ability to expand ourmarket presence.  If we experience a significant decrease in our historicalrate of growth, our results of operations and financial condition may beadversely affected because a high percentage of our operating costs are fixedexpenses. 

** *****Ourdecisions regarding credit risk and reserves for loan losses may materially andadversely affect our business.***

Making loansand other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specificunderwriting practices, our loans and other extensions of credit may not berepaid.  The risk of nonpayment is affected by a number of factors, including:

•         the duration of the credit;

•         credit risks of a particular customer;

•         changes in economic and industry conditions; and

•         in the case of a collateralized loan, risks resulting fromuncertainties about the future value of the collateral.

We attemptto maintain an appropriate allowance for loan losses to provide for probablelosses in our loan portfolio.  We periodically determine the amount of theallowance based on consideration of several factors, including:

•         an ongoing review of the quality, mix, and size of ouroverall loan portfolio;

•         our historical loan loss experience;

•         evaluation of economic conditions;

•         regular reviews of loan delinquencies and loan portfolioquality; and

•         the amount and quality of collateral, including guarantees,securing the loans.

There is noprecise method of predicting credit losses; therefore, we face the risk thatcharge-offs in future periods may exceed our allowance for loan losses and thatadditional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of ournet income, and possibly our capital.

** *****Lack ofseasoning of our loan portfolio may increase the risk of credit defaults in thefuture.***

                Dueto the rapid growth of our bank over the past several years and our relatively short operating history, a large portion of the loans in ourloan portfolio and of our lending relationships are of relatively recentorigin.  In general, loans do not begin to show signs of credit deteriorationor default until they have been outstanding for some period of time, a processwe refer to as "seasoning."  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loanportfolio is relatively new, the current level of delinquencies and defaultsmay not be representative of the level that will prevail when the portfoliobecomes more seasoned, which may be higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition.

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Our successsignificantly depends upon the growth in population, income levels, deposits,and housing starts in our markets, especially in Greenville County.  If thecommunities in which we operate do not grow or if prevailing economicconditions locally or nationally are unfavorable, our business may notsucceed.  An economic downturn would likely contribute to the deterioration ofthe quality of our loan portfolio and reduce our level of deposits, which inturn would hurt our business.  Interest received on loans representedapproximately 89.3% of our interest income for the year ended December 31, 2006. If an economic downturn occurs in the economy as a whole, or especially in theGreenville County area, borrowers may be less likely to repay their loans asscheduled.  Moreover, the value of real estate or other collateral that maysecure our loans could be adversely affected.  Unlike many larger institutions,we are not able to spread the risks of unfavorable local economic conditionsacross a large number of diversified economies.  An economic downturn could,therefore, result in losses that materially and adversely affect our business.

***Changes inprevailing interest rates may reduce our profitability.***

Our resultsof operations depend in large part upon the level of our net interest income,which is the difference between interest income from interest-earning assets,such as loans and investment securities, and interest expense oninterest-bearing liabilities, such as deposits and other borrowings.  Dependingon the terms and maturities of our assets and liabilities, a significant changein interest rates could have a material adverse effect on our profitability. Many factors cause changes in interest rates, including governmental monetarypolicies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjustingthe terms, maturities, and pricing of our assets and liabilities, our effortsmay not be effective and our financial condition and results of operationscould suffer.  ** **

***We aredependent on key individuals and the loss of one or more of these keyindividuals could curtail our growth and adversely affect our prospects.***

            R. Arthur Seaver, Jr., our chief executive officer, hasextensive and long-standing ties within our primary market area and substantial experience with our operations, and hehas contributed significantly to our growth.  If we lose the services of Mr.Seaver, he would be difficult to replace and our business and development couldbe materially and adversely affected.  

            Our success also depends, in part, on our continued abilityto attract and retain experienced loan originators, as well as other managementpersonnel, including Justin Strickland, Jim Austin, FredGilmer, III, and Eddie Terrell.  Competition forpersonnel is intense, and we may not be successful in attracting or retainingqualified personnel.  Our failure to compete for these personnel, or the lossof the services of several of such key personnel, could adversely affect ourgrowth strategy and seriously harm our business, results of operations, andfinancial condition.  

*** ***

***We are subject toextensive regulation that could limit or restrict our activities.***

 

Weoperate in a highly regulated industry and are subject to examination,supervision, and comprehensive regulation by various regulatory agencies.  Ourcompliance with these regulations is costly and restricts certain of ouractivities, including payment of dividends, mergers and acquisitions,investments, loans and interest rates charged, interest rates paid on deposits,and locations of offices.  We are also subject to capitalization guidelinesestablished by our regulators, which require us to maintain adequate capital tosupport our growth. 

 

The laws and regulationsapplicable to the banking industry could change at any time, and we cannotpredict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financialresults of all commercial banks and bank holding companies, our cost ofcompliance could adversely affect our ability to operate profitably. 

 

| 16 |
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***Efforts to comply with the Sarbanes-Oxley Actwill involve significant expenditures, and non-compliance with theSarbanes-Oxley Act may adversely affect us.***

 

The Sarbanes-Oxley Actof 2002, and the related rules and regulations promulgated by the Securities andExchange Commission that are now applicable to us, have increased the scope,complexity, and cost of corporate governance, reporting, and disclosurepractices.  We have experienced, and we expect to continue to experience,greater compliance costs, including costs related to internal controls, as aresult of the Sarbanes-Oxley Act.  For example, for the year ended December 31,2007, we will be required to comply with Section 404 of the Sarbanes-Oxley Actand our management will be required to issue a report on our internal controlsover financial reporting.  For the year ended December 31, 2008, ourindependent registered public accounting firm will be required to attest to ourinternal control over financial reporting, in addition to our management's assessment.  We expect these new rules and regulations to continue to increase ouraccounting, legal, and other costs, and to make some activities more difficult,time consuming, and costly.  In the event that we are unable to maintain orachieve compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected. 

 

We are evaluating ourinternal control systems in order to allow management to report on our internalcontrol over financial reporting, as required by Section 404 of the Sarbanes-OxleyAct for the year ended December 31, 2007.  If we identify significantdeficiencies or material weaknesses in our internal control over financialreporting that we cannot remediate in a timely manner, or if we are unable toreceive a positive attestation from our independent registered publicaccounting firm with respect to our internal control over financial reporting forthe year ended December 31, 2008, then we could be subject to scrutiny byregulatory authorities, the trading price of our common stock could decline andour ability to obtain any necessary equity or debt financing could suffer.

 

In addition, the newrules adopted as a result of the Sarbanes-Oxley Act could make it moredifficult or more costly for us to obtain certain types of insurance, includingdirectors' and officers' liability insurance, which could make it moredifficult for us to attract and retain qualified persons to serve on our boardof directors or as executive officers.

*** ***

***Our continued pace of growth may require us to raise additionalcapital in the future, but that capital may not be available when it is needed.***

 

We are required by regulatoryauthorities to maintain adequate levels of capital to support our operations. To support our continued growth, we may need to raise additional capital.  Ourability to raise additional capital, if needed, will depend in part onconditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise additional capital,if needed, on terms acceptable to us.  If we cannot raise additional capitalwhen needed, our ability to further expand our operations through internalgrowth and acquisitions could be materially impaired.  In addition, if wedecide to raise additional equity capital, your interest could be diluted.*** ***

***We face strong competitionfor clients, which could prevent us from obtaining clients and may cause us topay higher interest rates to attract clients.***

The banking business is highly competitive, and we experiencecompetition in our market from many other financial institutions.  We competewith commercial banks, credit unions, savings and loan associations, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother super-regional, national, and international financial institutions thatoperate offices in our primary market areas and elsewhere.  We compete withthese institutions both in attracting deposits and in making loans.  Inaddition, we have to attract our client base from other existing financialinstitutions and from new residents.  Many of our competitors arewell-established, larger financial institutions.  These institutions offer someservices, such as extensive and established branch networks, that we do notprovide.  There is a risk that we will not be able to compete successfully withother financial institutions in our market, and that we may have to pay higherinterest rates to attract deposits, resulting in reduced profitability.  Inaddition, competitors that are not depository institutions are generally notsubject to the extensive regulations that apply to us.

** *****We will facerisks with respect to future expansion and acquisitions or mergers.***

We may seekto acquire other financial institutions or parts of those institutions.  We mayalso expand into new markets, such as the announced Columbia, SC market, orlines of business or offer new products or services.  These activities wouldinvolve a number of risks, including: 

•      the potential inaccuracy of the estimates and judgments used toevaluate credit, operations, management, and market risks with respect to atarget institution;

•      the time and costs of evaluating new markets, hiring or retainingexperienced local management, and opening new offices and the time lags betweenthese activities and the generation of sufficient assets and deposits to support the costs of the expansion;

| 17 |
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•       the incurrence and possible impairment of goodwill associated withan acquisition and possible adverse effects on our results of operations; and
•       the risk of loss of key employees and customers.

***Thesuccess of our growth strategy depends on our ability to identify and retainindividuals with experience and relationships in the markets in which we intendto expand.***

To expand our upstate franchise successfully, wemust identify and retain experienced key management members with localexpertise and relationships in these markets.  We expect that competition forqualified management in the markets in which we may expand will be intense andthat there will be a limited number of qualified persons with knowledge of andexperience in the community banking industry in these markets.  Even if weidentify individuals that we believe could assist us in establishing a presencein a new market, we may be unable to recruit these individuals away from moreestablished financial institutions.  In addition, the process of identifyingand recruiting individuals with the combination of skills and attributesrequired to carry out our strategy requires both management and financialresources and is often lengthy.  Our inability to identify, recruit, and retaintalented personnel to manage new offices effectively would limit our growth andcould materially adversely affect our business, financial condition, andresults of operations.

***Ourdecisions regarding credit risk and reserves for loan losses may materially andadversely affect our business.***

While we generally underwrite the loans in ourportfolio in accordance with our own internal underwriting guidelines andregulatory supervisory guidelines, in certain circumstances we have made loanswhich exceed either our internal underwriting guidelines, supervisoryguidelines, or both.  As of December 31, 2006, approximately $34.2 million ofour loans, or 8.5% of total loans and 98.9% of our bank's capital, hadloan-to-value ratios that exceeded regulatory supervisory guidelines, of which fifteenloans totaling approximately $8.2 million had loan-to-value ratios of 100% ormore.  Included in the $34.2 million of loans that exceeded supervisoryguidelines at December 31, 2006, $23.0 million of our commercial loans, or 5.7%of total loans, exceeded the supervisory loan to value ratio.  The number of loansin our portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies anddefaults in our portfolio.  

***Asignificant portion of our loan portfolio is secured by real estate, and eventsthat negatively impact the real estate market could hurt our business.***

                  Asignificant portion of our loan portfolio is secured by real estate.  As ofDecember 31, 2006, approximately 81.4% of our loans had real estate as aprimary or secondary component of collateral.  The real estate collateral ineach case provides an alternate source of repayment in the event of default bythe borrower and may deteriorate in value during the time the credit isextended.  A weakening of the real estate market in our primary market areacould result in an increase in the number of borrowers who default on theirloans and a reduction in the value of the collateral securing their loans,which in turn could have an adverse effect on our profitability and assetquality.  If we are required to liquidate the collateral securing a loan tosatisfy the debt during a period of reduced real estate values, our earningsand capital could be adversely affected.  Acts of nature, including hurricanes,tornados, earthquakes, fires and floods, which may cause uninsured damage andother loss of value to real estate that secures these loans, may alsonegatively impact our financial condition.  

18
 
***Alarge percentage of the loans in our portfolio currently include exceptions toour loan policies and supervisory guidelines.*** 

                 Allof the loans that we make are subject to written loan policies adopted by ourboard of directors and to supervisory guidelines imposed by our regulators. Our loan policies are designed to reduce the risks associated with the loansthat we make by requiring our loan officers to take certain steps that varydepending on the type and amount of the loan, prior to closing a loan.  Thesesteps include, among other things, making sure the proper liens are documentedand perfected on property securing a loan, and requiring proof of adequateinsurance coverage on property securing loans.  Loans that do not fully complywith our loan policies are known as "exceptions."  We categorize exceptions aspolicy exceptions, financial statement exceptions and collateral exceptions. As of December 31, 2006, approximately 9% of the loans in our portfolioincluded collateral exceptions to our loan policies, which significantlyexceeds the 15% suggested by our regulators.  As a result of these exceptions,such loans may have a higher risk of loan loss than the other loans in ourportfolio that fully comply with our loan policies.  In addition, we may besubject to regulatory action by federal or state banking authorities if theybelieve the number of exceptions in our loan portfolio represents an unsafebanking practice.  

**Item 1B.     Unresolved Staff Comments.**

                None

**Item 2.        Properties.**

 In January2007, we relocated our main office facility to Verdae Boulevard near downtownGreenville, South Carolina.  The building is a full service banking facilitywith three drive-through banking stations and an automatic teller machine.  Priorto this move, our main office building was located at the corner of HaywoodRoad and Halton Road.  We purchased this former main office building fromHalton Properties, LLC, which is 100% owned by our director Mark A. Cothran, inDecember 2005 for $3.1 million.  Prior to the purchase, we leased our formermain office building from Halton Properties, LLC.  

               We signed a ten-year,five-month lease on our new headquarters and main office.  The lease providesfor a substantial reduction in the rent rate for the first five months of thelease.  Beginning in 2007, the monthly rent expense will be approximately$42,000.  The lease provides for annual lease rate escalations based on cost ofliving adjustments.  

We opened our first branch office on March 14, 2005, which islocated in the Thornblade area of Greenville, South Carolina on The Parkway, nearthe intersection of I-85 and Pelham Road.  

Weopened our second branch office, which is located at 2125 Augusta Road inGreenville, South Carolina, on November 4, 2005.  We lease the land for thisoffice from Augusta Road Holdings, LLC, which is owned by one of our directors,Mark A. Cothran, for approximately $58,000 per year.  Rental payments aresubject to increase in accordance with a formula based on the Consumer PriceIndex.  The initial term of the lease is 20 years.  

In January 2007, we openeda loan production office in Columbia, South Carolina.  We have signed aneighteen month lease with an unrelated third party on this building.                                                    

                We believe that allof our properties are adequately covered by insurance. 

**Item 3.        Legal Proceedings****.**

                In the ordinary course of operations, we may be aparty to various legal proceedings from time to time.  We do not believe thatthere is any pending or threatened proceeding against us, which, if determinedadversely, would have a material effect on our business, results of operations,or financial condition. 

**Item 4.        Submission of Matters to a Voteof Security Holders****.**

                No matter was submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report.

19

**PART II**

**Item 5.        Market for Common Equity andRelated Stockholder Matters****.**

From the date of our initial public offering on October 26, 1999to September 24, 2004, our common stock had been quoted on the OTC BulletinBoard under the symbol "GVBK."  On September 24, 2004,our common stock began trading on the NASDAQ Global Market underthe same symbol "GVBK.  On March 15, 2007, we hadapproximately 1,000 shareholders of record.  

                The followingtable shows the reported high and low common stock prices reported by the NASDAQGlobal Market for 2006 and 2005.

**2006**

** **

**High**

** **

**Low**

First Quarter

 $

22.72 

 $

20.91 

Second Quarter

22.65 

22.52 

Third Quarter

20.20 

18.50 

Fourth Quarter

22.46 

18.53 

**2005**

** **

**High**

** **

**Low**

First  Quarter

 $

19.26 

 $

17.14 

Second  Quarter

19.09 

17.27 

Third  Quarter

19.91 

17.97 

Fourth  Quarter

22.73 

19.24 

 

The following graphsummarizes a five-year comparison of cumulative returns for the company, theStandard and Poor (the "S&P") 500 Index, and the SNL Southeast Bank Index.The graph assumes $100 invested on December 31, 2001 in the company'scommon stock and in each of the indices indicated.

 

 

 

** **

**12/01**

** **

**12/02**

** **

**12/03**

** **

**12/04**

** **

**12/05**

** **

**12/06**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Greenville  First Bancshares, Inc.

 $

100

113 

357 

389 

491 

468 

S&P 500 Index

 $

100

78 

100 

111 

117 

135 

SNL Southeast Bank Index

 $

100

110 

139 

165 

168 

197 

 

20
                We have not declared or paid any cashdividends on our common stock since our inception.  For the foreseeable futurewe do not intend to declare cash dividends.  We intend to retain earnings to grow our business and strengthen ourcapital base.  Our ability to pay cash dividends depends primarily on theability of our subsidiary, Greenville First Bank, to pay dividends to us.  As anational bank, Greenville First Bank may only pay cash dividends out of its netprofits, after deducting expenses, including losses and bad debts.  Inaddition, the bank is prohibited from declaring a cash dividend on its sharesof common stock until its surplus equals its stated capital, unless there hasbeen transferred to surplus no less than one-tenth of the bank's net profits ofthe preceding two consecutive half-year periods (in the case of an annualdividend).  The approval of the Office of the Comptroller of the Currency (the"OCC") will be required if the total of all cash dividends declared in anycalendar year by the bank exceeds the bank's net profits to date for that yearcombined with its retained net profits for the preceding two years less anyrequired transfers to surplus.  The OCC also has the authority under federallaw to enjoin a national bank from engaging in what in its opinion constitutesan unsafe or unsound practice in conducting its business, including the paymentof a cash dividend under certain circumstances.
The following table sets forth equitycompensation plan information at December 31, 2006.  The number of shares andthe exercise prices for options and warrants has been adjusted for the 3 for 2stock split in 2003 and the subsequent 10 percent stock dividend in 2006.

**EquityCompensation Plan Information**

** **

** **

** **

** **

** **

**Plan Category**

** **

**Number of securities**

**to be issued**

**upon exercise of outstanding options,  warrants and rights (a)**

** **

** **

**Weighted-average**

**exercise price of outstanding options,  warrants and rights (b)**

**Number of securities**

**remaining available for**

**future issuance under**

**equity compensation plans (c)**

**(excluding securities**

**reflected in column(a))**

** **

Equity compensation	

plans approved by 

security holders 

   Stock options (1)

270,227 

 $

8.57 

146,199 

   Restricted stock

-  

-  

11,000 

** **

Equity compensation

plans not approved

by security holders(2)

209,192 

 $

6.06 

-

** **

 Total

479,419 

 $

7.47 

157,199 

(1)           The number of shares of common stockavailable under the 2000 Greenville First Bancshares, Inc. Stock Incentive Planautomatically increases each time we issue additional shares so that itcontinues to equal 15% of our total outstanding shares.  Our board of directors has approved 284,625shares of common stock to be issued as stock options. 

(2)           Each of our organizersreceived, for no additional consideration, a warrant to purchase one share ofcommon stock for $6.06 per share for each share purchased during our initialpublic offering.  The warrants are represented by separate warrant agreements. One third of the warrants vested on each of the first three anniversaries ofthe date of our initial public offering, and they are exercisable in whole orin part during the ten year period following that date.  The warrants may notbe assigned, pledged, or hypothecated in any way.  The 209,192 of shares issuedpursuant to the exercise of such warrants are transferable, subject tocompliance with applicable securities laws.  If the South Carolina Board ofFinancial Institutions or the FDIC issues a capital directive or other orderrequiring the bank to obtain additional capital, the warrants will beforfeited, if not immediately exercised.

21

**Item 6.  Selected Financial Data**

**Years Ended  December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

** **

**(Dollars and  shares in thousands, except per share amounts)**

**Summary Balance Sheet Data:**

Assets

$

509,344 

405,313 

315,811 

230,841 

170,358 

Federal funds sold

7,467 

19,381 

1,394 

2,843 

42 

Investment securities

74,304 

36,131 

29,162 

15,759 

15,497 

Loans, net (1)

397,234 

334,041 

276,630 

206,077 

148,079 

Allowance  for loan losses

4,949 

4,490 

3,717 

2,705 

1,824 

Deposits

345,504 

254,148 

204,864 

168,964 

133,563 

Securities  sold under agreement to repurchase

and federal  funds purchased

- 

14,680 

13,100 

9,297 

9,107 

Other borrowed funds

108,500 

79,500 

60,660 

32,500 

15,500 

Junior  subordinated debentures

13,403 

13,403 

6,186 

6,186 

- 

Shareholders'  equity

34,583 

30,473 

28,079 

11,187 

10,232 

**Summary Results of Operations  Data:**

Interest  income

$

30,929 

21,670 

13,965 

9,722 

8,153 

Interest  expense

16,579 

9,585 

5,317 

3,618 

3,492 

Net  interest income

14,350 

12,085 

8,648 

6,104 

4,661 

Provision  for loan losses

1,650 

1,000 

1,310 

1,050 

1,050 

Net  interest income after provision for loan losses

12,700 

11,085 

7,338 

5,054 

3,611 

Noninterest  income

579 

826 

761 

422 

520 

Noninterest  expenses

7,351 

7,856 

4,852 

3,853 

3,379 

Income  before income tax expense

5,928 

4,055 

3,247 

1,623 

752 

Income tax  expense

2,027 

1,541 

1,234 

617 

- 

Net income

$

3,901 

2,514 

2,013 

1,006 

752 

Net  operating income (4)

$

3,901 

3,444 

2,013 

1,006 

752 

**Per Share Data(2):**

Net income,  basic

$

1.33 

.86 

.93 

.53 

.40 

Net income,  diluted

$

1.20 

.78 

.82 

.48 

.39 

Book  value

$

11.79 

11.46 

10.60 

6.49 

5.93 

Weighted average number of common shares  outstanding:

Basic

2,932 

2,922 

2,169 

1,897 

1,897 

Diluted

3,238 

3,223 

2,464 

2,069 

1,929 

**Performance Ratios:**

Return on  average assets:

GAAP

0.85 %

0.70 %

0.73 %

0.52 %

0.51 %

Operating(4)

0.85 %

0.96 %

0.73 %

0.52 %

0.51 %

Return on  average equity: 

GAAP

11.95 %

8.44 %

12.37 %

9.28 %

7.72 %

Operating(4)

11.95 %

11.56 %

12.37 %

9.28 %

7.72 %

Net  interest margin

3.26 %

3.45 %

3.17 %

3.24 %

3.30 %

Loan to  deposit ratio(1)

116.40 %

133.20 %

136.85 %

123.57 %

112.23 %

Efficiency  ratio(3):

GAAP

49.24 %

60.85 %

51.58 %

59.04 %

65.21 %

Operating(4).

49.24 %

49.23 %

51.58 %

59.04 %

65.21 %

**Asset Quality Ratios:**

Nonperforming  assets, past due and restructured 

loans to  total loans(1)

0.62 %

0.14%

0.27 %

0.21 %

0.43 %

Nonperforming  assets, past due and restructured 

loans to  total assets

0.49 %

0.12%

0.24 %

0.19 %

0.37 %

Net  charge-offs to average total loans(1)

0.32 %

0.07 %

0.12 %

0.10 %

0.34 %

Allowance  for loan losses to nonperforming loans

332.46 %

962.74 %

502.84 %

609.35 %

1612.79 %

Allowance  for loan losses to total loans(1)

1.23 %

1.33 %

1.33 %

1.30 %

1.22 %

** **

** **

** **

22

**Item 6.  Selected Financial Data, Continued**

** **

**Years Ended  December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

** **

**(Dollars in  thousands)**

**Capital Ratios:**

Average  equity to average assets

7.15 %

8.36 %

5.87 %

5.57 %

6.71 %

Leverage  ratio

9.40 %

11.60 %

11.00 %

6.09 %

6.08 %

Tier 1  risk-based capital ratio

11.90 %

13.60 %

13.40 %

7.78 %

7.38 %

Total  risk-based capital ratio

13.10 %

14.90 %

14.60 %

10.24 %

8.63 %

**Growth Ratios and Other Data:**

Percentage  change in net income

55.15 %

24.89 %

100.10 %

33.78 %

n/m

Percentage  change in diluted net income per share

53.85 %

(4.44)%

69.81 %

23.26 %

n/m

Percentage  change in assets

25.67 %

28.34 %

36.81 %

35.50 %

43.68 %

Percentage  change in loans(1)

18.92 %

20.75 %

34.24 %

39.17 %

55.32 %

Percentage  change in deposits

35.95 %

24.06 %

21.25 %

26.51 %

44.08 %

Percentage  change in equity

13.49 %

8.53 %

151.00 %

9.33 %

8.17 %

**Reconciliation of GAAP to Non-GAAP  Measures:**

Net income,  as reported (GAAP)

$

3,901 

2,514 

2,013 

1,006 

752 

Non-operating  items:

Impariment  on long lived assets, net of income tax

- 

930 

- 

- 

- 

Net  operating income (net income, excluding

non-operating  items)

$

3,901 

3,444 

2,013 

1,006 

752 

Noninterest  expense, as reported (GAAP)

$

7,351 

7,856 

4,852 

3,853 

3,379 

Non-operating  items:

Impairment  on long lived assets

- 

1,500 

- 

- 

- 

Operating  noninterest expense (noninterest expense,

excluding  non-operating items)

$

7,351 

6,356 

4,852 

3,853 

3,379 

**                                                                               **                        

(1)     Includes nonperforming loans.

(2)     Adjustedfor all years presented giving retroactive effect to a three-for-two commonstock split in November 2003 and subsequent 10 percent stock dividend in July2006.

(3)     Computedby dividing noninterest expense by the sum of net interest income on a taxequivalent basis and noninterest income, net of securities gains or losses.

(4)     Returnon average assets, return on average equity and the efficiency ratio, on anoperating basis, are calculated using operating earnings and operating noninterestexpense and are non-GAAP measures which have been calculated on a pro-formabasis above and are further explained in "General - Non-GAAP Financial Measures."

 

As used in the table above, "n/m" means not a meaningfulmeasurement.

 

23
 
**Item 7.  Management's Discussion and Analysis of FinancialCondition and Results of Operation.**

** CRITICALACCOUNTING POLICIES**

                We have adopted various accounting policies thatgovern the application of accounting principles generally accepted in theUnited States of America and with general practices within the banking industryin the preparation of our financial statements.  Our significant accountingpolicies are described in footnote 1 to our audited consolidated financialstatements as of December 31, 2006.

                Certainaccounting policies involve significant judgments and assumptions by us thathave a material impact on the carrying value of certain assets andliabilities.  We consider these accounting policies to be critical accountingpolicies.  The judgment and assumptions we use are based on historicalexperience and other factors, which we believe to be reasonable under thecircumstances.  Because of the nature of the judgment and assumptions we make,actual results could differ from these judgments and estimates that could havea material impact on the carrying values of our assets and liabilities and ourresults of operations.

                Webelieve the allowance for loan losses is the critical accounting policy thatrequires the most significant judgment and estimates used in preparation of ourconsolidated financial statements.  Some of the more critical judgmentssupporting the amount of our allowance for loan losses include judgments aboutthe credit worthiness of borrowers, the estimated value of the underlyingcollateral, the assumptions about cash flow, determination of loss factors for estimatingcredit losses, the impact of current events, and conditions, and other factorsimpacting the level of probable inherent losses.  Under different conditions orusing different assumptions, the actual amount of credit losses incurred by usmay be different from management's estimates provided in our consolidatedfinancial statements.  Refer to the portion of this discussion that addressesour allowance for loan losses for a more complete discussion of our processesand methodology for determining our allowance for loan losses.

**GENERAL**

We were incorporated in March 1999 to organize and serve as theholding company for Greenville First Bank, N.A.  Since we opened our bank inJanuary 2000, we have experienced consistent growth in total assets, loans, deposits,and shareholders' equity.  We experienced our first quarterly profit in thethird quarter of 2001, and we have been profitable in each subsequent quarter. We became cumulatively profitable in the third quarter of 2003.

                Like most community banks, we derive the majority of our incomefrom interest received on our loans and investments.  Our primary source offunds for making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the key measures of our success is our amountof net interest income, or the difference between the income on ourinterest-earning assets, such as loans and investments, and the expense on ourinterest-bearing liabilities, such as deposits and borrowings.  Another keymeasure is the spread between the yield we earn on these interest-earningassets and the rate we pay on our interest-bearing liabilities, which is calledour net interest spread.  

There are risks inherent in all loans, so we maintain an allowancefor loan losses to absorb probable losses on existing loans that may becomeuncollectible.  We maintain this allowance by charging a provision for loanlosses against our operating earnings for each period.  We have included adetailed discussion of this process, as well as several tables describing ourallowance for loan losses.

In addition to earning interest on our loans and investments, weearn income through fees and other charges to our clients.  We have alsoincluded a discussion of the various components of this noninterest income, aswell as of our noninterest expense.  

Theefficiency ratio represents the percentage of one dollar of expense required tobe incurred to earn a full dollar of revenue.  We compute our efficiency ratioby dividing noninterest expense by the sum of net interest income andnoninterest income.  For the year ended December 31, 2006, we spent $0.49 onaverage to earn each $1.00 of revenue. 

                Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the accompanying financial statements.  We encourage you to readthis discussion and analysis in conjunction with our financial statements andthe other statistical information included in this report.

24
**Effect ofEconomic Trends **
  Beginningin July of 2004 and through 2006, our rates on both short-term or variable rateinterest-earning assets and interest-bearing liabilities increased as theFederal Reserve began to increase short-term rates as the economy showed signsof strengthening following an economic decline and historically low interestrates.  During this period, the Federal Reserve increased rates 17 times for atotal of 425 basis points.  Three of these rate increases occurred during the firstsix months of 2006 for a total of 75 basis points.  However, the FederalReserve allowed short-term rates to remain unchanged during the third andfourth quarters of 2006, leading many economists to believe that the FederalReserve is nearing the end of this cycle of rate increases.  The followingdiscussion includes our analysis of the effect that we anticipate changes in interestrates will have on our financial condition.  However, no assurance can be givenrelated to future actions that the Federal Reserve may choose to take or thatthe results we anticipate will actually occur.

**Results ofOperations **

***IncomeStatement Review ***

*Summary*               

                Net income for the year ended December 31, 2006 was $3.9million, a 55.2% increase from $2.5 million for the year ended December 31, 2005. The $1.4 million increase in net income resulted from a $2.3 million increasein net interest income and a $504,072 decrease in noninterest expenses, offsetby a $650,000 increase in the provision for loan losses, a $246,286 decrease innoninterest income, and $485,978 additional income tax expense.  The primaryreason for the $504,072 decrease in noninterest expenses relates to the $1.5million write-down on real-estate in 2005.  Ourefficiency ratio was 49.2% for 2006, which compared favorably to 60.9% in2005.  The company's operating efficiency ratio for 2006 was unchanged from theoperating efficiency ratio for 2005 excluding the write-down on real estate.

Our netincome in 2005 increased $501,563, or 24.9%, compared to our net income in 2004of $2.0 million.  The $501,563 increase in net income resulted from a $3.4million increase in net interest income, a $64,318 increase in noninterestincome, a $310,000 reduction in the provision for loan losses, offset by a $3.0million increase in noninterest expense, of which $1.5 million was attributableto a one-time impairment charge on real estate, and $307,209 additional incometax expense.  Our operating efficiency ratio was 49.23% (excluding theimpairment charge on real estate) and 51.58% for the years ended December 31,2005 and 2004, respectively.  

           

*Net InterestIncome*

Our level of net interest income is determined by the level ofearning assets and the management of our net interest margin.  The continuousgrowth in our loan portfolio is the primary driver of the increase in netinterest income.  During the three years ended December 31, 2006, our loanportfolio increased an average of $63.7 million per year.  The growth in 2006was $63.2 million.  We anticipate the growth in loans will continue to drivethe growth in assets and the growth in net interest income.  However, noassurance can be given that we will be able to continue to increase loans atthe same levels we have experienced in the past.  

Our decision to grow the loan portfolio at the current pacecreated the need for a higher level of capital and the need to increasedeposits and borrowings.  This loan growth strategy also resulted in a significant portion of our assets being in higher earning loans than in lower yielding investments.  At December 31, 2006, net loans represented 78.0% of total assets.  However, as described below, we have also increased our level of deposits significantly.  While we plan to continue our focus on increasing the loan portfolio, as rates on investment securities rose during 2006 and we obtained additional deposits, we increased the size of theinvestment portfolio.  As a result, net loans as a percentage of total assets has actually decreased from the 82% amount at December 31, 2005 to 78% at December 31, 2006.  Our investment portfolio increased by $38.2 million during 2006.  At December 31, 2006, investments and federal funds sold represented 16.1% of total assets. 

The historically low market interest rate environment in the last fouryears allowed us to obtain short-term borrowings and wholesale certificates ofdeposit at rates that were lower than certificate of deposit rates beingoffered in our local market.  Therefore, we decided not to begin our retaildeposit expansion program until the beginning of 2005.  This funding strategyallowed us to operate in one location until 2005, maintain a smaller staff, andnot incur marketing costs to advertise deposit rates, which in turn allowed usto focus on the fast growing loan portfolio.  

25
                    Inanticipation of rising interest rates, we opened one retail deposit office inMarch and a second in November of 2005.  Our focus forthese two locations is to obtain low cost transaction accounts that we believewill be less impacted by changing market rates.  Our goal is to increase both the percentage of assets being funded by "in market" retail deposits and to increasethe percentage of low-cost transaction accounts to total deposits.  The two additional retail deposit offices are assisting us in meeting these objectives.  We also anticipate that deposit promotions and the opening of the two new offices will continue tohave a negative impact on earnings during 2007.  However, we believe that these two strategies will provide additional clients in our local market and will eventuallyprovide a lower alternative cost of funding.  At December 31, 2006, retail depositsrepresented $254.2 million, or 49.9% of total assets, borrowings represented $121.9million, or 23.9% of total assets, and wholesale out-of-market depositsrepresented $91.3 million, or 17.9% of total assets. 
As more fully discussed in the"Market Risk" and "Liquidity and Interest Rate Sensitivity" sections below, atDecember 31, 2006, 48.8% of our loans had variable rates.  Given our highpercentage of rate-sensitive loans, our primary focus during the past threeyears has been to obtain short-term liabilities to fundour asset growth.  This strategy improves our ability to manage the impact onour earnings resulting from anticipated changes in market interest rates. 

AtDecember 31, 2006, 84.6% of our interest-bearing liabilities had a maturity ofless than one year.   Therefore, we believe that we are positioned to benefitfrom future decreases in short-term rates.  Conversely, future increases inshort-term rates would likely have a negative effect on our earnings.  At December31, 2006, we had $119.0 million more liabilities than assets that repricewithin the next twelve months.  Based on a review of our deposit portfolio, webelieve that the interest rates that we pay on the majority of our interest-bearingtransaction accounts, would only be impacted by a portion of any change inmarket rates.  This key assumption is utilized in our overall evaluation of ourlevel of interest sensitivity.

We intend to maintain a capital level for the bank that exceedsthe OCC requirements to be classified as a "well capitalized" bank.  To providethe additional capital needed to support our bank's growth in assets, in 2003we issued $6.2 million in junior subordinated debentures in connection with ourtrust preferred securities offering.  During 2004, we issued 920,000 additionalshares of common stock (1,012,000 adjusted for the 10 percent stock dividend in2006) that resulted in $14.9 million of additional capital.  In 2005, we issuedan additional $7.2 million in junior subordinated debentures in a second trustpreferred securities offering.  The company also has a $4.5million unused short-term holding company line of credit that could be utilizedto provide additional capital for the bank if deemed necessary. As of December31, 2006, the company's regulatory capital levels were over $12.4 million inexcess of the various well capitalized requirements.

In addition to the growth in both assets and liabilities, and thetiming of repricing of our assets and liabilities, net interest income is alsoaffected by the ratio of interest-earning assets to interest-bearingliabilities and the changes in interest rates earned on our assets and interestrates paid on our liabilities.

Our net interest margin was 3.26% for the year ended December 31, 2006, whileour netinterest spread was 2.82% for the same period.  During this period, our netinterest margin exceeded our net interest spread because we had moreinterest-earning assets than interest-bearing liabilities.  Averageinterest-earning assets exceeded average interest-bearing liabilities by $46.0million during the twelve month period ended December 31, 2006.  

During the year ended December 31, 2006, ourrates on both short-term or variable rate earning assets and short-term orvariable rate interest-bearing liabilities continued to increase primarily as aresult of the actions taken by the Federal Reserve over the last twelve monthsto raise short-term rates.  The impact of the Federal Reserve's actionsresulted in an increase in both the yields on our variable rate assets and therates that we paid for our short-term deposits and borrowings.  Our netinterest spread declined since more of our rate-sensitive liabilities repricedthan our rate-sensitive assets during the twelve month period ending December31, 2006.  Given the fact that the Federal Reserve has increased short-termrates by 425 basis points since July 2004, we believe that short-term interestrates are currently at or near their peak.  Therefore, we have chosen toincrease the amount of fixed rate loans in our loan portfolio and targeted tohave a significant portion of our liabilities to reprice within a twelve-monthperiod.  

26
 
We haveincluded a number of unaudited tables to assist in our description of variousmeasures of our financial performance.  For example, the "Average Balances,Income and Expenses, and Rates" table shows the average balance of eachcategory of our assets and liabilities as well as the yield we earned or therate we paid with respect to each category during 2006, 2005, and 2004.  Areview of these tables shows that our loans typically provide higher interestyields than do other types of interest-earning assets, which is why we direct asubstantial percentage of our earning assets into our loan portfolio. Similarly, the "Rate/Volume Analysis" table helps demonstrate the effect ofchanging interest rates and changing volume of assets and liabilities on ourfinancial condition during the periods shown.  We also track the sensitivity ofour various categories of assets and liabilities to changes in interest rates,and we have included tables to illustrate our interest rate sensitivity withrespect to interest-earning and interest-bearing accounts.  Finally, we haveincluded various tables that provide detail about our investment securities,our loans, our deposits, and borrowings.

The following table sets forth information related to our averagebalance sheet, average yields on assets, and average costs of liabilities.  Wederived these yields or costs by dividing income or expense by the averagebalance of the corresponding assets or liabilities.  We derived averagebalances from the daily balances throughout the periods indicated.  During thesame periods, we had no interest-bearing deposits in other banks or anysecurities purchased with agreements to resell.  All investments were owned atan original maturity of over one year.  Nonaccrual loans are included in earningassets in the following tables.  Loan yields have been reduced to reflect thenegative impact on our earnings of loans on nonaccrual status.  The net ofcapitalized loan costs and fees are amortized into interest income on loans.

**Average Balances, Income and Expenses, and Rates**

**For the Years Ended December 31,**

**2006**

** **

**2005**

** **

**2004**

** **

**Average   Balance**

** **

**Income/  Expense**

** **

**Yield/  Rate**

** **

**Average   Balance**

** **

**Income/  Expense**

** **

**Yield/  Rate**

** **

**Average   Balance**

** **

**Income/  Expense**

** **

**Yield/  Rate**

** **

**(Dollars in  thousands)**

Earning assets:

 Federal funds sold

$

9,091 

$

473 

5.21 %

$

3,129 

$

105 

3.32 %

$

1,842 

$

23 

1.25 %

 Investment	securities

55,555 

2,826 

5.09 %

36,873 

1,634 

4.43 %

22,585 

967 

4.28 %

 Loans

375,351 

27,630 

7.36 %

310,317 

19,931 

6.42 %

248,115 

12,975 

5.23 %

     Total earning assets

439,997 

30,929 

7.03 %

350,319 

21,670 

6.19 %

272,542 

13,965 

5.12 %

Nonearning assets

16,949 

6,695 

4,534 

     Total assets

$

456,946 

$

357,014 

$

277,076 

Interest-bearing  liabilities:

 NOW accounts

$

35,048 

$

649 

1.85%

$

28,153 

$

390 

1.39 %

$

24,552 

$

332 

1.35 %

 Savings & money

    market 

80,687 

2,751 

3.41 %

48,815 

931 

1.91 %

43,188 

630 

1.46 %

 Time deposits

163,879 

7,740 

4.72 %

129,735 

4,715 

3.63 %

99,420 

2,608 

2.62 %

Total interest-bearing  	

   deposits

279,614 

11,140 

3.98 %

206,703 

6,036 

2.92 %

167,160 

3,570 

2.14 %

 FHLB advances

91,525 

3,985 

4.35 %

74,013 

2,548 

3.44 %

54,515 

1,204 

2.21 %

 Other borrowings

22,856 

1,454 

6.36 %

23,849 

1,001 

4.20 %

21,375 

543 

2.54 %

Total interest-bearing     	

      liabilities

393,995 

16,579 

4.21 %

304,565 

9,585 

3.15 %

243,050 

5,317 

2.19 %

Noninterest-bearing

    liabilities

30,298 

22,608 

17,756 

Shareholders' equity

32,653 

29,841 

16,270 

Total liabilities and

      shareholders' equity

$

456,946 

$

357,014 

$

277,076 

Net interest spread

2.82 %

3.04 %

2.93 %

Net interest income/

     margin

$

14,350 

3.26 %

$

12,085 

3.45 %

$

8,648 

3.17 %

Our net interest spread was 2.82% for the year ended December 31,2006, compared to 3.04% for the year ended December 31, 2005 and 2.93% for theyear ended December 31, 2004.  The net interest spread is the differencebetween the yield we earn on our interest-earning assets and the rate we pay onour interest-bearing liabilities.  Because we had more interest-bearing liabilitiesthan interest-earning assets that repriced, our net interest spread decreased22 basis points in 2006, compared to the same period in 2005.  On the contrary,the net interest spread increased from 2004 to 2005 as the bank had moreinterest-earning assets than interest-bearing liabilities that repriced asmarket rates increased during the second half of 2004 and the twelve months of2005.

Our net interest margin is calculated as net interest income dividedby average interest-earning assets.  Our net interest margin for the periodended December 31, 2006 was 3.26%, compared to 3.45% for the year endedDecember 31, 2005 and 3.17% for the year ended December 31, 2004.  During thetwelve-month periods ended December 31, 2006, 2005 and 2004, interest earningassets exceeded interest bearing liabilities by $46.0 million, $45.8 million,and $29.5 million, respectively.  During 2006, interest-earning assets averaged$440.0 million, compared to $350.3 million in 2005 and $272.5 million in 2004.

27
                    Our loan yield increased 94 and 119 basis pointsfor the years ended December 31, 2006 and 2005 compared to prior years as aresult of approximately 49% and 61% of the loan portfolio having variable ratesat December 31, 2006 and 2005, respectively, combined with the increase inrates over the two years ended December 31, 2006.  Offsetting the increases inour loan yield was a 106 and 78 basis point increase in the cost of ourinterest-bearing deposits for the years ended December 31, 2006 and 2005 comparedto the same period in 2005 and 2004.  The increases in the rate on our timedeposits is due to the renewal rates on time deposits being much higher thanthe original rates as a result of the number of increases in the market rate inthe past twenty-four months.  In addition, the cost of our savings and moneymarket accounts has increased by 150 basis points in 2006 as we have increasedthe rates we offer on these products to stay competitive in response to theincrease in short-term market rates.  The 91 and 123 basis point increases inFHLB advances and the 216 and 166 basis point increases in other borrowed fundsduring 2006 and 2005 compared to the same periods in the prior years resultedprimarily from the impact of the 300 basis point increase in short-term marketrates over the past two years.  The rate on other borrowings increased morethan the increase in market rates as a result of the additional $7.2 milliontrust preferred securities that were obtained at a higher cost at the end of2005.  As of December 31, 2006, approximately 46% of our FHLB advances hadvariable rates, while all of our other borrowings had variable rates.  AtDecember 31, 2005 and 2004, approximately 37% and 59% of our FHLB advances hadvariable rates, respectively.
Net interestincome, the largest component of our income, was $14.4 million, $12.1 million,and $8.6 million, for the years ended December 31, 2006, 2005, and 2004,respectively.  The increases in both 2006 and 2005 related primarily to the neteffect of higher levels of both average earning assets and interest-bearingliabilities.  In 2006 and 2005, average earning assets increased $89.7 millionand $77.8 million, respectively.  During the same periods, average interest-bearingliabilities increased $89.4 million and $61.5 million, respectively.  Thehigher average balances is the primary reason for the $2.3 million and $3.4million additional net interest income for the years ended December 31, 2006and 2005, respectively.  

** ** Interest income for the year ended December 31, 2006was $30.9 million, consisting of $27.6 million on loans, $2.8 million oninvestments, and $473,362 on federal funds sold.  Interest income for the sameperiod ended December 31, 2005 was $21.7 million, consisting of $19.9 millionon loans, $1.6 million on investments, and $104,414 on federal funds sold.  Interestincome for 2004 was $14.0 million, consisting of $13.0 million on loans,$966,653 on investments, and $22,751 on federal funds sold.  Interest on loansfor the years ended December 31, 2006, 2005 and 2004 represented 89.3%, 92.0%and 92.9%, respectively, of total interest income, while income frominvestments and federal funds sold represented 10.7%, 8.0% and 7.1% of totalinterest income for the years ended December 31, 2006, 2005 and 2004, respectively. The high percentage of interest income from loans related to our strategy tomaintain a significant portion of our assets in higher earning loans comparedto lower yielding investments.  Average loans represented 85.3%, 88.6% and 91.0%of average interest-earning assets for the years ended December 31, 2006, 2005and 2004, respectively.  Included in interest income on loans for the yearsended December 31, 2006, 2005 and 2004 was $569,012, $604,564 and $496,119,respectively, related to the net amortization of loan fees and capitalized loanorigination costs.

Interest expense for the year ended December 31, 2006 was $16.6million, a 73.0% increase compared to $9.6 million for the year ended December31, 2005.  For the years ended December 31, 2006 and 2005, interest expenseconsisted of $11.1 million and $6.0 million, respectively, related to depositsand $5.4 million and $3.5 million, respectively, related to borrowings.   Interestexpense for the year ended December 31, 2004 was $5.3 million, consisting of $3.6million related to deposits and $1.7 million related to borrowings.  Interestexpense on deposits for the years ended December 31, 2006, 2005 and 2004represented 67.2%, 63.0% and 67.2%, respectively, of total interest expense,while interest expense on borrowings represented 32.8%, 37.0% and 32.8%,respectively, of total interest expense.  During the year ended December 31,2006, average interest-bearing deposits were higher by $72.9 million than forthe same period in 2005, while FHLB advances and other borrowings were $16.5million higher than for the same period in 2005.  Average interest-bearingdeposits were higher by $39.5 million during the year ended December 31, 2005 thanfor the same period 2004, while FHLB advances and other borrowings during 2005were $22.0 million higher than for the same period in 2004.  Both the short-termborrowings from the FHLB and the sale of securities under agreements torepurchase provided us with the opportunity to obtain low cost funding withvarious maturities similar to the maturities on our loans and investments. 

28

*Rate/Volume Analysis*** **

Net interest income can be analyzed in terms of the impact ofchanging interest rates and changing volume.  The following tables set forththe effect which the varying levels of interest-earning assets andinterest-bearing liabilities and the applicable rates have had on changes innet interest income for the periods presented.** **
 
**Years  Ended**

**December  31, 2006 vs. 2005**

** **

**December  31, 2005 vs. 2004**

**Increase (Decrease)  Due to**

** **

**Increase  (Decrease) Due to**

** **

** **

** **

** **

**Rate/**

** **

** **

** **

** **

** **

** **

** **

**Rate/**

** **

** **

** **

**Volume**

** **

**Rate**

** **

**Volume**

** **

**Total**

** **

**Volume**

** **

**Rate**

** **

**Volume**

** **

**Total**

** **

**(Dollars  in thousands)**

**Interest  income**

 Loans

$

4,173 

2,909 

617 

7,699 

3,199 

2,998 

759 

6,956 

 Investment securities

828 

242 

122 

1,192 

603 

39 

25 

667 

 Federal funds sold

198 

59 

112 

369 

16 

38 

27 

81 

      Total interest  income

5,199 

3,210 

851 

9,260 

3,818 

3,075 

811 

7,704 

**Interest  expense**

** **

** **

** **

 Deposits

1,438 

2,957 

709 

5,104 

840 

1,309 

317 

2,466 

 FHLB advances

603 

675 

160 

1,438 

426 

676 

242 

1,344 

 Other borrowings

(42)

516 

(21)

453 

62 

355 

41 

458 

      Total interest  expense

1,999 

4,148 

848 

6,995 

1,328 

2,340 

600 

4,268 

** **

** **

** **

**Net  interest income**

**$**

3,200 

(938)

3 

2,265 

2,490 

735 

211 

3,436 

*Provision for Loan Losses*

** **                Wehave established an allowance for loan losses through a provision for loanlosses charged as an expense on our statements of income.  We review our loanportfolio periodically to evaluate our outstanding loans and to measure boththe performance of the portfolio and the adequacy of the allowance for loanlosses.  Please see the discussion below under "Balance Sheet Review -Provision and Allowance for Loan Losses" for a description of the factors weconsider in determining the amount of the provision we expense each period tomaintain this allowance.** **

For the year ended December31, 2006, we incurred a noncash expense related to the provision for loanlosses of $1.7 million, bringing the allowance for loan losses to $4.9 million,or 1.23% of gross loans, as of December 31, 2006.  During the year ended December31, 2006, we charged-off $1.3 million in loans and recorded $145,661 ofrecoveries on loans previously charged-off.  In contrast, for the same periodsin 2005 and 2004, we added $1.0 million and $1.3 million, respectively, to theprovision for loan losses, resulting in an allowance of $4.5 million and $3.7million at December 31, 2005 and 2004.  The allowance for loan losses as apercentage of gross loans was 1.33% at both December 31, 2005 and 2004,respectively.  We reported net charge-offs of $227,048 and $298,505 for the yearsended December 31, 2005 and 2004, respectively, including recoveries of $63,206and $36,423 for the same periods in 2005 and 2004.

The substantial portion,or $1.1million, of loans charged-off in the twelve months ended December 31,2006 relates to a group of loans with a common interest totaling $3.1 million. These loans were secured by diversified real estate or vehicles, on which wehave foreclosed.  During the second and third quarters of 2006, we sold $1.3million of the property which had secured these loans.  At December 31, 2006,the remaining $1.0 million in property which had secured these loans isrecorded at their estimated fair market value as other real estate owned on ourconsolidated balance sheets.

At December 31, 2006,the allowance for loan losses represented 3.3 times the amount ofnon-performing loans, compared to 9.6 times and 4.8 times at December 31, 2005and 2004, respectively.  As a result of this level of coverage onnon-performing loans, we determined that the provision of $1.7 million for the twelvemonths ended December 31, 2006 to be adequate.

29

*Noninterest Income  *

*               *Thefollowing tables set forth information related to our noninterest income. * *

**Years  ended December 31,** 
** **

**2006**

** **

**2005**

** **

**2004** 
** **

** **

** **

** **

** **

	 
Loan fee income

$

123,756 

169,876 

146,986 
Service fees on deposit  accounts

259,296 

251,644 

296,100 
Other real estate owned activity   
	(165,627)
   
	- 
   
(2,725)

Income from bank owned life  insurance

142,947 

- 

-  
Other income

219,123 

404,261 

321,102 
  Total noninterest income

$

579,495 

825,781 

761,463 

** **Noninterest income for the yearended December 31, 2006 was $579,495, a decrease of $246,286 or 29.8% comparedto noninterest income of $825,781 during the same period in 2005.  The $246,286decrease in 2006 was primarily related to $165,627 of other real estate ownedactivity and a $185,138 decrease in other income. Noninterest income for the yearended December 31, 2004 was $761,463. 

Loan fee income consists primarily of late charge fees andmortgage origination fees we receive on residential loans funded and closed bya third party.  Loan fees were $123,756 and $169,876 for the years ended December31, 2006 and 2005, respectively.  The $46,120 decrease relates primarily to a $60,127decrease in mortgage origination fees and fees related to lines and letters ofcredit, partially offset by a $14,007 increase in late charge fees.  Wereceived $3,585 of mortgage origination fees in 2006 compared to $35,562 in 2005. We anticipate that the level of mortgage origination fees will remain stable asthe mortgage refinancing business has declined due to higher mortgage ratescurrently being offered.  Fees related to lines and letters of credit were$30,854 for the year ended December 31, 2006, and $59,004 for the same periodin 2005. 

Income fromloan fees increased by $22,890 to $169,876 for the year ended December 31, 2005from $146,986 for the same period in 2004.  The increase relates primarily tothe $18,971 increase in mortgage origination fees on loans closed by a thirdparty.  We received $35,562 of mortgage origination fees in 2005 compared to $16,591in 2004.  The remaining increase is due to a net increase of $3,919 in latefees and other related loan fees in 2005 compared to 2004. 

Service fees on deposit accounts consist primarily of servicecharges on our checking, money market, and savings accounts and the fee incomereceived from client non-sufficient funds ("NSF") transactions.  Deposit fees were $259,296and $251,644 for the years ended December 31, 2006 and 2005, respectively.  The$7,652 increase is primarily related to a $10,919 increase in deposit relatedfees, partially offset by a $3,901 decrease in NSF fees.  Deposit related feeswere $28,153 and $17,234 for the years ended December 31, 2006 and 2005,respectively.  NSF income was $147,558 and $151,459 for the same periods endedDecember 31, 2006 and 2005, respectively, representing 56.9% of total servicefees on deposits in 2006 compared to 60.2% of total service fees on deposits in2005

Deposit feeswere $251,644 and $296,100 for the years ended December 31, 2005 and 2004,respectively.  The $44,456 decrease is primarily related to a significant amount ofNSF fees incurred by and charged to one individual customer in the prior year. NSFincome was $151,459 and $188,880 for the years ended December 31, 2005 and 2004,respectively, representing 60.2% of total service fees on deposits in 2005compared to 63.8% of total service fees on deposits in 2004. 

Asa result of loans that were transferred into real estate owned in 2006, ourcost of owning the real estate exceeded income derived from the property by $165,627for the twelve months ended December 31, 2006.  We had no income or expenses onreal estate owned for the same period in 2005 expenses of $2,725 in 2004.

We purchased bank owned life insurance in thethird quarter of 2006.  Income derived from life insurance was $142,947 for theyear ended December 31, 2006.  

30

Other income consistedprimarily of income from fees received on debit card transactions and sale ofcustomer checks, and fees received on wiretransfers.  Other income was $219,123 and $404,261 for the years ended December31, 2006 and 2005, respectively.  The $185,138 decrease resulted primarily froma $202,262 decrease in debit card transaction fees due to a change inmerchant service providers whereby we now receive a net fee related to theservice provided to our merchant clients.  In prior years, we received asubstantially higher fee, but also incurred additional transaction costs. Debit card transaction fees were $148,167 and $350,429 for the years endedDecember 31, 2006 and 2005, respectively and represented 67.6% and 86.7% oftotal other income for the 2006 and 2005 periods, respectively.  Thecorresponding transaction costs associated with debit card transactions areincluded in outside service expense.  The debit card transaction costs were $75,340and $278,936 for the years ended December 31, 2006 and 2005, respectively.  Thenet impact of the fees received and the related cost of the debit cardtransactions on earnings for the twelve months ended December 31, 2006 and 2005was $72,827 and $71,493, respectively. 

Other incomewas $321,102 for the year ended December 31, 2004.  The $83,159 increase in 2005from 2004 resulted primarily from an increase in the volume of ATM transactionsfor which we receive fees.  The ATM transaction fees were $350,429 and $290,143for the years ended December 31, 2005 and 2004, respectively.  The ATMtransaction fees represented 86.7% and 90.4% of total other income for theyears ended December 31, 2005 and 2004, respectively.  Included in noninterestdata processing and related costs was $278,936 and $252,581 related tocorresponding transaction costs associated with ATM transaction fees for theyears ended December 31, 2005 and 2004, respectively.  The net impact of thefees received and the related cost of the ATM transactions on earnings for theyears ended December 31, 2005 and 2004 was $71,493 and $37,562, respectively.

*Noninterest Expenses*

* **                   *Thefollowing tables set forth information related to our noninterest expenses. 

** **

**Years  ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

** **

** **

** **

** **

** **

Compensation  and benefits

$

4,398,106 

3,340,402 

2,497,445 

Professional  fees

384,926 

303,986 

213,168 

Marketing

390,377 

377,093 

247,536 

Insurance

183,139 

152,761 

128,978 

Occupancy

663,139 

799,267 

603,033 

Data  processing and related costs

854,084 

919,379 

813,097 

Telephone

82,066 

55,972 

32,216 

Impairment  of long lived assets

- 

1,500,000 

- 

Other

395,471 

406,520 

317,822 

  Total  noninterest expenses

$

7,351,308 

7,855,380 

4,853,295 

We incurred noninterest expenses of $7.4 million for the yearended December 31, 2006 compared to $7.9 million and $4.9 million for the yearsended December 31, 2005 and 2004. Included in noninterest expenses for the yearended December 31, 2005, is a one-time charge of $1.5 million related to theimpairment of long lived assets.  Average interest-earning assets increased 25.5%and 28.5% during the years ended December 31, 2006 and 2005, respectively, whilegeneral and administrative expense, excluding the one-time $1.5 millionimpairment charge, increased by 15.7% and 30.9%, respectively, for the sameperiods.

In December of 2005, we decided to exercise our option to purchaseour main office and headquarters building.    Purchasing the building ascompared to continuing to lease the building for an additional fourteen years, provideda cost benefit to the company of approximately $90,000 per year.  We paidapproximately $3.1 million for the building, a price which was calculated basedon a pre-determined formula in our lease agreement.  We also engaged an outsideappraiser to evaluate the market value of our building.  This analysisconcluded that the building's market value, including leasehold improvements,was approximately $2.2 million, whereas the purchase price and leaseholdimprovements totaled approximately $3.7 million, resulting in an impairmentcharge of $1.5 million.  

For the yearended December 31, 2006, compensation and benefits, occupancy, data processingand related costs, and the impairment of long lived assets accounted for 80.5%of the total noninterest expenses compared to 83.5% in 2005 and 80.6% in 2004.

31

                Thefollowing tables set forth information related to our compensation andbenefits.  

 

**Years  ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

** **

** **

** **

** **

** **

Base  compensation

$

3,020,391 

2,353,952 

1,708,492 

Incentive  compensation

763,000 

594,925 

570,049 

 Total  compensation

3,783,391 

2,948,877 

2,278,541 

Benefits

755,895 

525,715 

341,124 

Capitalized  loan origination costs

(141,180)

(134,190))

(122,220)

 Total  compensation and benefits

$

4,398,106 

3,340,402 

2,497,445 

Compensationand benefits expense was $4.4 million, $3.3 million and $2.5 million for theyears ended December 31, 2006, 2005 and 2004, respectively.  Compensation andbenefits represented 59.8% of our total noninterest expenses for the year endedDecember 31, 2006, 42.5% for the same period in 2005, and 51.5% for the sameperiod in 2004.  The $1.1 million increase in compensation and benefit expensein 2006 compared to 2005 is primarily related to a $666,439 increase in basecompensation and $230,180 of additional benefits cost.  In addition, incentivecompensation expense increased by $168,075, offset by an increase of $6,990 inloan origination costs, which is required to be capitalized and amortized overthe life of the loans as a reduction of loan interest income.  Compensation andbenefits expense increased by $842,957 in 2005 compared to 2004.  The increaseis a result of $645,460 additional base compensation, $24,876 in additionalincentive compensation, and $184,591 in higher benefits costs, offset by anincrease of $11,970 in loan origination costs. 

The $666,439 increase in base compensation expense for the yearended December 31, 2006 compared to the same period in 2005, related to the costof 8 additional employees, most of which were hired to support the growth inretail deposits, as well as annual salary increases.  The $645,460 increase inbase compensation expense in 2005, related to the addition of 14 employees,plus the impact of annual salary increases.  Seven of the new employees relateto the staff that was hired for the new retail offices that opened in the firstand fourth quarters of 2005.  The remaining seven employees were hiredprimarily to support the growth in both loans and deposit operations. 

Incentivecompensation represented 20.2% of total compensation for the years endedDecember 31, 2006 and 2005, respectively, and 25.0% for the year ended December31, 2004.  The incentive compensation expense recorded for the years 2006, 2005and 2004 represented an accrual of the estimated incentive compensation earnedduring the respective year.  

Benefitsexpense increased $230,180 in the year ended December 31, 2006 compared to theyear ended December 31, 2005 and $184,591 in 2005 compared to the year endedDecember 31, 2004.  Benefits expense represented 20.0%, 17.8%, and 15.0% of thetotal compensation for the years ended December 31, 2006, 2005, and 2004,respectively.  

Thefollowing tables set forth information related to our data processing andrelated costs. 

**Years  ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

** **

** **

** **

** **

** **

Data processing costs

$

573,046 

473,013 

420,588 

ATM transaction expense

75,340 

278,936 

252,581 

Courier expense

92,064 

81,214 

74,166 

Other expenses

113,634 

86,216 

65,762 

 Total data processing and  related costs

$

854,084 

919,379 

813,097 

Data processing and related costs were $854,084, $919,379 and $813,097for the years ended December 31, 2006, 2005 and 2004, respectively.  During theyear ended December 31, 2006, our data processing costs for our core processingsystem increased by $100,033 to $573,046 compared to $473,013 for the sameperiod in 2005.  Data processing costs for our core processing system were $420,588for the year ended December 31, 2004.  We have contracted with an outsidecomputer service company to provide our core data processing services. 

32
                   Dataprocessing costs increased $100,033, or 21.1%, for the year ended December 31,2006 and $52,425, or 12.5%, for the year ended December 31, 2005 when comparedto the same periods in 2005 and 2004, respectively.  Theincreases in costs were caused by the higher number of loan and depositaccounts.  A significant portion of the fee charged by the third partyprocessor is directly related to the number of loan and deposit accounts andthe related number of transactions.  
Wereceive income from debit card transactions performed by our clients.  Since weoutsource this service, we are charged related transaction expenses from ourmerchant service provider.  Debit card transaction expense was $75,340, $278,936 and $252,581 for the years ended December31, 2006, 2005 and 2004, respectively.  The decrease of $203,596 relatesprimarily to a change in merchant service card providers, whereby we nowreceive net fee income related to the service provided to our merchantclients.  In prior years, we received a substantially higher fee, but alsoincurred a higher transaction cost.  The $26,355 increasein 2005 compared to 2004 relates to the higher transaction volume during therespective periods.

Occupancy expense represented 9.0%, 10.2% and 12.4% of totalnoninterest expenses for the years ended December 31, 2006, 2005 and 2004,respectively.  Occupancy expense decreased $136,128 to $663,139 for the yearended December 31, 2006 from $799,267 for the same period in 2005, in spite ofthe addition of two new retail offices.  The additional costs of the two new retailoffices were largely offset because we purchased our main retail office andheadquarter building at the end of 2005.  The depreciation expense related toour main office and headquarter building is significantly less than the rentexpense paid in prior years.    During 2005,occupancy expense increased $196,234 from $603,033for the year ended December 31, 2004.  The increase resulted primarily fromincreased rent expense and the increased depreciation expenses related toopening our Parkway and Augusta Road offices.  

The $1.5million impairment on long lived assets charge for the year ended December 31,2005 is related to the purchase of our Haywood Road office building.  OnDecember 30, 2005, we purchased the main office building for $3.1 million and immediatelythereafter recorded a $1.5 million write-down on the valuation of the purchasedbuilding in accordance with SFAS No. 121, "Impairment of Long-Lived Assets." The $1.5 million impairment is based on various assumptions related to ourability to either sell or lease the building at various lease rates.  Theactual results of our ability to either sell or lease the building couldsignificantly differ from the assumption used in the impairment calculation.

                Theremaining $139,647 increase in noninterest expenses for the year ended December31, 2006 compared to the same period in 2005, resulted primarily from increasesof $80,940 in professional fees, $30,378 in insurance expenses, and $77,898 in telephoneand other expenses, partially offset by a decrease of $13,284 in marketingexpenses.  Professionalfees increased as a result of legal fees related to research of certainstrategic business opportunities and the overall growth of our company. Asignificant portion of the increase in other expenses was due to increasedcosts of postage and office supplies, additional staff education and training,and higher dues and subscription costs

Contributingto the increase in noninterest expenses for the year ended December 31, 2005compared to the same period in 2004 were increases of $90,818 in professionalfees, $129,557 in marketing costs, $23,783 in insurance expenses, and $94,108in telephone and other expenses.  A significant portion of the increase inprofessional fees related to additional legal and accounting fees related tonew SEC reporting requirements.  The increase in marketing expenses related toexpanding our market awareness in the Greenville market, while a significantportion of the increase in other expenses was due to increased costs of postageand office supplies, additional staff education and training, and higher duesand subscription costs.

                Income tax expensewas $2.0 million, $1.5 million and $1.2 million for the years ended December31, 2006, 2005 and 2004.  Our effective tax rate was 34.2% for the year endedDecember 31, 2006, and 38% for each of the years ended December 31, 2005 and 2004. Thedecrease in the effective tax rate for 2006 compared to prior years resultsprimarily from the tax exempt income on bank owned life insurance which wepurchased in the third quarter of 2006.  

33

***Balance Sheet Review***

*General*

                AtDecember 31, 2006, we had total assets of $509.3 million, consistingprincipally of $397.2 million in loans, $74.3 million in investments, $7.5million in federal funds sold, and $9.1 million in cash and due from banks. Our liabilities at December 31, 2006 totaled $474.8 million, consistingprincipally of $345.5 million in deposits, $108.5 million in FHLB advances, $4.1million of official checks outstanding, and $13.4 million of juniorsubordinated debentures.  At December 31, 2006, our shareholders' equity was $34.6million.

*FederalFunds Sold*

                AtDecember 31, 2006, our $7.5 million in short-term investments in federal fundssold on an overnight basis comprised 1.5% of total assets, compared to $19.4 million, or 4.8% of total assets, at December 31, 2005.  Due to thelarge amount of official checks outstanding, our federal funds sold were higherthan normal at December 31, 2005.

*Investments*

*               *At December 31, 2006, the $74.3 million in our investmentsecurities portfolio represented approximately 14.6% of our total assets.  Weheld Government sponsored enterprise securities, municipal securities, and mortgage-backedsecurities with a fair value of $66.8 million and an amortized cost of $67.3million for an unrealized loss of $537,138.  As a result of the strong growthin our loan portfolio and the historically low fixed rates that were availableduring the last two and one-half years, through December 31, 2005, we hadmaintained a lower than normal level of investments.  During 2006, as rates oninvestment securities have risen and we have attracted a material amount ofadditional deposits, we increased the size of our investment portfolio. 

Contractual maturities and yields on our investments at December31, 2006 are shown in the following table.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  At December 31, 2006,we had no securities with a maturity of less than one year.

** **

** **

**One to Five Years**

** **

**Five to Ten Years**

** **

**Over Ten Years**

** **

**Total**

** **

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

** **

** (Dollars in thousands)**

**Available for Sale**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Government sponsored enterprises

$

1,989 

5.06 %

$

- 

- 

$

- 

- 

$

1,989 

5.06 %

State and political subdivisions

- 

- 

- 

- 

3,782 

3.81 %

3,782 

3.81 %

Mortgage-backed securities

- 

- 

4,608 

5.33 %

39,821 

5.64 %

44,429 

5.61 %

Total

$

1,989 

5.06 %

$

4,608 

5.33 %

$

43,603 

5.48 %

$

50,200 

5.45 %

** **

** **

**Held to Maturity**

Mortgage-backed securities

$

- 

- 

$

441 

3.92 %

$

16,604 

4.63 %

$

17,045 

4.61 %

At December 31, 2006, our investments included securities issuedby Federal National Mortgage Association and Federal Home Loan MortgageCorporation with carrying values of  $39.5 million and $12.4 million,respectively.

Other investments at December 31, 2006 consisted of FederalReserve Bank stock with a cost of $968,700, investments in Greenville FirstStatutory Trust I and II of $186,000 and $217,000, respectively, and FederalHome Loan Bank stock with a cost of $5.7 million.  At December 31, 2005, weowned Federal Reserve Bank stock with a cost of $863,700, Federal Home LoanBank stock with a cost of $4.2 million, and investments in Greenville FirstStatutory Trust I and II of $186,000 and $217,000, respectively. 

34

Theamortized costs and the fair value of our investments at December 31, 2006, 2005,and 2004 are shown in the following table.

** **

** **

**2006**

** **

**2005**

** **

**2004**

** **

** **

**Amortized**

** **

**Fair**

** **

**Amortized**

** **

**Fair**

** **

**Amortized**

** **

**Fair**

** **

** **

**Cost**

** **

**Value**

** **

**Cost**

** **

**Value**

** **

**Cost**

** **

**Value**

** **

** **

**(Dollars in  thousands)**

**Available for Sale**

** **

Government sponsored enterprises

$

1,996 

1,989 

1,005 

1,012 

1,014 

1,053

State and political subdivisions 

3,795 

3,782

1,292

1,292

-

-

Mortgage-backed securities

44,478 

44,429 

9,242 

9,007 

11,070 

11,107

Total

$

50,269 

50,200 

11,539 

11,311 

12,084 

12,160 

** **

** **

**Held to Maturity                  **

** **

Mortgage-backed securities

$

17,045 

16,577 

19,345 

18,709 

13,139

13,089 

*Loans*

* ***               **Since loanstypically provide higher interest yields than other types of interest-earningassets, a substantial percentage of our earning assets are invested in our loanportfolio.  Average loans for the years ended December 31, 2006 and 2005 were $375.4million and $310.3 million, respectively.  Before allowance for loan losses,total loans outstanding at December 31, 2006 and 2005 were $402.2 million and $338.5million, respectively.

                Theprincipal component of our loan portfolio is loans secured by real estatemortgages.  Most of our real estate loans are secured by residential orcommercial property.  We do not generally originate traditional long termresidential mortgages, but we do issue traditional second mortgage residentialreal estate loans and home equity lines of credit.  We obtain a securityinterest in real estate whenever possible, in addition to any other availablecollateral.  This collateral is taken to increase the likelihood of theultimate repayment of the loan.  Generally, we limit the loan-to-value ratio onloans we make to 80%.  Due to the short time our portfolio has existed, thecurrent mix may not be indicative of the ongoing portfolio mix.  We attempt tomaintain a relatively diversified loan portfolio to help reduce the riskinherent in concentration in certain types of collateral.

Thefollowing table summarizes the composition of our loan portfolio for each ofthe five years ended December 31, 2006.

 

** **

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**% of**

** **

** **

** **

**% of**

** **

** **

** **

**% of**

** **

** **

** **

**% of**

** **

** **

** **

**% of**

** **

**Amount**

** **

**Total**

** **

**Amount**

** **

**Total**

** **

**Amount**

** **

**Total**

** **

**Amount**

** **

**Total**

** **

**Amount**

** **

**Total**

**(Dollars in  thousands)**

Real Estate:

 Commercial

    Owner Occupied

$

77,668 

19.3 %

$

72,222 

21.3 %

$

54,323 

19.4 %

$

39,301 

18.8 %

$

22,653 

15.1 %

    Non-owner occupied

126,008 

31.3 %

96,950 

28.7 %

76,284 

27.2 %

53,898 

25.8 %

43,077 

28.7 %

    Construction

20,466 

5.1 %

14,661 

4.3 %

12,212 

4.4 %

10,878 

5.2 %

4,008 

2.7 %

      	

   	Total commercial real estate

224,142 

55.7 %

183,833 

54.3 %

142,819 

51.0 %

104,077 

49.8 %

69,738 

46.5 %

 Consumer

Residential

59,187 

14.7 %

50,756 

15.0 %

46,240 

16.5 %

35,823 

17.2 %

25,500 

17.0 %

Home  equity

35,986 

9.0 %

37,254 

11.0 %

35,085 

12.5 %

24,278 

11.6 %

18,069 

12.1 %

Construction

8,259 

2.0 %

5,409 

1.6 %

5,938 

2.1 %

4,365 

2.1 %

4,200 

2.8 %

    Total  consumer real  estate

103,432 

25.7 %

93,419 

27.6 %

87,263 

31.1 %

64,466 

30.9 %

47,769 

31.9 %

     Total real estate

327,574 

81.4 %

277,252 

81.9 %

230,082 

82.1 %

168,543 

80.7 %

117,507 

78.4 %

     	

Commercial business

65,891 

16.4% 

53,753 

15.9% 

44,872 

16.0 %

36,107 

17.3 %

28,192 

18.8 %

Consumer - other

9,524 

2.4 %

8,211 

2.4 %

6,035 

2.1 %

4,662 

2.2 %

4,591 

3.1 %

Deferred origination	fees, net    

(806)

(0.2)%

(685)

(0.2)%

(642)

(0.2)%

(530)

(0.2)%

(387)

(0.3)%

Total gross loans, net

    of deferred fees

402,183 

100.0 %

338,531 

100.0 %

280,347 

100.0 %

208,782 

100.0 %

149,903 

100.0 %

    Less - allowance for	loan losses

(4,949)

(4,490)

(3,717)

(2,705)

(1,824)

Total loans, net

$

397,234 

$

334,041 

$

276,630 

$

206,077 

$

148,079 

* *

35

*Maturitiesand Sensitivity of Loans to Changes in Interest Rates*

                Theinformation in the following tables is based on the contractual maturities ofindividual loans, including loans which may be subject to renewal at theircontractual maturity.  Renewal of such loans is subject to review and creditapproval, as well as modification of terms upon maturity.  Actual repayments ofloans may differ from the maturities reflected below because borrowers have theright to prepay obligations with or without prepayment penalties.

 The following table summarizes the loan maturity distribution by typeand related interest rate characteristics at December 31, 2006.

**After one**

** **

**One year**

** **

**but within**

** **

**After five**

** **

** **

** **

**or less**

** **

**five years**

** **

**years**

** **

**Total**

** **

**(Dollars  in thousands)**

Real estate- mortgage

$

59,676 

195,649 

43,524 

298,849 

Real estate- construction

18,630 

9,685 

410 

28,725 

     Total real estate

78,306 

205,334 

43,934 

327,574 

Commercial

40,143 

24,891 

857 

65,891 

Consumer- other

4,299 

4,818 

407 

9,524 

Deferred origination fees,  net

(267)

(454)

(85)

(806)

     Total gross loan, net  of 

           deferred fees

$

122,481 

234,589 

45,113 

402,183 

Loans maturing - after one  year with 

     Fixed interest rates

$

143,291 

     Floating interest  rates

$

136,411 

* Provision and Allowance forLoan Losses*

**                 **We have established an allowance for loan losses through aprovision for loan losses charged to expense on our statements of income.  Theallowance for loan losses represents an amount which we believe will beadequate to absorb probable losses on existing loans that may becomeuncollectible.  Our judgment as to the adequacy of the allowance for loanlosses is based on a number of assumptions about future events, which webelieve to be reasonable, but which may or may not prove to be accurate.  Ourdetermination of the allowance for loan losses is based on evaluations of thecollectibility of loans, including consideration of factors such as the balanceof impaired loans, the quality, mix, and size of our overall loan portfolio,economic conditions that may affect the borrower's ability to repay, the amountand quality of collateral securing the loans, our historical loan lossexperience, and a review of specific problem loans.  We also considersubjective issues such as changes in the lending policies and procedures,changes in the local/national economy, changes in volume or type of credits, changesin volume/severity of problem loans, quality of loan review and board ofdirector oversight, concentrations of credit, and peer group comparisons. Periodically, we adjust the amount of the allowance based on changingcircumstances.  We charge recognized losses to the allowance for loan lossesand add subsequent recoveries back to the allowance for loan losses.  There canbe no assurance that charge-offs of loans in future periods will not exceed theallowance for loan losses as estimated at any point in time or that provisionsfor loan losses will not be significant to a particular accounting period. 

36

Thefollowing table summarizes the activity related to our allowance for loanlosses for the five years ended December 31, 2006.  

**December  31,**

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

**(Dollars  in thousands)**

Balance, beginning of  year

$

4,490 

3,717 

2,705 

1,824 

1,192 

Charge-offs

Commercial

(65)

(27)

(70)

(18)

(410)

Real  estate-construction

(181)

- 

- 

- 

- 

Real  estate-mortgage

(982)

(229)

(225)

(118)

- 

Consumer

(78)

(34)

(40)

(37)

8 

Total  charge-offs

(1,306)

(290)

(335)

(173)

(418)

Recoveries	

Commercial

8 

1 

13 

- 

- 

Real  estate-construction

- 

- 

- 

- 

- 

Real  estate-mortgage

65 

60 

2 

- 

- 

Consumer

42 

2 

22 

4 

- 

Total  recoveries

115

63

37

4

- 

Net loans charged-off

$

(1,191)

(227)

(298)

(169)

(418)

Provision for loan  losses

1,650 

1,000 

1,310 

1,050 

1,050 

Balance, end of year

$

4,949 

4,490 

3,717 

2,705 

1,824 

Net charge-offs to average  loans

0.32 %

0.07 %

0.12 %

0.10 %

0.34 %

We do not allocate the allowance for loan losses to specificcategories of loans.  Instead, we evaluate the adequacy of the allowance forloan losses on an overall portfolio basis utilizing our credit grading systemwhich we apply to each loan.  We have retained an independent consultant toreview the loan files on a test basis to confirm the grading of each loan. 

37

*Nonperforming Assets*

The following table shows the nonperforming assets, percentages ofnet charge-offs, and the related percentage of allowance for loan losses forthe five years ended December 31, 2006.  All loans over 90 days past due are on andincluded in loans on nonaccrual.

**2006**

** **

**2005**

** **

**2004**

** **

**2003**

** **

**2002**

** **

**(Dollars in thousands)**

** **

Loans over 90 days past  due

$

945 

351 

683 

396 

3 

Loans on nonaccrual:

Mortgage

1,424 

419 

339 

150 

- 

Commercial

32 

41 

386 

224 

100 

Consumer

33 

6 

14 

70 

13 

Total  nonaccrual loans

1,489 

466 

739 

444 

113 

Total of  nonperforming loans

1,489 

466 

739 

444 

113 

Other nonperforming  assets

1,012 

- 

28 

- 

525 

Total  nonperforming assets

$

2,501 

466 

767 

444 

638 

Percentage of total  assets

0.49 %

0.12 %

0.24 %

0.19 %

0.37 %

Percentage of nonperforming  loans and

     assets to gross loans

0.62 %

0.14 %

0.27 %

0.21 %

0.43 %

** **

Allowance for loan losses  to gross loans

1.23 %

1.33 %

1.33 %

1.30 %

1.22 %

Net charge-offs to average  loans

0.32 %

0.07 %

0.12 %

0.10 %

0.34 %

                AtDecember 31, 2006 and December31, 2005, the allowance for loan losses was $4.9 million and $4.5 million,respectively, or 1.23% and 1.33% of outstanding loans, respectively.  Duringthe years ended December 31, 2006 and 2005, our net charged-off loans were $1.2million and $227,048, respectively. 

  The substantial portion,or $1.1million, of loans charged-off in the twelve months ended December 31,2006 relates to a group of loans with a common interest totaling $3.1million. These loans were secured by diversified real estate or vehicles, on which wehave foreclosed.  During the second and third quarters of 2006, we sold $1.3million of the property which had secured these loans.  At December 31, 2006,the remaining $1.0 million in property which had secured these loans isrecorded at their fair market value as other real estate owned on ourconsolidated balance sheet.

  AtDecember 31, 2006, the allowance for loan losses represented 3.3 times theamount of non-performing loans, compared to 9.6 times and 4.8 times at December31, 2005 and 2004, respectively.  The coverage level of the allowance atDecember 31, 2006 decreased from the coverage level at December 31, 2005 due toan increase in non-performing loans.  A significant portion, or 56.9%, ofnonperforming loans at December 31, 2006 are secured by real estate.  We haveevaluated the underlying collateral on these loans and determined that thecollateral on these loans is sufficient to minimize future losses.  

At December31, 2006, nonaccrual loans represented 0.29% of total assets.  At December 31, 2006 and December 31, 2005, we had $1.5 million and $466,333 ofloans, respectively, on nonaccrual status.  Generally, a loan is placed onnonaccrual status when it becomes 90 days past due as to principal or interest,or when we believe, after considering economic and business conditions andcollection efforts, that the borrower's financial condition is such thatcollection of the loan is doubtful.  A payment of interest on a loan that isclassified as nonaccrual is recognized as a reduction in principal whenreceived.

The amount of foregone interest income on the nonaccrual loans forthe years ended December 31, 2006 and 2005 was approximately $46,000 and $23,000,respectively.    The amount of interest income recorded in 2006 for loans thatwere on nonaccrual at December 31, 2006 was approximately $90,000, and wasapproximately $6,000 in 2005.

38

As of December 31,2006, we were not aware of any potential problem loans that were not alreadycategorized as nonaccrual, past due, restructured, or impaired that hadborrower credit problems causing us to have serious doubt as to the ability ofthe borrower to comply with the present loan repayment terms.* *

*Deposits and OtherInterest-Bearing Liabilities*

**                **Our primary source of funds for loans and investments is ourdeposits, advances from the FHLB, and short-term repurchase agreements. National and local market trends over the past several years suggest thatconsumers have moved an increasing percentage of discretionary savings fundsinto investments such as annuities, stocks, and fixed income mutual funds. Accordingly, it has become more difficult to attract deposits.  We have chosento obtain a portion of our certificates of deposits from areas outside of our market. The deposits obtained outside of our market area generally have lower ratesthan rates being offered for certificates of deposits in our local market.  Wealso utilize out-of-market deposits in certain instances to obtain longer-termdeposits than are readily available in our local market.  The amount ofout-of-market deposits was $91.3 million at December 31, 2006 and $81.4 atDecember 31, 2005.  

We anticipate being able to either renew or replace theseout-of-market deposits when they mature, although we may not be able to replacethem with deposits with the same terms or rates.  Our loan-to-deposit ratio was116%, 133%, and 137% at, December 31, 2006, 2005, and2004, respectively.  

The following table shows the average balance amounts and the averagerates paid on deposits held by us for the years ended December 31, 2006, 2005,and 2004.

**2006**

** **

**2005**

** **

**2004**

** **

**Amount**

**Rate**

** **

**Amount**

**Rate**

** **

**Amount**

**Rate**

** **

**(Dollars  in thousands)**

Noninterest bearing demand deposits

$

26,281

- %

$

19,083

- %

$

15,081

-  %

Interest bearing demand deposits

35,048

1.85%

28,153

1.39%

24,552

1.35%

Money market accounts

79,323

3.46%

47,527

1.95%

41,892

1.49%

Savings accounts

1,364

.45%

1,288

.37%

1,296

0.34%

Time deposits less than $100,000 

35,957

4.55%

25,291

3.36%

23,611

2.48%

Time deposits greater than $100,000

127,922

4.77%

104,444

3.70%

75,809

2.67%

    Total deposits

$

305,895

3.64%

$

225,786

2.67%

$

182,241

1.96%

Core deposits, which exclude time deposits of $100,000 or more andwholesale time deposits, provide a relatively stable funding source for ourloan portfolio and other earning assets.  Our core deposits were $197.7million, $125.9 million, and $107.8 million at December31, 2006, December 31, 2005, and December31, 2004, respectively.  

All of our time deposits are certificates of deposits.  Thematurity distribution of our time deposits of $100,000 or more at December 31,2006 and 2005 is as follows: 

**2006**

** **

**2005**

** **

**(Dollars  in thousands)**

Three months or  less

$

25,399

$

15,680

Over three through six  months

49,831

23,965

Over six through twelve  months

39,874

27,132

Over twelve  months

32,772

49,878

   Total

$

147,876

$

116,655

** ****CapitalResources**

Total shareholders' equity was $34.6 million at December 31, 2006and $30.5 million at December 31, 2005.  The $4.1 million increase between 2006and 2005 primarily resulted from $3.9 million of net income earned during 2006. 

39

                The followingtable shows the return on average assets (net income divided by average totalassets), return on average equity (net income divided by average equity), andequity to assets ratio (average equity divided by average total assets) for thethree years ended December 31, 2006.  Since our inception, we have not paidcash dividends.

           

**2006**

**2005**

**2004**

Return on  average assets

0.85%

0.70%

0.73%

Return on  average equity

11.95%

8.44%

12.37%

Equity to  assets ratio

7.15%

8.36%

5.87%

               Ourreturn on average assets was 0.85% for the year ended December 31, 2006 and0.70% and 0.73% for the years ended December 31, 2005 and 2004, respectively. In addition, our return on average equity was 11.95% for the year ended December31, 2006, and 8.44% and 12.37% for the same periods in 2005 and 2004,respectively.  The lower returns for the year ended December 31, 2005 relate tothe one-time impairment charge on the purchase of the building that occurred inlate 2005.   The decrease in the equity to assets ratio from December 31, 2005is a function of the $99.9 million increase in average assets compared to the$2.8 million increase in average equity.

                Underthe capital adequacy guidelines, regulatory capital is classified into twotiers.  These guidelines require an institution to maintain a certain level ofTier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists ofcommon shareholders' equity, excluding the unrealized gain or loss onsecurities available for sale, minus certain intangible assets.  In determiningthe amount of risk-weighted assets, all assets, including certain off-balancesheet assets, are multiplied by a risk-weight factor of 0% to 100% based on therisks believed to be inherent in the type of asset.  Tier 2 capital consists ofTier 1 capital plus the general reserve for loan losses, subject to certainlimitations.  We are also required to maintain capital at a minimum level basedon total average assets, which is known as the Tier 1 leverage ratio.

                Atboth the holding company and bank level, we are subject to various regulatorycapital requirements administered by the federal banking agencies.  To beconsidered "adequately capitalized" under these capital guidelines, we mustmaintain a minimum total risk-based capital of 8%, with at least 4% being Tier1 capital.  In addition, we must maintain a minimum Tier 1 leverage ratio of atleast 4%.  To be considered "well-capitalized," we must maintain totalrisk-based capital of at least 10%, Tier 1 capital of at least 6%, and aleverage ratio of at least 5%.  

The following table sets forth the holding company's and thebank's various capital ratios at December 31, 2006, 2005, and 2004.  For allperiods, the bank was considered "well capitalized" and the holding company metor exceeded its applicable regulatory capital requirements.

**2006**

** **

**2005**

** **

**2004**

**Holding Company**

**Bank**

**Holding Company**

**Bank  **

** **

**Holding Company**

**Bank**

Total risk-based capital

13.1 %

12.3 %

14.9 %

13.7 %

14.6 %

13.7 %

Tier 1 risk-based capital

11.9 %

11.1 %

13.6 %

12.4 %

13.4 %

12.4 %

Leverage capital

9.4 %

8.7 %

11.6 %

10.5 %

11.0 %

10.2 %

 

40

**Borrowings* ***

The following table outlines our various sources of borrowed fundsduring the years ended December 31, 2006, 2005, and 2004, the amounts outstanding at the end of each period, atthe maximum point for each component during the periods and on average for eachperiod, and the average interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for eachcomponent of borrowed funds at any time during each of the periods shown. 

*** ***

** **

** **

**Period-**

**Maximum**

** **

** **

** **

**Ending**

**End**

**Month-end**

**Average  for the Period**

** **

**Balance**

**Rate**

**Balance**

**Balance**

**Rate**

**At or for the Year**

**(Dollars  in thousands)**

**Ended December 31,  2006**

** **

Federal Home Loan Bank advances

 $

108,500 

4.52 %

 $

108,500 

 $

91,525 

4.35 %

Securities sold under agreement to

 repurchase

- 

- %  

14,434 

8,362 

4.92 %

Federal funds purchased

- 

- %

3,345 

572 

5.47 %

Junior subordinated debentures

13,403 

7.57 %

13,403 

13,403 

7.3 %

**At or for the Year**

**Ended December 31,  2005**

Federal Home Loan Bank advances

 $

79,500 

3.84 %

 $

81,500 

 $

74,013 

3.44 %

Securities sold under agreement to

 repurchase

14,680 

4.32 %   

18,947 

16,710 

3.35 %

Federal funds purchased

- 

4.60 %

- 

755 

2.93 %

Junior subordinated  debentures

13,403 

6.74 %

13,403 

6,384 

6.57 %

**At or for the Year**

**Ended December 31, 2004**

Federal Home Loan Bank advances

 $

60,660 

2.82 %

 $

58,400 

 $

54,515 

2.21 %

Securities sold under agreement to

 repurchase

13,100 

2.25 %

14,637 

13,643 

1.43 %

Federal funds purchased

- 

2.44 %

- 

332 

1.46 %

Correspondent bank line of  credit

- 

4.40 %

3,000 

1,214 

3.38 %

Junior subordinated  debentures

6,186 

5.65 %

6,186 

6,186 

4.88 %

*** *Effect of Inflation and Changing Prices**

                The effect of relative purchasing power over timedue to inflation has not been taken into account in our consolidated financialstatements.  Rather, our financial statements have been prepared on anhistorical cost basis in accordance with generally accepted accounting principles.

                Unlikemost industrial companies, our assets and liabilities are primarily monetary innature.  Therefore, the effect of changes in interest rates will have a moresignificant impact on our performance than will the effect of changing pricesand inflation in general.  In addition, interest rates may generally increaseas the rate of inflation increases, although not necessarily in the samemagnitude.  As discussed previously, we seek to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide rate fluctuations, including those resulting from inflation.** **

41
 
**Off-Balance Sheet Risk**

                Commitmentsto extend credit are agreements to lend to a client as long as the client hasnot violated any material condition established in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire the payment of a fee.  At December 31, 2006, unfunded commitments toextend credit were $79.2 million, of which approximately $40.6 million was atfixed rates and $38.6 million was at variable rates.  A significant portion ofthe unfunded commitments related to consumer equity lines of credit.  Based onhistorical experience, we anticipate that a significant portion of these linesof credit will not be funded.  We evaluate each client's credit worthiness on acase-by-case basis.  The amount of collateral obtained, if deemed necessary byus upon extension of credit, is based on our credit evaluation of theborrower.  The type of collateral varies but may include accounts receivable,inventory, property, plant and equipment, and commercial and residential realestate.

                AtDecember 31, 2006, there was a $2.4 million commitment under letters ofcredit.  The credit risk and collateral involved in issuing letters of creditis essentially the same as that involved in extending loan facilities toclients.  Since most of the letters of credit are expected to expire withoutbeing drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this document, we are not involved inoff-balance sheet contractual relationships, unconsolidated related entitiesthat have off-balance sheet arrangements or transactions that could result inliquidity needs or other commitments that significantly impact earnings.

** Market Risk**

**              **Market risk is the risk of loss from adverse changes in marketprices and rates, which principally arises from interest rate risk inherent inour lending, investing, deposit gathering, and borrowing activities.  Othertypes of market risks, such as foreign currency exchange rate risk andcommodity price risk, do not generally arise in the normal course of ourbusiness.  

We actively monitor and manage our interest rate risk exposureprincipally by measuring our interest sensitivity "gap," which is the positiveor negative dollar difference between assets and liabilities that are subjectto interest rate repricing within a given period of time.  Interest ratesensitivity can be managed by repricing assets or liabilities, sellingsecurities available for sale, replacing an asset or liability at maturity, oradjusting the interest rate during the life of an asset or liability.  Managingthe amount of assets and liabilities repricing in this same time interval helpsto hedge the risk and minimize the impact on net interest income of rising orfalling interest rates.  We generally would benefit from increasing marketrates of interest when we have an asset-sensitive gap position and generallywould benefit from decreasing market rates of interest when we areliability-sensitive.

Wewere asset sensitive during most of the year ended December 31, 2005 andthrough the first six months of 2006.  As we obtained more fixed rateloans and retail deposits, our gap position has shifted to being liabilitysensitive.  We have been, and we expect to continue to be, liability sensitive during2007.  Our variable rate loans and a majority of our deposits reprice over a12-month period.  Approximately 49% and 61% of our loans were variable rateloans at December 31, 2006 and 2005, respectively.  The ratio of cumulative gapto total earning assets after 12 months was (25.0%) because $119.0 million moreliabilities will reprice in a 12 month period than assets.   However, our gapanalysis is not a precise indicator of our interest sensitivity position.  Theanalysis presents only a static view of the timing of maturities and repricingopportunities, without taking into consideration that changes in interest ratesdo not affect all assets and liabilities equally.  For example, rates paid on asubstantial portion of core deposits may change contractually within arelatively short time frame, but those rates are viewed by us as significantlyless interest-sensitive than market-based rates such as those paid on noncoredeposits.  Net interest income may be affected by other significant factors ina given interest rate environment, including changes in the volume and mix ofinterest-earning assets and interest-bearing liabilities.

**Liquidity and Interest Rate Sensitivity**

                Liquidity represents the ability of a company toconvert assets into cash or cash equivalents without significant loss, and theability to raise additional funds by increasing liabilities.  Liquiditymanagement involves monitoring our sources and uses of funds in order to meetour day-to-day cash flow requirements while maximizing profits.  Liquiditymanagement is made more complicated because different balance sheet componentsare subject to varying degrees of management control.  For example, the timingof maturities of our investment portfolio is fairly predictable and subject toa high degree of control at the time investment decisions are made.  However,net deposit inflows and outflows are far less predictable and are not subjectto the same degree of control.

                 At December 31, 2006 and 2005, our liquid assets amounted to $16.6 million and$25.6 million, or 3.3% and 6.3% of total assets, respectively.  Our investmentsecurities at December 31, 2006 and 2005 amounted to $74.3 million and $36.1million, or 14.6% and 8.9% of total assets, respectively.  Investmentsecurities traditionally provide a secondary source of liquidity since they canbe converted into cash in a timely manner.  However, substantially all of thesesecurities are pledged against outstanding debt.  Therefore, the related debtwould need to be repaid prior to the securities being sold in order for thesesecurities to be converted to cash.  

42
                  Our ability to maintainand expand our deposit base and borrowing capabilities serves as our primarysource of liquidity.  We plan to meet our future cash needs through theliquidation of temporary investments, the generation of deposits, and fromadditional borrowings.  In addition, we will receive cash upon the maturity andsale of loans and the maturity of investment securities.  During most of 2005and 2006, as a result of historically low rates that were being earned onshort-term liquidity investments, we chose to maintain a lower than normallevel of short-term liquidity securities.  In addition, we maintain threefederal funds purchased lines of credit with correspondent banks totaling $26.1million for which there were no borrowings against the lines at December 31,2006.  We are also a member of the Federal Home Loan Bank of Atlanta, fromwhich applications for borrowings can be made for leverage purposes.  The FHLBrequires that securities, qualifying mortgage loans, and stock of the FHLBowned by the bank be pledged to secure any advances from the FHLB.  The unusedborrowing capacity currently available from the FHLB at December 31, 2006 was $15.3million, based on the bank's $5.7 million investment in FHLB stock, as well asqualifying mortgages available to secure any future borrowings.
                We signed a ten-year,five-month lease on our new headquarters and main office.  The lease providesfor a substantial reduction in the rent rate for the first five months of thelease.  Beginning in 2007, the monthly rent expense will be approximately$42,000.  The lease provides for annual lease rate escalations based on cost ofliving adjustments.   

We believethat our existing stable base of core deposits, borrowings from the FHLB,short-term repurchase agreements, and proceeds we received fromour secondary offeringwill enable us to successfully meet our long-term liquidity needs.

**               **Asset/liability management is the process by which we monitor andcontrol the mix and maturities of our assets and liabilities. The essentialpurposes of asset/liability management are to ensure adequate liquidity and tomaintain an appropriate balance between interest sensitive assets andliabilities in order to minimize potentially adverse impacts on earnings fromchanges in market interest rates.  Our asset/liability management committee("ALCO") monitors and considers methods of managing exposure to interest raterisk.  We have both an internal ALCO consisting of senior management that meetsat various times during each month and a board ALCO that meets monthly.  TheALCOs are responsible for maintaining the level of interest rate sensitivity ofour interest sensitive assets and liabilities within board-approved limits.

43
 
Thefollowing table sets forth information regarding our rate sensitivity, as ofDecember 31, 2006, at each of the time intervals.  The information in the tablemay not be indicative of our rate sensitivity position at other points intime.  In addition, the maturity distribution indicated in the table may differfrom the contractual maturities of the earning assets and interest-bearingliabilities presented due to consideration of prepayment speeds under variousinterest rate change scenarios in the application of the interest ratesensitivity methods described above.

**Within  three  months**

** **

**After three  but**

**within twelve**

**months**

** **

**After one  but**

**within five**

**years**

** **

**After**

**five**

**years**

** **

**Total**

** **

**(Dollars in  thousands)**

Interest-earning assets:

Federal  funds sold

$

7,467 

$

- 

$

- 

$

- 

$

7,467 

Investment  securities

3,159 

8,588 

29,940 

25,557 

67,244 

Loans

205,316 

25,828 

134,035 

36,321 

401,500 

Total earning assets

$

215,942 

$

34,416 

$

163,975 

$

61,878 

$

476,211 

Interest-bearing liabilities:

Money  market and NOW

$

117,538 

$

- 

$

- 

$

- 

$

117,538 

Regular  savings

1,544 

- 

- 

- 

1,544 

Time  deposits

45,443 

114,940 

34,995 

165 

195,543 

FHLB  advances

57,500 

19,000 

32,000 

- 

108,500 

Junior  subordinated debentures

13,403 

- 

- 

- 

13,403 

Total  interest-bearing liabilities

$

235,428 

$

133,940 

$

66,995 

$

165 

$

436,528 

Period gap

$

(19,486) 

$

(99,524)

$

96,980 

$

61,713 

Cumulative gap

(19,486) 

(119,010)

(22,030)

39,683 

Ratio of	cumulative gap to total earning assets

-4.1 %

-25.0 %

-4.6 %

8.3 %

** ContractualObligations**

** **             We utilize a variety of short-term and long-termborrowings to supplement our supply of lendable funds, to assist in meetingdeposit withdrawal requirements, and to fund growth of interest-earning assetsin excess of traditional deposit growth. Certificates of deposit, repurchaseagreements, FHLB advances, and junior subordinate debentures serve as ourprimary sources of such funds. 

     Obligations under noncancelable operating lease agreementsare payable over several years with the longest obligation expiring in 2025. Wedo not feel that any existing noncancelable operating lease agreements are likelyto materially impact the company's financial condition or results of operationsin an adverse way. Contractual obligations relative to these agreements arenoted in the table below. Option periods that we have not yet exercised are notincluded in this analysis as they do not represent contractual obligationsuntil exercised. 

     The following tableprovides payments due by period for obligations under long-term borrowings andoperating lease obligations as of December 31, 2006.

** **

** **

** **

**Payments Due by Period**

** **

** **

** **

** **

**Over One**

** **

**Over Two**

** **

**Over Three**

** **

**After**

** **

** **

** **

** **

**Within**

** **

**to Two**

** **

**to Three**

** **

**to Five**

** **

**Five**

** **

** **

** **

** **

**One Year**

** **

**Years**

** **

**Years**

** **

**Years**

** **

**Years**

** **

**Total**

** **

** **

**(Dollars in thousands)**

Certificates of deposit

$

160,383 

$

18,463 

$

9,515 

$

7,017 

$

165 

$

195,543 

FHLB advances

5,000 

- 

- 

40,000 

63,500 

108,500 

Junior subordinated debentures

- 

- 

- 

- 

13,403 

13,403 

Operating lease obligations

989

1,002 

976 

1,207 

3,774 

7,948 

  Total

$

166,372 

$

19,465 

$

10,491

$

48,224 

$

80,842 

$

325,394 

** **

44

                   InFebruary 2007, the company decided to actively market the sale of its formermain office and corporate headquarters building.  The company, accordingly,reclassified the building from property and equipment to property held forsale, in accordance with SFAS No. 144 "Accounting for the Impairment ofDisposal of Long-Lived Assets," and ceased depreciation of the building.  Thecompany received a sales contract for $2.4 million which would result in apre-tax gain of $375,000 and is expected to close in the second quarter of2007.

** Accounting,Reporting, and Regulatory Matters**         

Thefollowing is a summary of recent authoritative pronouncements that could impactthe accounting, reporting, and / or disclosure of financial information by the company.

InFebruary 2006,the Financial Accounting Standards Board ("FASB") issued Statement of FinancialAccounting ("SFAS") No. 155, "Accounting for Certain Hybrid FinancialInstruments-an amendment of FASB Statements No. 133 and 140." This Statementamends SFAS No. 133, "Accounting for Derivative Instruments and HedgingActivities," and SFAS No. 140, "Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities." This Statement resolvesissues addressed in SFAS No. 133 Implementation Issue No. D1, "Application ofStatement 133 to Beneficial Interests in Securitized Financial Assets." FAS 155 permits fair value re-measurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation, clarifies which interest only-strips and principal-onlystrips are not subject to the requirements of Statement 133, establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives, and amends Statement 140 to eliminate the prohibitionon a qualifying special purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS No. 155 is effective for all financialinstruments acquired or issued after the beginning of an entity's first fiscalyear that begins after September 15, 2006. The company does not believe thatthe adoption of SFAS No. 155 will have a material impact on its financialposition, results of operations or cash flows. 

In March 2006, the FASBissued SFAS No. 156, "*Accounting forServicing of Financial Assets-an amendment of FASB Statement No. 140." *ThisStatement amends FASB No. 140, "Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities," with respect to theaccounting for separately recognized servicing assets and servicingliabilities. SFAS No. 156 requires an entity torecognize a servicing asset or servicing liability each time it undertakes anobligation to service a financial asset by entering into a servicing contract;requires all separately recognizedservicing assets and servicing liabilities to be initially measured at fairvalue, if practicable; permits an entity to choose its subsequent measurementmethods for each class of separately recognized servicing assets and servicingliabilities; at its initial adoption, permits a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognizedservicing rights, without calling into question the treatment of otheravailable-for-sale securities under Statement 115, provided that the available-for-salesecurities are identified in some manner as offsetting the entity's exposure tochanges in fair value of servicing assets or servicing liabilities that aservicer elects to subsequently measure at fair value; and requires separatepresentation of servicing assets and servicing liabilities subsequentlymeasured at fair value in the statement of financial position and additionaldisclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFASNo. 156 as of the beginning of its first fiscal year that begins afterSeptember 15, 2006. The company does not believe the adoption of SFAS No. 156will have a material impact on its financial position, results of operations orcash flows.  

In July 2006, the FASBissued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty inIncome Taxes". FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in enterprises' financial statements in accordance with FASBStatement No. 109, "Accounting for Income Taxes". FIN 48 prescribes arecognition threshold and measurement attributable for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosures andtransitions. FIN 48 is effective for fiscal years beginning after December 15,2006. The company is currently analyzing the effects of FIN 48 on its financialposition, results of operations and cash flows.

In September 2006, theFASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. This standard does not require any new fair value measurements,but rather eliminates inconsistencies found in various prior pronouncements.SFAS 157 is effective for the company on January 1, 2008 and is not expected tohave a significant impact on the company's financial position, results ofoperations or cash flows.

 

45

In September 2006, theFASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pensionand Other Postretirement Plans"**("SFAS 158"), which amends SFAS 87 andSFAS 106 to require recognition of the overfunded or underfunded status ofpension and other postretirement benefit plans on the balance sheet. Under SFAS158, gains and losses, prior service costs and credits, and any remainingtransition amounts under SFAS 87 and SFAS 106 that have not yet been recognizedthrough net periodic benefit cost will be recognized in accumulated othercomprehensive income, net of tax effects, until they are amortized as acomponent of net periodic cost. The measurement date - the date at which thebenefit obligation and plan assets are measured - is required to be the company'sfiscal year end. SFAS 158 is effective for publicly−held companies forfiscal years ending after December 15, 2006, except for the measurement dateprovisions, which are effective for fiscal years ending after December 15,2008. The company does not have a defined benefit pension plan. Therefore, SFAS158 will not impact the company's financial position, results of operations orcash flows.

In September, 2006, TheFASB ratified the consensuses reached by the FASB'sEmerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for theDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements".  EITF 06-4 addresses employer accounting for endorsement split-dollar lifeinsurance arrangements that provide a benefit to an employee that extends topostretirement periods should recognize a liability for future benefits inaccordance with SFAS No. 106, "*Employers'Accounting for Postretirement Benefits Other Than Pensions",*orAccounting Principles Board ("APB") Opinion No. 12, "*Omnibus Opinion-1967". *EITF06-4 is effective for fiscal years beginning after December 15, 2007. Entitiesshould recognize the effects of applying this Issue through either (a) a changein accounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) a changein accounting principle through retrospective application to all prior periods. The company is currently analyzing the effects of EITF 06-4 on itsfinancial position, results of operations and cash flows.

In September2006, the FASB ratified the consensus reached related to EITF 06-5,**"Accountingfor Purchases of Life Insurance-Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchasesof Life Insurance."  EITF 06-5 states that a policyholder should considerany additional amounts included in the contractual terms of the insurancepolicy other than the cash surrender value in determining the amount that couldbe realized under the insurance contract.  EITF 06-5 also states that apolicyholder should determine the amount that could be realized under the lifeinsurance contract assuming the surrender of an individual-life byindividual-life policy (or certificate by certificate in a group policy). EITF06-5 is effective for fiscal years beginning after December 15, 2006.  The company is currentlyanalyzing the effects of EITF 06-5 on its financial position, results ofoperations and cash flows.

In September 2006, theSEC issued Staff Accounting Bulleting No. 108 ("SAB 108"). SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a potential current yearmisstatement. Prior to SAB 108, Companies might evaluate the materiality offinancial statement misstatements using either the income statement or balancesheet approach, with the income statement approach focusing on newmisstatements added in the current year, and the balance sheet approachfocusing on the cumulative amount of misstatement present in a company'sbalance sheet. Misstatements that would be material under one approach could beviewed as immaterial under another approach, and not be corrected. SAB 108 nowrequires that companies view financial statement misstatements as material ifthey are material according to either the income statement or balance sheetapproach. The company has analyzed SAB 108 and determined that the adoption ofSAB 108 had no impact on the reported financial position, results of operationsor cash flows.

46
                In February 2007, theFASB issued SFAS No. 159, "The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No. 115." Thisstatement permits, but does not require, entities to measure many financialinstruments at fair value. The objective is to provide entities with an opportunityto mitigate volatility in reported earnings caused by measuring related assetsand liabilities differently without having to apply complex hedge accountingprovisions. Entities electing this option will apply it when the entity firstrecognizes an eligible instrument and will report unrealized gains and losseson such instruments in current earnings.   This statement 1) applies to allentities, 2) specifies certain election dates, 3) can be applied on aninstrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)applies only to entire instruments. One exception is demand deposit liabilitieswhich are explicitly excluded as qualifying for fair value. With respect toSFAS 115, available-for-sale and held-to-maturity securities at the effectivedate are eligible for the fair value option at that date. If the fair valueoption is elected for those securities at the effective date, cumulativeunrealized gains and losses at that date shall be included in thecumulative-effect adjustment and thereafter, such securities will be accountedfor as trading securities. SFAS 159 is effective for the company on January 1,2008. Earlier adoption is permitted in 2007 if the company also elects to applythe provisions of SFAS 157, "Fair Value Measurement." The company is currentlyanalyzing the fair value option provided under SFAS 159.  
Other accountingstandards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on the company'sfinancial position, results of operations or cash flows.

** Item 7A. Quantitative and Qualitative Disclosures about MarketRisk**

** **                SeeItem 7. Management's Discussion and Analysis of Financial Condition and Resultsof Operations - Market Risk and Liquidity and Interest Rate Sensitivity.

47

**Item8.  Financial Statements and Supplementary Data**

**INDEX TO FINANCIAL STATEMENTS**

** FOR THEYEARS ENDED DECEMBER 31, 2006, 2005 and 2004**

 

ConsolidatedBalance Sheets....................................................................................................................................................... 49

Consolidated Statements ofIncome............................................................................................................................................50

Consolidated Statements ofShareholders' Equity and ComprehensiveIncome.................................................................. 51

Consolidated Statements of CashFlows....................................................................................................................................52

Notes to Consolidated FinancialStatements.............................................................................................................................53

Report of Independent RegisteredPublic AccountingFirm....................................................................................................79

** **

** **

48

 

***GREENVILLE FIRST BANCSHARES,INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS***

**                                                                                                                                                                                  **

** **

** **

**December  31,**

** **

** **

**2006**

** **

**2005**

**Assets**

** **

Cash and  due from banks

 $

9,112,675 

 $

6,223,397 

Federal  funds sold

7,466,458 

19,380,755 

Investment  securities available for sale

50,199,513 

11,310,956 

Investment  securities held to maturity-

 (fair  value $16,576,673  and $18,709,112)

17,044,531 

19,345,016 

Other  investments, at cost

7,060,100 

5,475,400 

Loans,  net

397,233,829 

334,040,776 

Property  and equipment, net

6,450,854 

5,576,882 

Accrued  interest receivable 

2,381,336 

1,694,648 

Other real  estate owned

1,012,030 

- 

Bank owned  life insurance

8,142,947 

- 

Other  assets 

3,239,678 

2,264,713 

          Total assets

 $

509,343,951 

 $

405,312,543 

** **

** **

**Liabilities**

** **

** **

** **

Deposits

 $

345,504,076 

    	

 $

254,148,041 

Official  checks outstanding

4,131,107 

7,786,468 

Repurchase  agreements

- 

14,680,000 

Federal  Home Loan Bank advances

108,500,000 

  	

79,500,000 

Junior  subordinated debentures

13,403,000 

13,403,000 

Accrued  interest payable

2,278,154 

1,510,635 

Accounts  payable and accrued expenses

944,168 

3,811,652 

Total  liabilities

474,760,505 

374,839,796 

** **

** **

Commitments and contingencies - Note 12

**Shareholders' equity**

** **

Preferred stock, par value $.01  per share, 10,000,000 shares

authorized,  no shares issued

- 

- 

Common stock, par value $.01 per  share,

    authorized, 10,000,000 shares, issued and  outstanding  2,933,868 and

     2,659,719 at  December 31, 2006 and 2005, respectively

29,339 

26,597 

Additional  paid-capital

30,846,538 

25,626,740 

Accumulated  other comprehensive loss

(16,465)

(150,602)

Retained  earnings

3,724,034 

4,970,012 

Total  shareholders' equity

34,583,446 

30,472,747 

Total  liabilities and shareholders' equity

 $

509,343,951 

 $

405,312,543 

See notes toconsolidated financial statements that are an integral part of theseconsolidated statements.

49

*** GREENVILLEFIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME ***

*** ***

*** ***

*** ***

*** ***

*** ***

**For the  years ended December 31,**

*** ***

*** ***

*** ***

*** ***

*** ***

**2006**

** **

**2005**

** **

**2004**

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

**Interest income**

*** ***

Loans

 $

27,629,556 

 $

19,930,728 

 $

12,975,296 

*** ***

Investment  securities

2,826,007 

1,634,403 

966,653 

*** ***

Federal  funds sold

473,362 

104, 414 

22,751 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

         Total interest income

30,928,925 

21,669,545 

13,964,700 

**Interest expense**

*** ***

Deposits

11,139,822 

6,036,043 

3,570,263 

*** ***

Borrowings

5,439,587 

3,548,820 

1,746,294 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

        Total  interest expense

16,579,409 

9,584,863 

5,316,557 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net interest income

14,349,516 

12,084,682 

8,648,143 

*** ***

Provision for loan losses

1,650,000 

1,000,000 

1,310,000 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net  interest income after provision for loan losses

12,699,516 

11,084,682 

7,338,143 

*** ***

*** ***

*** ***

*** ***

*** ***

**Noninterest income**

*** ***

Loan fee  income

123,756 

169,876 

146,986 

*** ***

Service  fees on deposit accounts

259,296 

251,644 

296,100 

*** ***

Other real estate  owned activity

(165,627)

- 

(2,725)

*** ***

Income from  bank owned life insurance

142,947 

- 

- 

*** ***

Other income

219,123 

404,261 

321,102 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

        Total noninterest income

579,495 

825,781 

761,463 

*** ***

*** ***

*** ***

*** ***

*** ***

**Noninterest expenses**

*** ***

Compensation  and benefits

4,398,106 

3,340,402 

2,497,445 

*** ***

Professional  fees

384,926 

303,986 

213,168 

*** ***

Marketing

390,377 

377,093 

247,536 

*** ***

Insurance

183,139 

152,761 

128,978 

*** ***

Occupancy

663,139 

799,267 

603,033 

*** ***

Data  processing and related costs

854,084 

919,379 

813,097 

*** ***

Telephone

82,066 

55,972 

32,216 

*** ***

Impairment  of long lived assets

- 

1,500,000 

- 

*** ***

Other

395,471 

406,520 

317,822 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

        Total noninterest expenses

7,351,308 

7,855,380 

4,853,295 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

         Income before income tax expense

5,927,703 

4,055,083 

3,246,311 

*** ***

*** ***

*** ***

*** ***

*** ***

**Income tax  expense**

2,026,909 

1,540,931 

1,233,722 

*** ***

*** ***

*** ***

*** ***

*** ***

**Net  income**

 $

3,900,794   

$

2,514,152 

$

2,012,589 

*** ***

*** ***

*** ***

*** ***

*** ***

**Earnings per common share**

*** ***

Basic (1)

 $

1.33 

$

.86 

$

.93 

*** ***

Diluted (1)

 $

1.20 

$

.78 

$

.82 

*** ***

*** ***

*** ***

*** ***

*** ***

**Weighted average common shares outstanding**

*** ***

Basic  (1)

2,931,640 

2,922,403 

2,169,296 

*** ***

Diluted  (1)

3,238,329 

3,223,405 

2,463,672 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

                                                                                   (1)  Allperiods have been restated for the 10 percent stock dividend distributed August14, 2006.

See notes to consolidated financial statements that are an integral part ofthese consolidated statements.

50

 

***GREENVILLE FIRST BANCSHARES, INC. ANDSUBSIDIARY***

***CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY***

***AND COMPREHENSIVE INCOME***

***FOR THE YEARS ENDED DECEMBER 31, 2006, 2005AND 2004***

 

 

 

** **

** **

** **

** **

**Accumulated**

** **

** **

** **

**Total** 

 

** **

** **

**Additional**

** **

**other**

** **

** **

** **

**share-** 

 

**Common  stock**

** **

**paid-in**

** **

**comprehensive**

** **

**Retained**

** **

**holders'** 

 

**Shares**

** **

**Amount**

** **

**capital**

** **

**income  (loss)**

** **

**earnings**

** **

**equity**

 

 

 

 

 

 

 

 

 

 

 

 

**December  31, 2003**

1,724,994  

 

$

17,250 

 

$

10,629,450 

 

$

96,997 

 

$

443,271 

 

$

11,186,968 
                                                   
Net income

- 

 

- 

 

- 

 

- 

 

2,012,589 

 

2,012,589 

** **

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax -

 

 

 

 

 

 

 

 

 

 

 

** **

Unrealized holding loss on  securities

 

 

 

 

 

 

 

 

 

 

 

** **

available  for sale

- 

 

- 

 

- 

 

(47,008)

 

- 

 

(47,008)

** **

 

 

 

 

 

 

 

 

 

 

 

Comprehensive  income

- 

 

- 

 

- 

 

- 

 

- 

 

1,965,581 

** **

 

 

 

 

 

 

 

 

 

 

 

Proceeds  from sale of common stock, net

920,000 

 

9,200 

 

14,896,829 

 

-

 

-

 

14,906,029
	Proceeds  from exercise of warrants
3,000 

 

30 

 

19,980 

 

- 

 

- 

 

20,010 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**December  31, 2004**

2,647,994 

 

$
26,480 

 
$
25,546,259 

 

$
49,989 

 

$

2,455,860 

 

$
28,078,588 

** **

 

 

 

 

 

 

 

 

 

 

 

Net  income

- 

 

- 

 

- 

 

- 

 

2,514,152 

 

2,514,152 

** **

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax -

 

 

 

 

 

 

 

 

 

 

 

** **

Unrealized holding loss on  securities 

 

 

 

 

 

 

 

 

 

 

 

 

available  for sale

- 

 

- 

 

- 

 

(200,591)

 

- 

 

(200,591)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive  income

- 

 

- 

 

- 

 

- 

 

- 

 

2,313,561 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock	

 

 

 

 

 

 

 

 

 

 

 

 

options and  warrants

11,725 

 

117 

 

80,481 

 

- 

 

- 

 

80,598 

** **

 

 

 

 

 

 

 

 

 

 

 

**December  31, 2005**

2,659,719 

 

$
26,597 

 

$
25,626,740 

 

$
(150,602)

 

$
4,970,012 

 

$
30,472,747 

** **

** **

 

 

 

 

 

 

 

 

 

 

 

Net  income

- 

- 

- 

- 

3,900,794 

 

3,900,794 

** **

 

 

 

 

 

 

 

 

Comprehensive income, net of tax -

 

 

 

 

 

 

 

** **

Unrealized holding gain on  securities 

 

 

 

 

 

 

 

** **

available  for sale.

- 

- 

- 

134,137 

 

- 

 

134,137 

** **

 

 

 

 

 

 

 

 

Comprehensive  income

- 

- 

- 

- 

- 

 

4,034,931 

** **

** **

 

 

 

 

 

 

 

	Proceeds from exercise of stock	options
7,500 

75 

49,645 

- 

- 

 

49,720 

Stock  dividend (10%), net of cash in lieu

266,649 

2,667 

5,143,659 

- 

(5,146,772)

 

(446)

 

of  fractional shares

 

 

 

 

 

 

 

Compensation  expense related to 

 

 

 

 

 

 

 

 

stock options, net of tax

- 

- 

1,141

- 

- 

 

1,141

Tax benefit related to exercise of  	

 

 

 

 

 

 

 

 

 

 

 

** **

stock options

- 

- 

25,353 

- 

- 

 

25,353 

** **

** **

 

 

 

 

 

 

 

**December  31, 2006**

2,933,868 

$
29,339 

$
30,846,538 

$
(16,465)

$
3,724,034 

 

$
34,583,446 

Seenotes to consolidated financial statements that are an integral part of theseconsolidated statements. 

51

***GREENVILLEFIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

**For the  years ended December 31,**

*** ***

*** ***

*** ***

*** ***

*** ***

**2006**

** **

**2005**

** **

**2004**

*** ***

*** ***

*** ***

*** ***

*** ***

**Operating activities**

*** ***

Net  income

 $

3,900,794 

 $

2,514,152 

 $

2,012,589 

*** ***

Adjustments to reconcile net income to cash

*** ***

*** ***

provided by (used for) operating activities:

*** ***

*** ***

Provision  for loan losses 

1,650,000 

1,000,000 

1,310,000 

*** ***

*** ***

Depreciation  and other amortization

348,679 

260,009 

163,738 

*** ***

*** ***

Impairment  of long lived assets

- 

1,500,000 

- 

*** ***

*** ***

Gain on sale of real estate owned

(1,065)

- 

- 

*** ***

*** ***

Gain on sale of property and equipment

(17,889)

- 

- 

*** ***

*** ***

Accretion and amortization of securities discounts and premium,  net

100,019 

127,724 

94,394 

*** ***

*** ***

Compensation expense related to  stock options

1,141 

- 

- 

*** ***

*** ***

Increase in cash surrender value  of bank owned life insurance

(142,947)

- 

- 

*** ***

*** ***

Increase in deferred tax asset

(336,782)

(869,971)

(255,642)

*** ***

*** ***

Increase in other assets,  net

(1,324,871)

(451,228)

(1,149,152)

*** ***

*** ***

Increase (decrease) in other  liabilities, net

(5,754,740)

10,289,618 

239,027 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net cash provided by (used for) operating  activities

(1,577,661)

14,370,304 

2,414,954 

*** ***

*** ***

*** ***

*** ***

*** ***

**Investing activities**

*** ***

Increase (decrease) in cash realized from:

*** ***

*** ***

Origination of loans,  net

(67,194,287)

(58,410,292)

(72,169,136)

*** ***

*** ***

Purchase of property and  equipment

(1,229,762)

(5,322,896)

(1,353,474)

*** ***

*** ***

Proceeds from sale of property and equipment

25,000 

- 

- 

*** ***

*** ***

Purchase of investment securities:

*** ***

*** ***

*** ***

Available for sale

(44,333,554)

(1,292,018)

(9,983,843)

*** ***

*** ***

*** ***

Held to  maturity

- 

(10,258,021)

(5,585,719)

*** ***

*** ***

*** ***

Other  investments

(5,567,200)

(5,241,250)

(4,575,000)

*** ***

*** ***

Payments and maturity of investment securities:

*** ***

*** ***

*** ***

Available for  sale

5,548,167 

1,777,884 

1,340,037 

*** ***

*** ***

*** ***

Held to  maturity

2,256,200 

3,982,907 

2,228,854 

*** ***

*** ***

*** ***

Other  investments

3,982,500 

3,629,700 

3,007,300 

*** ***

*** ***

Purchase of life insurance  policies

(8,000,000)

- 

- 

*** ***

*** ***

Proceeds from sale of real estate  acquired in settlement of loans

1,340,269 

28,000 

277,486 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net cash used for investing  activities

(113,172,667)

(71,105,986)

(86,813,495)

*** ***

*** ***

*** ***

*** ***

*** ***

**Financing activities**

*** ***

Increase in deposits,  net

91,356,035 

49,283,899 

35,900,547 

*** ***

Increase (decrease) in federal  funds purchased and repurchase agreements

(14,680,000)

1,580,001 

3,803,000 

*** ***

Proceeds from the issuance of  junior subordinated debentures

- 

7,217,000 

- 

*** ***

Increase in Federal Home Loan Bank  advances

29,000,000 

18,840,000 

28,160,000 

*** ***

Proceeds from the issuances of  common stock, net

- 

-  

14,906,029 

*** ***

Proceeds from the exercise of  stock options and warrants

49,720 

80,598 

20,010 

*** ***

Cash in lieu of fractional  shares

(446)

- 

- 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net cash provided by financing  activities

105,725,309 

77,001,498 

82,789,586 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Net increase (decrease) in cash  and cash equivalents

(9,025,019)

20,265,816 

(1,608,955)

*** ***

*** ***

*** ***

*** ***

*** ***

**Cash and cash equivalents at  beginning of the period**

25,604,152 

5,338,336

6,947,291 

*** ***

*** ***

*** ***

*** ***

*** ***

**Cash and cash equivalents at end  of the period**

 $

16,579,133 

 $

25,604,152 

 $

5,338,336 

*** ***

*** ***

*** ***

*** ***

*** ***

**Supplemental information**

*** ***

**Cash paid for**

*** ***

*** ***

Interest

 $

15,811,890 

 $

8,694,242 

 $

5,268,815 

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Income taxes

 $

2,225,869 

 $

2,192,025 

 $

2,148,425 

*** ***

*** ***

*** ***

*** ***

*** ***

**Schedule of non-cash transactions**

*** ***

*** ***

Foreclosure of real  estate

 $

2,351,234 

$

-  

 $

308,210 

*** ***

*** ***

Unrealized (gain) loss on  securities, net of income taxes

$

(134,137)

$

200,591 

$

47,008 

See notes to consolidated financialstatements that are an integral part of these consolidated statements.

52

 

***GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY***

***NOTES TOCONSOLIDATED FINANCIAL STATEMENTS***
 
 
NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES AND ACTIVITIES
        ***GreenvilleFirst Bancshares, Inc.*** (the "company") is a South Carolina corporationthat owns all of the capital stock of Greenville First Bank, N.A. (the "bank")and all of the stock of Greenville First Statutory Trust I and II (collectively(the "Trusts")).  The bank is a national bank organized under the laws of theUnited States located in Greenville County, South Carolina.  The bank isprimarily engaged in the business of accepting demand deposits and savingsdeposits insured by the Federal Deposit Insurance Corporation, and providingcommercial, consumer and mortgage loans to the general public.  The bank owns all of thecapital stock of JB Properties.  This subsidiary was formed for the purpose ofowning real estate acquired in loan foreclosures.  The Trustsare special purpose subsidiaries organized for the sole purpose of issuingtrust preferred securities.  

        OnOctober 26, 1999, the company sold 1,100,000 shares of its common stock at $10per share and on November 30, 1999 sold 50,000 additional shares for a total of1,150,000 shares (1,897,493 after adjustment for 3 for 2 stock split in 2003 andthe subsequent 10 percent stock dividend in 2006). The offering raisedapproximately $10.6 million, net of underwriting discounts, commissions andoffering expenses.  

        OnJune 26, 2003, the Trust offered and sold $6.0 million of floating rate securities. The company received the proceeds from the issuance of these securities and hasreflected the obligation resulting from the receipt of the proceeds as juniorsubordinate debentures in the balance sheets.  The company invested $186,000 inthe Trust.

 On November 17, 2003, shareholders of record as of November 3,2003, received one additional share of stock for every two shares of stockowned prior to the 3 for 2 stock split.  All fractional shares were paid incash.  OnJune 20, 2006, the company's Board of Directors approved a 10 percent stockdividend to the company's shareholders.  The record date was July 24, 2006 andthe distribution date was August 14, 2006.  All fractional shares were paid incash.  Earnings per share and average shares outstanding have been adjusted toreflect the 3 for 2 stock split and subsequent stock dividend for all periodsshown.

        OnSeptember 24, 2004, the company sold 800,000 shares of its common stock and onOctober 15, 2004 sold 120,000 additional shares for a total of 920,000shares.   All shares were sold at $17.875 per share. The offering raisedapproximately $14.9 million, net of underwriting discounts, commissions andoffering expenses.  

        On December 22, 2005, theTrust offered and sold $7.0 million of floating rate securities.  The companyreceived the proceeds from the issuance of these securities and has reflectedthe obligation resulting from the receipt of the proceeds as junior subordinatedebentures in the balance sheets.  The company invested $217,000 in the Trust.

        Thefollowing is a description of the more significant accounting and reportingpolicies that the company follows in preparing and presenting consolidatedfinancial statements.

** Basis of presentation**

The accompanyingconsolidated financial statements include the accounts of the company and itswholly owned subsidiary, Greenville First Bank, N.A.  In consolidation, allsignificant intercompany transactions have been eliminated.  The accounting andreporting policies conform to accounting principles generally accepted in theUnited States of America.  In accordance with guidance issued by the FinancialAccounting Standards Board ("FASB") in Interpretation number 46, the operationsof the Trusts have not been consolidated in these financial statements.  
 Estimates
The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the dateof the consolidated financial statements and the reported amount of income andexpenses during the reporting periods.  Actual results could differ from thoseestimates.** **

53

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES AND ACTIVITIES, Continued**

** Risks and uncertainties**

In the normal course ofits business the company encounters two significant types of risks: economicand regulatory.  There are three main components of economic risk: interestrate risk, credit risk and market risk.  The company is subject to interestrate risk to the degree that its interest-bearing liabilities mature or repriceat different speeds, or on different bases, than itsinterest-earning assets.  Credit risk is the risk of default within the company'sloan portfolio that results from borrowers' inability or unwillingness to makecontractually required payments.  Market risk reflects changes in the value ofcollateral underlying loans receivable and the valuation of real estate held bythe company.

The company is subject to the regulations of various governmentalagencies.  These regulations can and do change significantly from period toperiod.  The company also undergoes periodic examinations by the regulatoryagencies, which may subject it to changes with respect to valuation of assets,amount of required loss allowance and operating restrictions resulting from theregulators' judgments based on information available to them at the time oftheir examinations.  

The bankmakes loans to individuals and businesses in and around "Upstate" SouthCarolina for various personal and commercial purposes.  The bank has adiversified loan portfolio. Borrowers' ability to repay their loans is notdependent upon any specific economic sector.
 Investmentsecurities
The company accounts for investmentsecurities in accordance with Statement of Financial Accounting Standards("SFAS") No. 115, "Accounting for Certain Investments in Debt and EquitySecurities".  The statement requires investments in equity and debtsecurities to be classified into three categories:

1.  *  Availablefor sale securities*: These are securities that are not classified as either held tomaturity or as trading securities.  These securities are reported at fairmarket value.  Unrealized gains and losses are reported, net of income taxes,as separate components of shareholders' equity (accumulated other comprehensiveincome).
2.  * Held tomaturity securities*: These are investment securities that the company has the abilityand intent to hold until maturity.  These securities are stated at cost,adjusted for amortization of premiums and the accretion of discounts. 

3.  * Tradingsecurities*: These are securities that are bought and held principally forthe purpose of selling in the near future.  Trading securities are reported atfair market value, and related unrealized gains and losses are recognized inthe income statement.  The company has no trading securities.

Gains or losses on dispositions ofinvestment securities are based on the differences between the net proceeds andthe adjusted carrying amount of the securities sold, using the specificidentification method.   Premiums and discounts are amortized or accrued intointerest income by a method that approximates a level yield.

**Otherinvestments**

The bank, as a member institution, is required to own stockinvestments in the Federal Home Loan Bank of Atlanta and the Federal ReserveBank.  The stock is generally pledged against any borrowings from theseinstitutions.  No ready market exists for the stock and it has no quoted marketvalue.  However, redemption of these stocks has historically been at parvalue.  Other investments also include a $403,000 investment in the twoStatutory Trusts.

**Loans,interest and fee income on loans**

Loans are stated at the principalbalance outstanding.  Unamortized net loan fees and the allowance for possibleloan losses are deducted from total loans on the balance sheet.  Interest incomeis recognized over the term of the loan based on the principal amountoutstanding.  The net of loan origination fees received and direct costsincurred in the origination of loans is deferred and amortized to interestincome over the contractual life of the loans adjusted for actual principalprepayments using a method approximating the interest method. 

Loans aregenerally placed on non-accrual status when principal or interest becomesninety days past due, or when payment in full is not anticipated.  When a loanis placed on non-accrual status, interest accrued but not received is

54
**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES AND ACTIVITIES, Continued**
generally reversed against interestincome.  Cash receipts on non-accrual loans are not recorded as interestincome, but are used to reduce principal.

** Allowance for loan losses** 

The allowance for loan losses isestablished as losses are estimated to have occurred through a provision forloan losses charged to earnings.  Loan losses are charged against the allowancewhen management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses isevaluated on a regular basis by management and is based upon management'speriodic review of the collectibility of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower's ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

The allowance consists of specific,general and unallocated components.  The specific component relates to loansthat are classified as either doubtful, substandard, or special mention.  Forsuch loans that are also classified as impaired, an allowance is establishedwhen the discounted cash flows (or collateral value or observable market price)of the impaired loan is lower than the carrying value of that loan.  Thegeneral component covers non-classified loans and is based on historical lossexperience adjusted for qualitative factors.  An unallocated component is maintainedto cover uncertainties that could affect management's estimate of probablelosses.  The unallocated component of the allowance reflects the margin ofimprecision inherent in the underlying assumptions used in the methodologiesfor estimating specific and general losses in the portfolio.

A loan is considered impaired when,based on current information and events, it is probable that the company willbe unable to collect the scheduled payments of principal or interest when dueaccording to the contractual terms of the loan agreement.  Factors consideredby management in determining impairment include payment status, collateralvalue, and the probability of collecting scheduled principal and interestpayments when due.  Loans that experience insignificant payment delays andpayment shortfalls generally are not classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower's prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment ismeasured on a loan by loan basis for commercial and construction loans byeither the present value of expected future cash flows discounted at the loan'seffective interest rate, the loan's obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

Large groups of smaller balancehomogeneous loans are collectively evaluated for impairment.  Accordingly, the companydoes not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuringagreement.

**Non-performing assets**

 Non-performing assets include realestate acquired through foreclosure or deed taken in lieu of foreclosure, andloans on non-accrual status.  Loans are placed on non-accrual status when, inthe opinion of management, the collection of additional interest isquestionable.  Thereafter no interest is taken into income until such time asthe borrower demonstrates the ability to pay both principal and interest.

**Real estateacquired in settlement of loans**

 Real estate acquired throughforeclosure is initially recorded at the lower of cost or estimated fairvalue.  Subsequent to the date of acquisition, it is carried at the lower ofcost or fair value, adjusted for net selling costs.  Fair values of real estateowned are reviewed regularly and writedowns are recorded when it is determinedthat the carrying value of real estate exceeds the fair value less estimatedcosts to sell.  Costs relating to the development and improvement of suchproperty are capitalized, whereas those costs relating to holding the propertyare expensed.           

55

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES AND ACTIVITIES, Continued **

**Property and equipment** 

Property and equipment are stated atcost.  Major repairs are charged to operations, while major improvements arecapitalized.  Depreciation is computed using the straight-line method over theestimated useful lives of the related assets.  Upon retirement, sale, or otherdisposition of property and equipment, the cost and accumulated depreciationare eliminated from the accounts, and gain or loss is included in income fromoperations.** **

Construction in progress is statedat cost, which includes the cost of construction and other direct costsattributable to the construction.  No provision for depreciation is made onconstruction in progress until such time as the relevant assets are completedand put into use.  

**Cash surrender value of life insurance policies**

    Cash surrender value of life insurancepolicies represents the cash value of policies on certain officers of the bank.** **

**Securities sold under agreements torepurchase **

The bank enters intosales of securities under agreements to repurchase.  Fixed-coupon repurchaseagreements are treated as financing, with the obligation to repurchase securitiessold being reflected as a liability and the securities underlying theagreements remaining as assets.** **

**Advertising and public relations expense** 

Advertising, promotional and other business development costs aregenerally expensed as incurred.  External costs incurred in producing mediaadvertising are expensed the first time the advertising takes place.  Externalcosts relating to direct mailing costs are expensed in the period in which thedirect mailings are sent.
Income taxes 
Thefinancial statements have been prepared on the accrual basis.  When income andexpenses are recognized in different periods for financial reporting purposesversus for the purposes of computing income taxes currently payable, deferredtaxes are provided on such temporary differences.  The company accounts forincome taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" andFASB Interpretation No. 48 ("FIN 48"), "*Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109**."* Under SFAS No. 109 and FIN 48, deferred tax assets and liabilities arerecognized for the expected future tax consequences of events that have beenrecognized in the consolidated financial statements or tax returns.  Deferredtax assets and liabilities are measured using the enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be realized or settled. 

**Stock based compensation **

The company has astock-based employee compensation plan.  On January 1, 2006, the companyadopted the fair value recognition provisions of SFAS 123(R), "Accountingfor Stock-Based Compensation," to account for compensation costs under itsstock option plan.  The company previously utilized the intrinsic value methodunder Accounting Principles Board Opinion No. 25, "Accounting for Stock Issuedto Employees (as amended)" ("APB 25").  Under the intrinsic value methodprescribed by APB 25, no compensation costs were recognized for the company'sstock options because the option exercise price in its plans equals the marketprice on the date of grant.  Prior to January 1, 2006, the company onlydisclosed the pro forma effects on net income and earnings per share as if thefair value recognition provisions of SFAS No. 123(R) had been utilized. OnDecember 20, 2005, the Board of Directors approved accelerating the vesting of45,813 unvested stock options effective December 28, 2005.  The decision toaccelerate vesting of these options was made so as to reduce compensationexpense upon the adoption of SFAS No. 123(R) by approximately $68,000 and$52,000 in the years ended December 31, 2006 and 2007, respectively, and $4,000in each of the years ended December 31, 2008 and 2009.

56

**NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued**

    In adopting SFAS No. 123(R),the company elected to use the modified prospective method to account for thetransition from the intrinsic value method to the fair value recognitionmethod.  Under the modified prospective method, compensation cost is recognizedfrom the adoption date forward for all new stock options granted and for anyoutstanding unvested awards as if the fair value method had been applied tothose awards as of the date of grant. The following table illustrates theeffect on net income and earnings per share as if the fair value based methodhad been applied to all outstanding and unvested awards in each period.  Earnings per share amountshave been adjusted to reflect the 10 percent stock dividend in 2006.

**For the years ended  December 31,**

**2006**

**2005**

**2004**

Net  income as reported

$

3,900,794 

$

2,514,152

$

2,012,589

Add:   Stock-based employee compensation expense included in 

reported net income, net of related tax  effects

1,141 

-

- 

Deduct:   Total stock-based employee compensation expense 

determined under fair value based method for  all awards, net

of related tax effects

(1,141)

(199,934)

(82,876)

Pro  forma net income including stock-based compensation cost 

based on fair-value method

**$**

**3,900,794 **

** **

**$**

**2,314,218**

** **

**$**

**1,929,713 **

Earnings  per share:

    Basic - as reported

$

1.33 

$

.86

0.93 

    Basic - pro forma

$

1.33 

$

.79

0.89 

Diluted - as reported

$

1.20 

$

.78

0.82 

Diluted - pro forma

$

1.20 

$

.72

0.78 

              Thefair value of the option grant is estimated on the date of grant using theBlack-Scholes option-pricing model.  The following assumptions were used forgrants: expected volatility of 10.00% for 2006, 6.76% for 2005, and 10.00% for2004, risk-free interest rate of 4.60% for 2006, 4.02% for 2005, and 3.00% for2004, expected lives of the options 10 years, and the assumed dividend rate waszero**.   **
Statement of cash flows 
For purposesof reporting cash flows, cash and cash equivalents are defined as those amountsincluded in the balance sheet captions "Cash and due from banks" and "Federalfunds sold."  Cash and cash equivalents have an original maturity of threemonths or less. 

**Reclassifications**

Certainamounts, previously reported, have been reclassified to state all periods on acomparable basis that had no effect on shareholders' equity or net income.** **

57
**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND ACTIVITIES, Continued**
**Earnings per common share** 

              Thefollowing schedule reconciles the numerators and denominators of the basic anddiluted earnings per share computations for the years ended December 31, 2006,2005 and 2004.  Dilutive common shares arise from the potentially dilutiveeffect of the company's stock options and warrants that are outstanding.  Theassumed conversion of stock options and warrants can create a differencebetween basic and dilutive net income per common share.  The 2005 and 2004 numbersof shares and the earnings per share have been adjusted for the 10 percent stockdividend in 2006.

              At December31, 2006, 10,000 options were anti-dilutive in the calculation of earnings pershare as their exercise price exceeded the fair market value.

**2006**

** **

**2005**

** **

**2004**

Basic Earnings Per Share

 Average common shares outstanding

2,931,640 

2,922,403 

2,169,296 

 Net income

 $

3,900,794 

 $

2,514,152 

 $

2,012,589 

 Earnings per share

 $

1.33 

 $

.86 

 $

.93 

Diluted Earnings Per Share

 Average common shares outstanding

2,931,640 

2,922,403 

2,169,296 

 Average dilutive common shares

306,689 

301,002 

294,376 

 Adjusted average common shares

3,238,329 

3,223,405 

2,463,672 

 Net income

 $

3,900,794 

 $

2,514,152 

 $

2,012,589 

 Earnings per share

 $

1.20 

 $

.78 

 $

.82 

** Recently issued accounting pronouncements**                   

              The following is a summary of recentauthoritative pronouncements that could impact the accounting, reporting, and /or disclosureof financial information by the company.

In February 2006, the FinancialAccounting Standards Board ("FASB") issued Statement of Financial Accounting("SFAS") No. 155, "Accounting for Certain Hybrid Financial Instruments-anamendment of FASB Statements No. 133 and 140." This Statement amends SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," and SFASNo. 140, "Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities." This Statement resolves issues addressed inSFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 toBeneficial Interests in Securitized Financial Assets." FAS155 permits fair value re-measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation,clarifies which interest only-strips and principal-only strips are not subjectto the requirements of Statement 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives, andamends Statement 140 to eliminate the prohibition on a qualifying special purposeentity from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument. SFASNo. 155 is effective for all financial instruments acquired or issued after thebeginning of an entity's first fiscal year that begins after September 15,2006. The company does not believe that the adoption of SFAS No. 155 will havea material impact on its financial position, results of operations or cashflows. 

In March 2006, the FASB issued SFAS No. 156, "*Accounting for Servicing of Financial Assets-anamendment of FASB Statement No. 140." *This Statement amends FASBNo. 140, "Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities," with respect to the accounting for separatelyrecognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract; requires all separately recognizedservicing assets and servicing liabilities to be initially measured at fairvalue, if practicable; permits an entity to choose its subsequent measurementmethods for each class of separately recognized servicing assets and servicingliabilities; at its initial adoption, permits a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognizedservicing rights, without calling into question the treatment of other available-for-salesecurities

58

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND ACTIVITIES, Continued**

 

under Statement 115,provided that the available-for-sale securities are identified in some manneras offsetting the entity's exposure to changes in fair value of servicingassets or servicing liabilities that a servicer elects to subsequently measureat fair value; and requires separate presentation of servicing assets andservicing liabilities subsequently measured at fair value in the statement of financialposition and additional disclosures for all separately recognized servicingassets and servicing liabilities. An entityshould adopt SFAS No. 156 as of the beginning of its first fiscal year thatbegins after September 15, 2006. The company does not believe the adoption ofSFAS No. 156 will have a material impact on its financial position, results ofoperations or cash flows.  

In July 2006, the FASB issued FASBInterpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes".FIN 48 clarifies the accounting for uncertainty in income taxes recognized inenterprises' financial statements in accordance with FASB Statement No. 109,"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold andmeasurement attributable for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosures and transitions. FIN 48is effective for fiscal years beginning after December 15, 2006. The company iscurrently analyzing the effects of FIN 48 on its financial position, results ofoperations and cash flows.

In September 2006, theFASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. This standard does not require any new fair value measurements,but rather eliminates inconsistencies found in various prior pronouncements.SFAS 157 is effective for the company on January 1, 2008 and is not expected tohave a significant impact on the company's financial position, results ofoperations or cash flows.

In September 2006, the FASB issued SFAS No. 158,"Employers' Accounting for Defined Benefit Pension and Other PostretirementPlans"**("SFAS 158"), which amends SFAS 87 and SFAS 106 to requirerecognition of the overfunded or underfunded status of pension and otherpostretirement benefit plans on the balance sheet. Under SFAS 158, gains andlosses, prior service costs and credits, and any remaining transition amountsunder SFAS 87 and SFAS 106 that have not yet been recognized through netperiodic benefit cost will be recognized in accumulated other comprehensiveincome, net of tax effects, until they are amortized as a component of netperiodic cost. The measurement date - the date at which the benefit obligationand plan assets are measured - is required to be the company's fiscal year end.SFAS 158 is effective for publicly−held companies for fiscal years endingafter December 15, 2006, except for the measurement date provisions, which areeffective for fiscal years ending after December 15, 2008. The company does nothave a defined benefit pension plan. Therefore, SFAS 158 will not impact the company'sfinancial position, results of operations or cash flows.

In September, 2006, The FASB ratified theconsensuses reached by the FASB's Emerging IssuesTask Force ("EITF") relating to EITF 06-4 "Accounting for the DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements".  EITF 06-4 addresses employer accounting for endorsement split-dollar life insurancearrangements that provide a benefit to an employee that extends topostretirement periods should recognize a liability for future benefits inaccordance with SFAS No. 106, "*Employers'Accounting for Postretirement Benefits Other Than Pensions",*orAccounting Principles Board ("APB") Opinion No. 12, "*Omnibus Opinion-1967". *EITF06-4 is effective for fiscal years beginning after December 15, 2007. Entitiesshould recognize the effects of applying this Issue through either (a) a changein accounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) a changein accounting principle through retrospective application to all prior periods. The company is currently analyzing the effects of EITF 06-4 on itsfinancial position, results of operations and cash flows.

In September 2006, the FASB ratifiedthe consensus reached related to EITF 06-5,**"Accounting for Purchases ofLife Insurance-Determining the Amount That Could Be Realized in Accordance withFASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance." EITF 06-5 states that a policyholder should consider any additional amountsincluded in the contractual terms of the insurance policy other than the cashsurrender value in determining the amount that could be realized under theinsurance contract.  EITF 06-5 also states that a policyholder shoulddetermine the amount that could be realized under the life insurance contractassuming the surrender of an individual-life by individual-life policy (orcertificate by certificate in a group policy). EITF 06-5 is effective forfiscal years beginning after December 15, 2006.  The company is currentlyanalyzing the effects of EITF 06-5 on its financial position, results ofoperations and cash flows.

59

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND ACTIVITIES, Continued**

In September 2006, the SEC issued StaffAccounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a potential current yearmisstatement. Prior to SAB 108, Companies might evaluate the materiality offinancial statement misstatements using either the income statement or balancesheet approach, with the income statement approach focusing on newmisstatements added in the current year, and the balance sheet approachfocusing on the cumulative amount of misstatement present in a company'sbalance sheet. Misstatements that would be material under one approach could beviewed as immaterial under another approach, and not be corrected. SAB 108 nowrequires that companies view financial statement misstatements as material ifthey are material according to either the income statement or balance sheetapproach. The company has analyzed SAB 108 and determined that the adoption ofSAB 108 had no impact on the reported financial position, results of operationsor cash flows.

In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities -Including an amendment of FASB Statement No. 115." This statement permits, butdoes not require, entities to measure many financial instruments at fair value.The objective is to provide entities with an opportunity to mitigate volatilityin reported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.Entities electing this option will apply it when the entity first recognizes aneligible instrument and will report unrealized gains and losses on suchinstruments in current earnings.   This statement 1) applies to all entities,2) specifies certain election dates, 3) can be applied on aninstrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)applies only to entire instruments. One exception is demand deposit liabilitieswhich are explicitly excluded as qualifying for fair value. With respect toSFAS 115, available-for-sale and held-to-maturity securities at the effectivedate are eligible for the fair value option at that date. If the fair valueoption is elected for those securities at the effective date, cumulativeunrealized gains and losses at that date shall be included in thecumulative-effect adjustment and thereafter, such securities will be accountedfor as trading securities. SFAS 159 is effective for the company on January 1,2008. Earlier adoption is permitted in 2007 if the company also elects to applythe provisions of SFAS 157, "Fair Value Measurement." The company is currentlyanalyzing the fair value option provided under SFAS 159.   

Other accounting standards that have been issuedor proposed by the FASB or other standards-setting bodies are not expected tohave a material impact on the company's financial position, results ofoperations or cash flows.

**NOTE 2 - RESTRICTIONSON CASH AND DUE FROM BANKS**

                    Thebank is required to maintain average cash reserve balances, computed byapplying prescribed percentages to its various types of deposits, either at thebank or on deposit with the Federal Reserve Bank.  At December 31, 2006 and 2005,the bank had $2.1million and $1.3 million, respectively on depositwith the Federal Reserve Bank to meet this requirement.  

**NOTE 3 - FEDERAL FUNDS SOLD**

                    Thebank's cash reserves in excess of the required amounts to be held by theFederal Reserve Bank (Note 2) may be lent to other banks on a daily basis.  AtDecember 31, 2006 and 2005, federal funds sold amounted to $7.5 million and $19.4million, respectively.  Management limits its credit risk by placing itsdeposits and federal funds with institutions that maintain high creditstandards.** **

60

**NOTE 4 - INVESTMENT SECURITIES**

                    Theamortized costs and fair value of investment securities available for sale andheld to maturity are as follows:

 

**December  31, 2006**

** **

**Amortized**

** **

**Gross  Unrealized**

** **

**Fair**

** **

**Cost**

** **

**Gains**

** **

**Losses**

** **

**Value**

** **

**Available for sale**

Government  sponsored enterprises

 $

1,995,984 

 $

- 

 $

7,448    

  	

 $

1,988,536 

State and  political subdivisions

3,794,969 

33 

13,326 

3,781,676 

Mortgage-backed  securities

44,477,840 

      	

191,228 

239,767 

   	

44,429,301 

**$**

**50,268,793**

** **

**$**

**191,261 **

** **

**$**

**260,541 **

** **

**$**

**50,199,513**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Held to maturity**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Mortgage-backed  securities

** $**

**17,044,531 **

** **

** $**

**- **

** **

** $**

**467,858 **

** **

** $**

**16,576,673 **

**                                                                              **

**December  31, 2005**

** **

**Amortized**

** **

**Gross  Unrealized**

** **

**Fair**

** **

**Cost**

** **

**Gains**

** **

**Losses**

** **

**Value**

** **

**Available for sale**

Government  sponsored enterprises

 $

1,005,294 

 $

6,269 

 $

-     

  	

 $

1,011,563 

State and  political subdivisions

1,292,007 

- 

- 

1,292,007 

Mortgage-backed  securities

9,241,839 

      	

1,110 

235,563 

   	

9,007,386 

**$**

**11,539,140**

** **

**$**

**7,379 **

** **

**$**

**235,563 **

** **

**$**

**11,310,956**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Held to maturity**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Mortgage-backed  securities

** $**

**19,345,016 **

** **

** $**

**- **

** **

** $**

**635,904 **

** **

** $**

**18,709,112 **

                     The amortized costs and fair valuesof investment securities available for sale at December 31, 2006 and 2005, bycontractual maturity, are shown below.  Expected maturities may differ fromcontractual maturities because issuers have the right to prepay theobligations.                     

** **

**December  31, 2006**

** **

**December  31, 2005**

** **

**Amortized**

** **

**Fair **

** **

**Amortized**

** **

**Fair**

** **

**Cost**

** **

**Value**

** **

**Cost**

** **

**Value**

** **

**Available for sale**

Due within one year

$

- 

$

- 

$

1,005,294  

$

1,011,563  

Due after one through five  years

1,995,984 

1,988,536 

-  

-  

Due after five through ten years

4,590,775 

4,607,783 

1,195,265 

1,185,621 

Due after ten  years

43,682,034 

43,603,194 

9,338,581 

9,113,772 

**$**

**50,268,793 **

** **

**$**

**50,199,513 **

** **

**$**

**11,539,140 **

** **

**$**

**11,310,956 **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Held to maturity**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Due after five through ten years

$

440,719 

$

429,041 

$

576,195 

$

559,081 

Due after ten years

16,603,812 

16,147,632 

18,768,821 

18,150,031 

**$**

**17,044,531 **

** **

**$**

**16,576,673**

** **

**$**

**19,345,016 **

** **

**$**

**18,709,112 **

 

61
**NOTE 4 - INVESTMENT SECURITIES, Continued**
**               **    Thetables below summarize gross unrealized losses on investment securities and thefair market value of the related securities, aggregated by investment categoryand length of time that individual securities have been in a continuousunrealized loss position, at December 31, 2006 and 2005.

**Less than 12 months**

** **

**12 months or longer**

** **

**Total**

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

**As  of December 31, 2006**

**value**

** **

**losses**

** **

**value**

** **

**losses**

** **

**value**

** **

**losses**

**Available for sale**

Government sponsored

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 enterprises

$

1,988,536 

$

7,448 

$

- 

$

- 

$

1,988,536 

$

7,448 

State and political

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 subdivisions

2,134,803 

13,326 

- 

- 

2,134,803 

13,326 

Mortgage-backed

6,412,576 

55,716 

7,425,274 

184,051

13,837,850 

239,767 

**$**

**10,535,9159**

$

**76,490 **

** **

**$**

**7,425,274 **

** **

**$**

**184,051**

** **

**$**

**17,961,189 **

** **

**$**

**260,541 **

** **

** **

** **

** **

** **

** **

** **

**Held to maturity**

Mortgage-backed

** $**

**- **

** $**

**- **

** $**

**16,576,673**

** $**

**467,858**

** $**

**16,576,673 **

** $**

**467,858 **

 

**Less than 12 months**

** **

**12 months or longer**

** **

**Total**

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

** **

**Fair**

** **

**Unrealized**

**As  of December 31, 2005**

**value**

** **

**losses**

** **

**value**

** **

**losses**

** **

**value**

** **

**losses**

**Available for sale**

Mortgage-backed

** **

** $**

**8,846,732 **

** **

** $**

**235,563 **

** **

** $**

**- **

** **

** $**

**- **

** **

** $**

**8,846,732 **

** **

** $**

**235,563 **

** **

** **

** **

** **

** **

** **

** **

**Held to maturity**

Mortgage-backed

** $**

**8,831,207 **

** $**

**274,614 **

** $**

**9,877,905**

** $**

**361,290**

** $**

**18,709,112 **

** $**

**635,904 **

                    At December 31, 2006,the company had one government sponsored enterprise, four state and politicalsubdivisions, and twelve mortgage-backed securities in an unrealized lossposition.  The company believes, based on industryanalyst reports and credit ratings that the deterioration in value isattributed to changes in market interest rates and not in the credit quality ofthe issuer and therefore, these losses are not consideredother-than-temporary.  The company has the ability and intent to hold thesesecurities until such time as the value recovers or the securities mature. 

                    Otherinvestments totaled approximately $7.1 million and $5.5 million at December 31,2006 and 2005, respectively.  Other investments at December 31, 2006, consistedof Federal Reserve Bank stock with a cost of $968,700, Federal Home Loan Bank("FHLB") stock with a cost of $5.7 million, and investments in the Trusts of$403,000.  At December 31, 2005, the company owned Federal Reserve Bank stockwith a cost of $863,700, Federal Home Loan Bank stock with a cost of $4.2million, and an investment in the Trust of $403,000.  All of the FHLB stock isused to collateralize advances with the FHLB.  

                    No investmentsecurities were sold in 2006, 2005 or 2004.  Accordingly, no gains or losseswere recorded.  At December 31, 2006, $23.7 million of securities were pledgedto the FHLB as collateral for outstanding borrowings.  In addition,approximately $1.0 million was pledged to secure deposits.  However, there wereno securities pledged as collateral for repurchase agreements from brokers atDecember 31, 2006.  At December 31, 2005, $16.4 million of securities werepledged as collateral for repurchase agreements from brokers. 

                    Managementlimits its credit risk by generally investing its portfolio principally inobligations of the United States, its agencies or its corporations and generalobligation municipal securities.  Included in the investment portfolio atDecember 31, 2006, are mortgage-backed securities issued by the FederalNational Mortgage Association and the Federal Home Loan Mortgage Corporation totaling$39.5 million and $12.4 million, respectively.  
NOTE 5 - LOANS 
                    The company makesloans to individuals and small businesses for various personal and commercialpurposes primarily in the upstate region of South Carolina.  The company'sloan portfolio is not concentrated in loans to any single borrower or arelatively small number of borrowers.   The company focuses itslending activities primarily on the professional market in Greenville, includingdoctors, dentists, and small business owners.  The principal component ofthe loan portfolio is loans secured by real estate mortgages which account for81.5% of total loans at December 31, 2006.  Commercial loans comprise 68.4%of total real estate loans and consumer loans account for 31.6%. Commercial loansare further categorized into owner occupiedwhich represents 19.3% of total loans and non-owner occupied of 31.3%.  Commercialconstruction loans represent only 5.1% of the total loan portfolio.

 

                     62
**NOTE 5 -LOANS, Continued**
                    In addition to monitoringpotential concentrations of loans to particular borrowers or groups ofborrowers, industries and geographic regions, Management monitors exposure tocredit risk from concentrations of lending products and practices such as loansthat subject borrowers to substantial payment increases (e.g. principaldeferral periods, loans with initial interest-only periods, etc.), and loanswith high loan-to-value ratios.  As of December 31, 2006, approximately $34.2million, or 8.5% of our loans had loan-to-value ratios which exceededregulatory supervisory limits, of which fifteen loans totaling approximately$8.2 million had loan-to-value ratios of 100% or more.  Additionally, there areindustry practices that could subject the company to increased credit riskshould economic conditions change over the course of a loan's life.  Forexample, the company makes variable rate loans and fixed rateprincipal-amortizing loans with maturities prior to the loan being fully paid(i.e. balloon payment loans). The various types of loans are individuallyunderwritten and monitored to manage the associated risks.

                    The composition of net loans by major loancategories is as follows:

**December  31,**

** **

**2006**

** **

**2005**

Real estate:

** **

** **

** **

Commercial

** **

** **

** **

Owner  occupied

 $

77,668,271 

 $

72,222,318 

Non-owner  occupied

126,007,968 

96,950,130 

Construction

20,466,078 

14,660,536 

224,142,317 

183,832,984 

Consumer:

Residential

59,186,972 

50,756,108 

Home  equity

35,986,034 

37,253,869 

Construction

8,258,829 

5,408,551 

103,431,835 

93,418,528 

Total real estate  loans

327,574,152 

277,251,512 

Commercial  business

65,890,649 

53,752,732 

Consumer-other

9,524,297 

8,211,323 

Deferred  origination fees, net

(806,007)

(685,194)

Gross  loans

402,183,091 

338,530,373 

Less  allowance for loan losses

(4,949,262)

(4,489,597)

** **

** **

** **

Loans,  net

** $**

**397,233,829 **

** **

** $**

**334,040,776 **

                   At December 31,2006 and 2005, there was $1.6 million and $466,333, respectively of loansclassified as non-accruing loans. Foregone interest income on the non-accrualloans in 2006 was approximately $46,000 and approximately $23,000 in 2005. 

                    AtDecember 31, 2006, certain of the bank's first mortgage loans were pledged ascollateral for advances from the Federal Home Loan Bank of Atlanta, as setforth in Note 9.

                    The composition of gross loans byrate type is as follows:

**December  31,**

** **

**2006**

** **

**2005**

Variable  rate loans

 $

195,020,965 

 $

206,537,381 

Fixed rate  loans 

207,162,126 

131,992,992 

** $**

**402,183,091 **

** **

** $**

**338,530,373 **

 

63
**NOTE 5 -LOANS, Continued**
                    Theallowance for loan losses is available to absorb future loan charge-offs.  Theallowance is increased by provisions charged to operating income and byrecoveries of loans that were previously written-off.  The allowance isdecreased by the aggregate loan balances, if any, that were deemeduncollectible during the year.

                    Activitywithin the allowance for loan losses account follows:                                                                                                                                                                                                                                                                                        

**For the  years ended December 31,**

**2006**

** **

**2005**

 

**2004**

Balance,  beginning of year

 $

4,489,597 

 $

3,716,645 

 $

2,705,150 

Recoveries  of loans previously charged-off

115,661 

63,206 

36,423 

Provision  for loan losses

1,650,000 

1,000,000 

1,310,000 

Loans  charged-off

(1,305,996)

(290,254)

(334,928)

Balance,  end of year

** $**

**4,949,262 **

** **

** $**

**4,489,597 **

** **

** $**

**3,716,645 **

** **                  At December 31, 2006,impaired loans amounted to approximately $4.7 million for which a $1.0 millionreserve was allocated in the allowance.  During 2006, the average recordedinvestment in impaired loans was approximately $4.4 million.  At December 31,2005, impaired loans amounted to approximately $4.2 million for which a $110,000reserve was allocated in the allowance. During 2005, the average recordedinvestment in impaired loans was approximately $2.7 million.  

** NOTE 6 -PROPERTY AND EQUIPMENT**

                    Propertyand equipment are stated at cost less accumulated depreciation.  Components ofproperty and equipment included in the consolidated balance sheets are asfollows:

**December  31,**

** **

**2006**

** **

**2005**

** **

Land

 $

1,099,459 

 $

1,099,459  

Buildings

3,648,550 

3,634,323 

Furniture  and equipment

1,351,716 

1,316,290 

Software

306,174 

256,012 

Construction  in process

1,095,034 

17,204 

7,500,933 

 

6,323,288 

Accumulated  depreciation

(1,050,079)

 

(746,406)

 

Total  property and equipment

** $**

**6,450,854 **

** **

** $**

**5,576,882 **

                    The companyleased its original main office building through the end of 2005 (see Note 12). On December 30, 2005, the company purchased the main office building for $3.1million.  Immediately thereafter, the company recorded a $1.5 millionwrite-down on the valuation of the purchased building in accordance with SFAS121, "Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of."  The $1.5 million write-down is based on variousassumptions related to the company's ability to either sell or lease thebuilding at various lease rates.  The actual results of the company's abilityto either sell or lease the building could significantly differ from theassumptions used in the impairment calculation.

                    At December 31,2006, construction in process is related to costs incurred to upfit the company'snew main office and headquarter building.  At December 31, 2005, constructionin process is related to costs incurred on property for a future branch officesite.                     

64

**NOTE 6 - PROPERTY AND EQUIPMENT,Continued**

                    Depreciation andamortization expense for the years ended December 31, 2006, 2005 and 2004 was $348,679, $260,009 and $163,738, respectively.  Depreciation ischarged to operations utilizing a straight-line method over the estimateduseful lives of the assets.  The estimated useful lives for the principal itemsfollow:

**Type of  Asset**

** **

**Life in  Years**

Software

3

Furniture  and equipment

5 to 7

Leasehold  improvements

5 to 15

Buildings

40
NOTE 7 - DEPOSITS
                    The following isa detail of the deposit accounts:

**December  31,**

** **

**2006**

** **

**2005**

** **

Non-interest  bearing

 $

30,878,769 

 $

21,712,665 

Interest bearing:

NOW  accounts

34,311,644 

29,466,156 

Money  market accounts

83,226,342 

56,272,124 

Savings

1,544,448 

1,318,732 

Time, less  than $100,000

47,666,785 

28,722,911 

Time,  $100,000 and over

147,876,088 

116,655,453 

Total  deposits

** $**

**345,504,076 **

**               **

** $**

**254,148,041 **

                     At December 31, 2006 and 2005, the bank had approximately $91.3million and $81.4 million of time deposits that wereobtained outside of the bank's primary market.  Interest expense on timedeposits greater than $100,000 was $6.1 millionand $3.7 million in the years ended December 31, 2006 and 2005, respectively.

                      AtDecember 31, 2006 the scheduled maturities of certificates of deposit are asfollows:

2007

 $

160,383,209 

2008

18,463,287 

2009

9,514,923 

2010

3,953,731 

2011 and  after

3,227,723 

** $**

**195,542,873 **

** NOTE 8 -REPURCHASEAGREEMENTS   **

                AtDecember 31, 2006, the bank had no securities under agreements to repurchasewith brokers.  During 2006, agreements to repurchase averaged $8.4 million,with $14.4 million being the maximum amount outstanding at any month-end.  Theaverage rate paid in 2006 was 4.92%.                                                                                                                                       

                AtDecember 31, 2005 the bank had sold $14.7 million of securities underagreements to repurchase with brokers with a weighted rate of 4.32% that maturein less than 90 days.  These agreements were secured with approximately $15.5 millionof investment securities.  The securities, under agreement to repurchase,averaged $16.7 million during 2005, with $18.9 million being the maximum amountoutstanding at any month-end.  The average rate paid in 2005 was 3.35%.

65
**NOTE 9 -FEDERAL HOME LOAN BANKADVANCES**
                At December 31, 2006 thebank had $108.5 million of advances from the FHLB.  These advances are securedwith approximately $123.8 million of first mortgage loans and $5.7 million of stock in theFHLB.    Listed below is a summary of the termsand maturities of the advances:      

**   Amount**

** **

**Rate**

**Maturity**

**Repricing Date**

 $

5,000,000   

5.49 %

October 15, 2007

January 15, 2007

 15,000,000 

4.99 %

April 22, 2019

January 22, 2007

10,000,000 

4.83 %

April 25, 2012

January 25, 2007

7,500,000 

3.22 %

February 10, 2015

February 12, 2007

20,000,000 

4.93 %

September 7, 2011

March 7, 2007

5,000,000 

4.53 %

April 22, 2013

April 23, 2007

5,000,000 

4.07 %

October 11, 2016

October 11, 2007

9,000,000 

4.03 %

October 11, 2016

October 11, 2007

5,000,000 

3.36 %

January 30, 2013

January 30, 2008

7,000,000 

4.21 %

May 14, 2014

May 14, 2009

20,000,000 

4.58 %

May 5, 2010

-

** $**

**108,500,000  **

** **

                      AtDecember 31, 2005 the bank had $79.5 million of advances from the FHLB.  Theseadvances are secured with approximately $101.6 million of first mortgage loansand $4.2 million stock in the FHLB.  At December 31, 2005, the company also had anoption whereby it chose, on May 5, 2006, to increase the size of a $10 millionadvance which matures on May 5, 2010, by an additional $10 million at the samerate and maturity date.  Listed below is a summary ofthe terms and maturities of the advances:     

**   Amount**

** **

**Rate**

**Maturity**

**Repricing Date**

 $

7,000,000  

4.45 %

January 6, 2006

Daily

5,000,000 

4.15 %

October 15, 2007

January 15, 2006

10,000,000 

3.88 %

April 25, 2012

January 25, 2006

7,500,000 

2.93 %

February 10, 2015

February 10, 2006

7,500,000 

4.48 %

March 10, 2006

March 10, 2006

3,000,000 

4.83 %

August 24, 2011

August 24, 2006

10,000,000 

2.84 %

October 7, 2009

October 10, 2006

7,500,000 

3.22 %

February 10, 2015

February 12, 2007

7,000,000 

4.21 %

May 14, 2014

May 14, 2009

5,000,000 

3.36 %

January 30, 2013

January 30, 2008

10,000,000 

4.58 %

May 5, 2010

-

** $**

**79,500,000  **

** **

**NOTE 10 - JUNIOR SUBORDINATED DEBENTURES**

                  On June 26, 2003,Greenville First Statutory Trust I, (a non-consolidated subsidiary) issued $6.0million floating rate trust preferred securities with a maturity of June 26,2033.  The rate is adjusted quarterly and was 8.46% at December 31, 2006.  Inaccordance with the revised FIN 46, the Trust has not been consolidated inthese financial statements. The company received from the Trust the $6.0million proceeds from the issuance of the securities and the $186,000 initialproceeds from the capital investment in the Trust, and accordingly has shownthe funds due to the Trust as $6.2 million junior subordinated debentures.  Thedebenture issuance cost, net of accumulated amortization, totaled $117,000 atDecember 31, 2006 and is included in other assets on the consolidated balancesheet.  Amortization of debt issuance costs totaled $18,000 for each of theyears ended December 31, 2006, 2005 and 2004, respectively, and are included inother borrowings interest expense. ** **

                    On December 22, 2005,Greenville First Statutory Trust II, (a non-consolidated subsidiary) issued$7.0 million floating rate trust preferred securities with a maturity ofDecember 22, 2035.  The rate is adjusted quarterly and was 6.78% at December31, 2006.  In accordance with the revised FIN 46, the Trust has not beenconsolidated in these financial statements. The company received from the Trustthe $7.0 million proceeds from the issuance of the

66

**NOTE 10 - JUNIOR SUBORDINATEDDEBENTURES, Continued**

securities and the $217,000 initial proceedsfrom the capital investment in the Trust, and accordingly has shown the fundsdue to the Trust as $7.2 million junior subordinated debentures.

                    The currentregulatory rules allow certain amounts of junior subordinated debentures to beincluded in the calculation of regulatory capital.  

 **NOTE 11 -UNUSEDLINES OF CREDIT**

                    AtDecember 31, 2006, the bank had three unused lines of credit to purchasefederal funds that totaled $26.1 million.  The lines of credit are available ona one to seven day basis for general corporate purposes of the bank.  Thelender has reserved the right to withdraw the line at their option.  The bankhas an additional line of credit with the Federal Home Loan Bank to borrowfunds, subject to a pledge of qualified collateral.  The bank has collateralthat would support approximately $15.3 million in additional borrowings. 

                    At December 31,2006 and 2005, the company had an unused revolving line of credit in the amountof $4.5 million, with another bank maturing on March 20, 2007.   Thecompany has utilized this line of credit in the past to provide proceeds toincrease the capital investment in the company's wholly-owned bank.  Theline of credit bears interest at the 30 day LIBOR rate plus 2.00%, which atDecember 31, 2006 was 7.32%.  The company has pledged all of the stock of the bankas collateral for this line of credit. The line of credit agreement containsvarious covenants related to net income and assetquality.  As of December 31, 2006, the company believes it was in compliancewith all covenants.  The company anticipates renewing this line of credit.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
                    The companyhas entered into a three year employment agreement with its chief executiveofficer and a two year employment agreement with its president and each of itsthree executive vice presidents.  These agreements include a) an incentiveprogram, b) a stock option plan, c) a one-year non-compete agreement upontermination and d) a severance payment equal to one year of compensation.  Thetotal estimated aggregate commitment is approximately $841,000.

                    The companyhas entered into an agreement with a data processor with a remaining term offour years to provide ATM services, item processing and general ledgerprocessing.  Components of this contract include monthly charges ofapproximately $32,000.

                      The bank has aten-year, five-month lease on its new headquarters and main office.  The leaseprovides for a substantial reduction in the rent rate for the first five monthsof the lease.  Beginning in 2007, the monthly rent expense will beapproximately $42,000.  The lease provides for annual lease rate escalationsbased on cost of living adjustments.  

                    The bank has a twenty-year landlease on property used for a branch office.  For 2007, the monthly rent will be$4,804. The lease provides for lease rate escalations based on cost of livingadjustments throughout the life of the loan.

                     The bank also has aneighteen month lease on a building used for a branch office.  Beginning inJanuary of 2007, the monthly rent will be $3,636. 

                     Thebank may become party to litigation and claims in the normal course ofbusiness.  As of December 31, 2006, management believes there is no materiallitigation pending.               

67
NOTE12 - COMMITMENTS AND CONTINGENCIES, Continued
                    Future minimum lease payments under theseoperating leases are summarized as follows:          

For the year ended December 31,

2007

 $

989,388  

2008

1,001,739 

2009

976,405 

2010

598,079 

2011

609,348 

Thereafter*  

3,773,851 

** $**

**7,948,810 **

                    *Amountis estimated based on an increase of 2.49 percent per year.  Actual lease willbe adjusted annually by the cost of living index as stated in the ConsumerPrice Index.

                    The bank has a commitment related to the cost toupfit its new main office and headquarter building for approximately $1.3million. The bank has incurred approximately $1.1 million as of December 31,2006. 
NOTE 13 - INCOME TAXES
                   Thecomponents of income tax expense for the years ended December 31, 2006, 2005and 2004 are as follows:

** **

**For the  years ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

Current income taxes:

Federal

 $

2,152,691 

 $

2,211,902 

$

1,383,364 

State

211,000 

199,000 

106,000 

Total current  tax expense

2,363,691 

2,410,902 

1,489,364 

Deferred  income tax benefit

(336,782)

(869,971)

(255,642)

Income tax  expense

** $**

**2,026,909 **

** **

** $**

**1,540,931 **

** **

**$**

**1,233,722 **

                       Thefollowing is a summary of the items that caused recorded income taxes to differfrom taxes computed using the statutory tax rate:

** **

**For the  years ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

** **

Tax expense at statutory  rate

 $

2,015,419 

 $

1,378,728 

$

1,103,746 

Effect of  state income taxes 

139,260 

131,340 

69,960 

Exempt  income and other

(127,770)

30,863 

60,016 

Income tax  expense

** $**

**2,026,909 **

** **

** $**

**1,540,931 **

** **

**$**

**1,233,722 **

        

68
NOTE13 - INCOME TAXES, Continued
                      The components of thedeferred tax assets and liabilities are as follows:

**December  31,**

** **

**2006**

** **

**2005**

Deferred  tax assets:

Allowance  for loan losses

 $

1,456,861 

 $

1,377,339 

Net  deferred loan fees

274,042 

232,966 

Real  estate impairment charge

510,000 

510,000 

Unrealized  loss on securities available for sale

23,555 

77,583 

Sale of  real estate owned

163,478 

- 

Other

45,650 

22,670 

2,473,586 

2,220,558 

Deferred  tax liabilities:

Property  and equipment

 $

147,366 

 $

128,447 

Other

53,263 

101,908 

200,629 

230,355 

Net  deferred tax asset

** $**

**2,272,957 **

** **

** $**

**1,990,203 **

                   The net of current taxes payable and net deferred tax assets is included inother assets.

**NOTE 14- RELATEDPARTY TRANSACTIONS**

                    Certaindirectors, executive officers, and companies with which they are affiliated,are clients of and have banking transactions with the bank in the ordinarycourse of business. These loans were made on substantially the same terms,including interest rates and collateral, as those prevailing at the time forcomparable arms-length transactions.

                     A summary ofloan transactions with directors, including their affiliates and executiveofficers is as follows:   

**For the  years ended December 31,**

**2006**

** **

**2005**

Balance,  beginning of year

 $

13,859,836 

 $

7,513,256 

New  loans

8,904,612 

17,488,496 

Less loan  payments

(9,967,325)

(11,141,916)

Balance,  end of year

** $**

**12,797,123 **

** **

** $**

**13,859,836 **

**   **    **       ****  **Deposits byofficers and directors and their related interests at December 31, 2006 and 2005,were $2.4 million and $1.0 million , respectively.

                  Thebank purchased signage for its new corporate office during 2006 from the samevendor used in the past for such signage.  During 2006 and 2005, one of the bank'sdirectors acted as chairman of the board for the respective company.  The bankpaid $36,445 and $16,568 to the company for the years ended December 31, 2006and 2005, respectively.  The bank is of the opinion that the cost of signagerepresents market costs that could have been obtained in similar "arms length"transactions.

One of the bank'sexecutive officers is a shareholder of a company which owns a local newspaper. During the years ended December 31, 2006 and 2005, the bank paid $31,915 and$29,376, respectively, to the company for advertising expenses.  The bank is ofthe opinion that the advertising costs represent market costs that could havebeen obtained in similar "arms length" transactions. 

69

**NOTE 14- RELATED PARTYTRANSACTIONS, Continued**

** **                  In 1999, the bankentered into a 20 year lease on the Haywood Road office building.  Monthlypayments on the lease were $33,343 in 2005.  On December 30, 2005, the companyexercised its option to purchase the building for $3.1 million from HaltonProperties LLC, a company owned by director Mark Cothran who is a real estatedeveloper.  The $3.1 million purchase price was based on an agreed upon formulathat was included in the original lease agreement.  See Note 6 for furtherdiscussion.

                    On September 20, 2005, the bankentered into a ten year, five month lease with various renewal options on itsnew main office building.  The company moved the corporate office and branchoperation, to the new leased space in the first quarter of 2007.  Mr. Cothran,a director of the bank and real estate developer by occupation, assisted thebank in the negotiation of the lease.  The lessor paid Mr. Cothran a leasingagency fee of $164,414, of which $82,207 was paid in 2005 and the remainder in2007 when the bank occupied the building.

                    The bank also has a landlease with Mr. Cothran on the property for a branch office, with monthlypayments of $4,804.  In addition, the bank had various consulting agreementswith the director for development, administration and advisory services relatedto the purchase of property and construction of current and future branchoffice sites.  During 2005, the bank paid the director $40,000 under theseagreements.  Beginning in 2006, the bank has also contracted with Mr. Cothranon an annual basis to provide property management services for each of itsbranch offices.  The bank paid Mr. Cothran approximately $19,000 for theseservices during 2006.

                    On July 28, 2006, thebank purchased $5.0 million of bank owned life insurance from NorthwesternMutual Insurance Company.  The purchase was made through an agency that isowned by director, David Ellison.  Mr. Ellison received a commission of$60,000.  At approximately the same time, the bank purchased a $3.0 millionbank owned life insurance policy from an independent third party.  The termsand conditions of both the $5.0 million and $3.0 million insurance policies aresubstantially the same.  Therefore, management believes that the $5.0 millionpolicy was obtained at a cost that was consistent with the cost in a similar"arms length" transaction.

                    The bank is of the opinionthat the lease payments and consulting fees represent market costs that could have been obtained in similar "armslength" transactions.
NOTE 15 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
                    Inthe ordinary course of business, and to meet the financing needs of its customers,the company is a party to various financial instruments with off balance sheetrisk.  These financial instruments, which include commitments to extend creditand standby letters of credit, involve, to varying degrees, elements of creditand interest rate risk in excess of the amounts recognized in the balancesheets.  The contract amount of those instruments reflects the extent ofinvolvement the company has in particular classes of financial instruments.

                    Thecompany's exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit and standbyletters of credit is represented by the contractual amounts of thoseinstruments.  The company uses the same credit policies in making commitmentsand conditional obligations as it does for on-balance sheet instruments. 

                    Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any material condition established in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire the payment of a fee.  At December 31, 2006, unfunded commitments toextend credit were approximately$79.2 million, of which $40.6 million is at fixed rates and $38.6 million is atvariable rates.  The company evaluates each customer's credit-worthiness on acase-by-case basis.  The amount of collateralobtained, if deemed necessary by the company upon extension of credit, is basedon management's credit evaluation of the borrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment, andcommercial and residential real estate.

                    AtDecember 31, 2006,there was a $2.4 million commitment under letters ofcredit.  The credit risk involved in issuing letters of credit is essentiallythe same as that involved in extending loan facilities to customers. Collateral varies but may include accounts receivable, inventory, equipment,marketable securities and property.  Since most of the letters of credit areexpected to expire without being drawn upon, they do not necessarily representfuture cash requirements.  The fair value of off balance sheet lendingcommitments are based on fees currently charged to enter into similaragreements, taking into account the remaining terms of the agreements and thecounterparties credit standing.  The total fair value of such instruments isnot material.

70

**NOTE 16 - EMPLOYEE BENEFIT PLAN**

                    OnJanuary 1, 2000, the company adopted the Greenville First Bancshares, Inc.Profit Sharing and 401(k) Plan for the benefit of all eligible employees.  ThePlan was amended in 2006 to provide a Roth 401(k) feature to the Plan.  The companycontributes to the Plan annually upon approval by the Board of Directors. Contributions made to the Plan in 2006, 2005 and 2004 amounted to approximately$100,000, $75,000 and $57,000, respectively. 

                    During 2006, thecompany adopted a Supplemental Executive Retirement Plan for nine of itsexecutive officers.  Expenses related to this plan totaled $55,958 for the yearended December 31, 2006. 

**NOTE 17 - WARRANTSAND STOCK OPTIONS AND GRANT PLANS** 

                    Upon completion of the1999 stock offering, the company issued warrants to each of its organizers topurchase up to an additional 213,593 shares (adjusted for the 3 for 2 stocksplit in 2003 and the 10 percent stock dividend in 2006) of common stock at$6.06 per share.  These warrants vested over a three-year period, are currentlyexercisable, and expire on October 27, 2009.  There were 209,192 warrantsoutstanding at December 31, 2006 and 2005 and 213,593 warrants outstanding atDecember 31, 2004.

                    On March 21, 2000, the companyadopted a stock option plan for the benefit of the directors, officers andemployees.  The Board may grant up to 436,424 options (adjusted for 3 for 2stock split and the stock dividend) at an option price per share not less thanthe fair market value on the date of grant. On December 20, 2005, the company'sBoard of Directors approved accelerating all unvested options granted toofficers and employees effective December 28, 2005.  The options expire 10years from the grant date.  During 2006, the company granted 10,000 shareswhich vest over four years and are exercisable at $21.70.  The fair value of theseshares on the date of grant was $7.87 per share.  None of the shares grantedduring 2006 were vested at December 31, 2006. 

Asummary of the status of the plan and changes for the years ended December 31,are presented below: 

**2006**

**2005**

**2004**

**Weighted**

**Weighted**

**Weighted**

**average**

**Average**

**average**

**average**

**exercise**

**Intrinsic**

**exercise**

**exercise**

**Shares**

**price**

**Value**

**Shares**

**price**

**Shares**

**price**

** **

Outstanding  at beginning of year

268,427 

 $

8.01 

277,475 

 $

7.82 

249,975 

 $

6.86 

Granted

10,000 

21.70 

2,750 

19.28

27,500 

16.53

Exercised

8,200 

6.63 

121,688 

11,798 

6.27

- 

- 

Forfeited  or expired

- 

- 

- 

- 

- 

- 

Outstanding at end of year

**270,227 **

** $**

**8.57 **

**3,487,915 **

**268,427 **

** $**

**8.01 **

**277,475 **

** $**

**7.82 **

** **

** **

** **

Options exercisable at year-end

**260,227 **

** $**

**8.07 **

**3,487,915 **

**268,427 **

** $**

**8.01 **

**181,707 **

** $**

**6.36 **

** **

** **

Shares available for grant

**146,199 **

**156,199 **

**158,949 **

      **           **The aggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the company's closing stock price on thelast trading day of 2006 and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders hadall option holders exercised their options on December 31, 2006.  Thisamount changes based on the fair market value of the company's stock.

                    On March 21, 2006, the companyadopted a restricted stock plan for the benefit of the directors, officers andemployees.  The Board may grant up to 11,000 shares (adjusted for stockdividend) of stock under the plan.  No stock grants were issued during 2006.** **

**NOTE 18- COMMON STOCK AND EARNINGS PER SHARE** 

**                   **SFAS No. 128, "Earningsper Share" requires that the company present basic and diluted net earnings percommon share.  The assumed conversion of stock options and warrants can createa difference between basic and diluted net earnings per common share. Theweighted average number of common shares outstanding for basic earnings was2,931,640, 2,922,403, and 2,169,296 for 2006, 2005, and 2004, respectively.  Theweighted average number of common shares assumed outstanding for dilutedearnings per common share was 3,238,329, 3,223,405, and 2,463,672 in 2006,2005, and 2004.  All shares outstanding have been adjusted for the 10 percent stockdividend in 2006.

71
NOTE 19 - DIVIDENDS 
                    On June 20,2006, the company's Board of Directors approved a 10 percent stock dividend tothe company's shareholders.  The record date was July 24, 2006, and thedistribution date was August 14, 2006.  All fractional shares were paid incash.

                    There are nocurrent plans to initiate payment of cash dividends and our future dividendpolicy will depend on the bank's and the company's earnings, capitalrequirements, financial condition and other factors considered relevant by the company'sBoard of Directors.   The bank is restricted in its ability to pay cash dividendsunder the national banking laws and regulations of the OCC.  Generally, theserestrictions require the bank to pay cash dividends derived solely from netprofits.  Moreover, OCC prior approval is required if cash dividends declaredin any calendar year exceed the bank's net profit for that year combined withits retained net profits for the preceding two years.** **

**NOTE 20 - REGULATORY MATTERS**

                    Thecompany and the bank are subject to various regulatory capital requirementsadministered by the federal banking agencies.  Failure to meet minimum capitalrequirements can initiate certain mandatory and possible additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the company and bank's financial statements.  Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the bank must meet specific capital guidelines that involve quantitativemeasures of the assets, liabilities, and certain off balance sheet items ascalculated under regulatory accounting practices.  The bank's capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

                    Quantitativemeasures established by regulation to ensure capital adequacy require the companyand bank to maintain minimum amounts and ratios (set forth in the table below)of Total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital toaverage assets.  Management believes, as of December 31, 2006, that the companyand bank exceed all well capitalized requirements to which it is subject.               

72

**NOTE 20 - REGULATORY MATTERS,Continued **

                    As of December31, 2006, the most recent notification from the Office of the Comptroller ofthe Currency categorized the bank as well capitalized under the regulatoryframework for prompt corrective action.  There are no conditions or events,since that notification that management believes have changed the bank'scategory.  The company's and bank's actual capital amounts and ratios andminimum regulatory amounts and ratios are presented as follows:**   **

** **

** **

** **

** **

** **

** **

** **

**To be well  capitalized**

** **

** **

** **

** **

**For  capital**

** **

**under  prompt corrective**

** **

** **

** **

** **

**adequacy  purposes**

** **

**action  provisions**

** **

**              Actual**

** **

**Minimum**

** **

**Minimum**

** **

**  Amount**

** **

**   Ratio**

** **

**Amount**

** **

**Ratio**

** **

**Amount**

** **

**Ratio**

** **

**(Dollars  in thousands)**

** **

**As of December 31, 2006**

** **

*The Company*

* *

Total Capital (to risk weighted assets)

 $

52,550 

13.1%

 $

32,137 

8.0%

 $

40,171 

10.0%

Tier 1 Capital (to risk weighted assets)

47,600 

11.9    

16,069 

4.0   

24,103 

6.0   

Tier 1 Capital (to average assets)

47,600 

9.4    

20,364 

4.0   

25,455 

5.0   

** **

*The Bank*

* *

Total Capital (to risk weighted assets)

 $

49,223 

12.3%

 $

31,970 

8.0%

 $

39,963 

10.0%

Tier 1 Capital (to risk weighted assets)

44,273 

11.1    

15,985 

4.0   

23,978 

6.0   

Tier 1 Capital (to average assets)

44,273 

8.7    

20,364 

4.0   

25,455 

5.0   

** **

**As of December 31, 2005**

** **

*The Company*

* *

Total Capital (to risk weighted assets)

 $

47,610 

14.9%

 $

25,651 

8.0%

 $

32,064 

10.0%

Tier 1 Capital (to risk weighted assets)

43,623 

13.6    

12,826 

4.0   

19,239 

6.0   

Tier 1 Capital (to average assets)

43,623 

11.6    

15,093 

4.0   

18,866 

5.0   

** **

*The Bank*

* *

Total Capital (to risk weighted assets)

 $

43,552 

13.7%

 $

25,478 

8.0%

 $

31,848 

10.0%

Tier 1 Capital (to risk weighted assets)

39,565 

12.4    

12,739 

4.0   

19,109 

6.0   

Tier 1 Capital (to average assets)

39,565 

10.5    

15,093 

4.0   

18,866 

5.0   

** NOTE 21 - SUBSEQUENTEVENT **

**                  **In February2007, the company decided to actively market the sale of its former main officeand corporate headquarters building.  The company, accordingly, reclassifiedthe building from property and equipment to property held for sale, inaccordance with SFAS No. 144 "Accounting for the Impairment of Disposal of Long-LivedAssets," and ceased depreciation of the building.  The company received a salescontract for $2.4 million which would result in a pre-tax gain of $375,000 andis expected to close in the second quarter of 2007.** **

73

**NOTE 22 -SELECTED CONDENSED QUARTERLY FINANCIAL DATA (UNAUDITED)** 

                    Followingis a summary of operations by quarter:

**2006**

**Quarters ended**

**March 31**

** **

**June 30**

** **

**September 30**

** **

**December 31**

Interest  income

$

6,626,130 

$

7,497,871 

$

8,134,068 

$

8,670,856 

Interest  expense

3,266,327

3,934,985

4,440,648

4,937,449

Net  interest income

3,359,803

3,562,886

3,693,420

3,733,407

Provision  for loan losses

400,000

400,000

400,000

450,000

Noninterest  income

155,575

133,998

112,927

176,995

Noninterest  expenses

1,789,544

1,769,398

1,854,176

1,938,190

Income  before provision for

income  taxes

1,325,834

1,527,486

1,552,171

1,522,212

Income  tax expense

483,930

557,531

532,494

452,954

Net  income

$

841,904 

$

969,955 

$

1,019,677 

$

1,069,258 

Earnings  per share

Basic

$

.29 

$

.33 

$

.35  

$

.36 

Diluted

$

.25 

$

.30 

$

.32  

$

.33 

Weighted  average common shares

Basic

2,927,250

2,931,723

2,933,721

2,933,868

Diluted

3,245,837

3,236,262

3,231,605

3,239,613

 
**2005**

**Quarters ended**

**March 31**

** **

**June 30**

** **

**September 30**

** **

**December 31**

Interest  income

$

4,582,162 

$

5,228,296 

$

5,669,311 

$

6,189,776 

Interest  expense

1,901,572

2,306,957

2,564,442

2,811,892

Net  interest income

2,680,590

2,921,339

3,104,869

3,377,884

Provision  for loan losses

345,000

265,000

225,000

165,000

Noninterest  income

213,375

217,494

201,851

193,061

Noninterest  expenses

1,484,211

1,548,577

1,586,042

3,236,550

Income  before provision for

income  taxes

1,064,754

1,325,256

1,495,678

169,395

Income  tax expense

404,606

503,598

568,357

64,370

Net  income

$

660,148 

$

821,658 

$

927,321 

$

105,025 

Earnings  per share

Basic

$

.23 

$

.28 

$

.32 

$

.04 

Diluted

$

.21 

$

.25 

$

.29 

$

.03 

Weighted  average common shares

Basic

2,912,793

2,925,423

2,925,698

2,925,691

Diluted

3,210,099

3,231,047

3,224,499

3,240,047

74
NOTE23 -FAIR VALUE OF FINANCIAL INSTRUMENTS 
                    SFAS No. 107,"Disclosures about Fair Value of Financial Instruments" requires disclosure offair value information, whether or not recognized in the consolidated balancesheets, when it is practical to estimate the fair value.  SFAS No. 107 definesa financial instrument as cash, evidence of an ownership interest in an entityor contractual obligations which require the exchange of cash or otherfinancial instruments.  Certain items are specifically excluded from thedisclosure requirements, including the company's common stock, premises and equipment andother assets and liabilities.

                    Fairvalue approximates carrying value for the following financial instruments dueto the short-term nature of the instrument: cash and due from banks, federalfunds sold, federal funds purchased, securities sold under agreement torepurchase and official checks.  

                    Securitiesare valued using quoted fair market prices.  Fair value for the company'soff-balance sheet financial instruments is based on the discounted presentvalue of the estimated future cash flows.

                    Fairvalue for variable rate loans and borrowings that reprice frequently and forloans that mature in less than one year is based on the carrying value.  Fairvalue for fixed rate mortgage loans, personal loans and all other loans(primarily commercial) maturing after one year is based on the discountedpresent value of the estimated future cash flows.  Discount rates used in thesecomputations approximate the rates currently offered for similar loans ofcomparable terms and credit quality.

                    The cash surrender value of lifeinsurance policies held by the bank approximates fair values of the policies.

                    Fairvalue for demand deposit accounts and interest-bearing accounts with no fixedmaturity date is equal to the carrying value.  Certificate of deposit accountsand FHLB advances with a maturity within one year are valued at their carryingvalue. The fair value of certificate of deposit accounts and FHLB advances witha maturity after one year are estimated by discounting cash flows from expectedmaturities using current interest rates on similar instruments.

                    Thecompany has used management's best estimate of fair value based on the aboveassumptions.  Thus, the fair values presented may not be the amounts that couldbe realized in an immediate sale or settlement of the instrument.  In addition,any income taxes or other expenses, which would be incurred in an actual saleor settlement, are not taken into consideration in the fair value presented. 

                    The estimatedfair values of the company's financial instruments at December 31, 2006 and 2005are as follows:

**2006**

** **

**2005**

** **

**Carrying**

** **

**Fair**

** **

**Carrying**

** **

**Fair**

** **

**Amount**

** **

**Value**

** **

**Amount**

** **

**Value**

**Financial Assets:**

** **

Cash and  due from banks

 $

9,112,675 

$

9,112,675 

 $

6,223,397 

 $

6,223,397 

Federal  funds sold

7,466,458 

7,466,458 

19,380,755 

19,380,755 

Investment  securities available for sale

50,199,513    

50,199,513 

11,310,956    

11,310,956 

Investment  securities held to maturity

17,044,531 

16,576,673 

19,345,016 

18,709,112 

Other  investments

7,060,100 

7,060,100 

5,475,400 

5,475,400 

Loans,  net

397,233,829 

391,139,997 

334,040,776 

330,057,600 

Bank owned life insurance

8,142,947 

8,142,947 

- 

- 

**Financial Liabilities:**

** **

Deposits

345,504,076 

315,729,070 

254,148,041 

246,595,200 

Official  checks outstanding

4,131,107 

4,131,107 

7,786,468 

7,786,468 

Repurchase  agreements

- 

- 

14,680,000 

14,680,000 

Federal  Home Loan Bank advances

108,500,000 

107,150,270 

79,500,000 

78,463,500 

Junior  subordinated debentures

13,403,000 

13,403,000 

13,403,000 

13,403,000 
 
75
 NOTE 24 - PARENT COMPANYFINANCIAL INFORMATION
                        Followingis condensed financial information of Greenville First Bancshares, Inc. (parentcompany only):                   

**Condensed  Balance Sheets**

** **

**December  31,**

** **

**2006**

** **

**2005**

**Assets**

** **

Cash and  cash equivalents

 $

1,264,515 

 $

4,938,484 

Investment  in subsidiaries

44,659,808 

39,816,507 

Property  and equipment

1,970,520 

2,030,384 

Other assets

117,000 

135,000 

** **

Total  assets

** $**

**48,011,843 **

** **

** $**

**46,920,375 **

** **

**Liabilities and Shareholders' Equity**

** **

Accounts  payable and accrued expenses

 $

25,397 

 $

3,044,628  

Junior  subordinated debentures

13,403,000 

13,403,000 

Shareholders'  equity

34,583,446 

30,472,747 

** **

Total  liabilities and shareholders' equity

** $**

**48,011,843 **

** **

** $**

**46,920,375 **

** **

** **

 
**Condensed  Statements of Income**

** **

** **

** **

** **

**For the  years ended December 31,**

** **

**2006**

** **

**2005**

** **

**2004**

**Revenues**

** **

** **

Interest  income

 $

31,429 

$

17,393 

$

5,150 

Rental  income

225,215 

- 

- 

Total  revenue

256,644 

17,393 

5,150 

** **

**Expenses**

Interest  expense

978,656 

419,362 

338,801 

Depreciation

59,864 

4,988 

- 

Impairment  of long lived assets

- 

1,500,000 

- 

Total  expense

1,038,520

1,924,350

338,801

Loss  before equity in undistributed net income of subsidiaries

(781,876)

(1,906,957)

(333,651)

Equity in  undistributed net income of subsidiaries

4,682,670

4,421,109 

2,346,240 

** **

** **

** **

Net  income

** $**

**3,900,794 **

** **

**$**

**2,514,152**

** **

** $**

**2,012,589 **
 
76

**NOTE24 - PARENT COMPANY FINANCIAL INFORMATION, Continued**

**Condensed  Statements of Cash Flows** 
** **

** **

** **

** **** ** 
** **

**For the  years ended December 31,** 
** **

** **

**2006**

** **

**2005**

** **

**2004** 
**Operating activities**

** **

	 
Net  income

 $

3,900,794 

$

2,514,152 

 $

2,012,589  
Adjustments  to reconcile net income to net cash provided by

	 
(used for) operating activities

	 
Equity in  undistributed net income of subsidiaries

(4,682,670)

(4,421,109)

(2,346,240) 
** **

Depreciation

59,864 

4,988 

-  
** **

Impairment  of long lived assets

- 

1,500,000 

-  
** **

Decrease in  other assets

18,000 

18,000 

18,000 
** **

Increase  (decrease) in accounts payable and accrued expenses

(3,019,231)

3,027,818 

2,091  
	 
Net cash  provided by (used for) operating activities

(3,723,243)

     

2,643,849 

(313,560)
	 
*** ***

** **

** **

** **

** **

**Investing activities**

** **

** **

** **

** **

** **

Purchase  of property and equipment

- 

(3,535,374)

-   
Investment  in subsidiaries

- 

(3,717,000)

(12,500,000) 
Net cash  used for investing activities

- 

** **

(7,252,374)

** **

(12,500,000) 
** **

** **

** **

** **

** ** 
**Financing activities**

** **

** **

** **

** **

** ** 
Proceeds  from note payable

- 

- 

3,000,000 
Repayment  of note payable

- 

- 

(3,000,000)
Proceeds  from junior subordinate debentures

- 

7,217,000 

-  
Proceeds  from sale of common stock, net

- 

- 

14,906,029  
Cash in  lieu of fractional shares

(446)

- 

-  
Proceeds  from the exercise of stock options and warrants

49,720 

80,598 

20,010  
	 
Net cash  provided by financing activities

49,274 

7,297,598 

14,926,039  
	 
Net  increase (decrease) in cash and cash equivalents

(3,673,969)

2,689,073 

2,112,479  
	 
**Cash and  cash equivalents, beginning of year**

4,938,484 

2,249,411 

136,932  
	 
**Cash and  cash equivalents, end of year**

**$**

**1,264,515 **

** **

**$**

**4,938,484 **

** **

** $**

**2,249,411 **
 
77

***REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM***

To the Boardof Directors

GreenvilleFirst Bancshares, Inc. and Subsidiary 

Greenville, South Carolina

 

                    Wehave audited the accompanying consolidated balance sheets of Greenville FirstBancshares, Inc. and Subsidiary as of December 31, 2006 and 2005, and therelated consolidated statements of income, shareholders' equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2006.  These consolidated financial statements are theresponsibility of the company's management.  Our responsibility is to expressan opinion on these consolidated financial statements based on our audits.

 

                    Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis for ouropinion.

 

                    Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Greenville FirstBancshares, Inc. and Subsidiary******as of December 31, 2006 and 2005 andthe results of their operations and their cash flows for each of the three yearsin the period ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America.

 

                                                                                                                                                                                                                                      

/s/Elliott Davis, LLC                                                                                                                                                                                                                                                     

Greenville, South Carolina

March 13, 2007

78

**Item 9.  Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**

None.

**Item 9A. Controls and Procedures**

As of the end of the period coveredby this report, we carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e).  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our current disclosure controls and procedures are effective asof December 31, 2006.  There have been no significant changes in our internalcontrols over financial reporting during the fourth fiscal quarter endedDecember 31, 2006 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

 

The design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

**Item 9B. Other Information**

Therewas no information required to be disclosed by the company in a report on Form8-K during the fourth quarter of 2006 that was not so disclosed.

**PART III**

**Item 10. Directors, Executive Officers and Corporate Governance.**

                Inresponse to this Item, this information is contained in our Proxy Statement forthe Annual Meeting of Shareholders to be held on May 15, 2007 and isincorporated herein by reference.

**Item 11.  Executive Compensation.**

                Inresponse to this Item, this information is contained in our Proxy Statement forthe Annual Meeting of Shareholders to be held on May 15, 2007 and isincorporated herein by reference. 

**Item 12.  Security Ownership of Certain Beneficial Owners and****Managementand Related Stockholder Matters.**

              Inresponse to this Item, the information required by Item 201(d) is contained inItem 5 of this report.  The other information required by thisitem is contained in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2007 and is incorporated herein byreference. 

**Item 13.  Certain Relationships and Related Transactions.**

                The information iscontained in our Proxy Statement for the Annual Meeting of Shareholders to beheld on May 15, 2007 is incorporated herein by reference.

**Item 14. Principal Accounting Fees and Services.**

                In response to this Item, this information iscontained in our Proxy Statement for the Annual Meeting of Shareholders to beheld on May 15, 2007 and is incorporated herein by reference.                   

**Item15.     Exhibits, Financial Statement Schedules**
(a)(1)  Financial Statements                    The following consolidated financial statements are located in Item 8 of this report.                    Report of Independent Registered Public Accounting Firm
79
                    Consolidated Balance Sheets as of December 31, 2006 and 2005                    Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                    Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004                    Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                    Notes to the Consolidated Financial Statements         (2)      Financial Statement SchedulesThese schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.        (3)       ExhibitsThe following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.3.1.                          Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form SB-2, File No. 333-83851).
3.2.                          Bylaws(incorporated by reference to Exhibit 3.2 of the Registration Statement on FormSB-2, File No. 333-83851).

4.1.                          See Exhibits 3.1and 3.2 for provisions in Greenville First Bancshares's Articles ofIncorporation and Bylaws defining the rights of holders of the common stock(incorporated by reference to Exhibit 4.1 of the Registration Statement on FormSB-2, File No. 333-83851).

4.2.                          Form ofcertificate of common stock (incorporated by reference to Exhibit 4.2 of theRegistration Statement on Form SB-2, File No. 333-83851).

10.1.                        EmploymentAgreement dated July 27, 1999 between Greenville First Bancshares and ArtSeaver (incorporated by reference to Exhibit 10.1 of the Registration Statementon Form SB-2, File No. 333-83851).*

10.2.                        Lease Agreementincorporated by reference between Greenville First Bank and Halton Properties,LLC, formerly Cothran Properties, LLC (incorporated by reference to Exhibit10.2 of Form 10-K filed on March 28, 2000).

10.3                         DataProcessing Services Agreement dated June 28, 1999 between Greenville FirstBancshares and the Intercept Group (incorporated by reference to Exhibit 10.3of the Registration Statement on Form SB-2, File No. 333-83851).

10.4                         Form of Stock WarrantAgreement (incorporated by reference to Exhibit 10.4 of the RegistrationStatement on Form SB-2, File No. 333-83851).*

10.5                         2000 GreenvilleFirst Bancshares, Inc. Stock Incentive Plan and Form of Option Agreement(incorporated by reference to Exhibit 10.7 to the company's Form 10-QSB for theperiod ended March 31, 2000).*

10.6                         EmploymentAgreement dated April 1, 2004 between Greenville First Bank, N.A.,Greenville First Bancshares, Inc., and James M. Austin, III(incorporated by reference to Exhibit 10.1 to the company's Form 10-QSB for theperiod ended June 30, 2004).*

10.7                         EmploymentAgreement dated April 1, 2004 between Greenville First Bank, N.A. andFrederick Gilmer, III (incorporated by reference to Exhibit 10.2 to the company'sForm 10-QSB for the period ended June 30, 2004).*

10.8                         EmploymentAgreement dated April 1, 2004 between Greenville First Bank, N.A. andJ. Edward Terrell (incorporated by reference to Exhibit 10.3 to the company'sForm 10-QSB for the period ended June 30, 2004).*

10.9                         Consulting ServicesAgreement between Greenville First Bank, N.A. and Cothran Properties, LLC datedJanuary 12, 2004 (incorporated by reference to Exhibit 10.4 to the company'sForm 10-QSB for the period ended June 30, 2004).

80

10.10                       Consulting ServicesAgreement between Greenville First Bank, N.A. and Cothran Properties, LLC datedJune 14, 2004 (incorporated by reference to Exhibit 10.5 to the company'sForm 10-QSB for the period ended June 30, 2004).

10.11                       Sublease Agreementbetween Greenville First Bank, N.A. and Augusta Road Holdings, LLC datedFebruary 26, 2004 (incorporated by reference to Exhibit 10.6 to the company'sForm 10-QSB for the period ended June 30, 2004).

10.12                       Bonaventure I OfficeLease Agreement with Greenville First Bank, N.A., dated September 20, 2005(incorporated by reference to Exhibit 10.1 to the company's Form 10-Q for theperiod ended September 30, 2005).

10.13                       First Amendment toOffice Lease Agreement with Greenville First Bank, N.A., dated September 20,2005 (incorporated by reference to Exhibit 10.2 to the company's Form 10-Q forthe period ended September 30, 2005).

10.14                       Employment Agreementdated November 2, 2006 between Greenville First Bank, N.A. and F. JustinStrickland (incorporated by reference to Exhibit 10.1 to the company's Form 8-Kfor the period ended December 12, 2006).*

21                            Subsidiaries.

24                            Powerof Attorney (contained herein as part of the signature pages).

31.1                         Rule13a-14(a) Certification of the Chief Executive Officer.

31.2                         Rule13a-14(a) Certification of the Chief Financial Officer.
32                            Section 1350 Certifications.                                                             
*      Managementcontract or compensatory plan or arrangement required to be filed as an Exhibitto this Annual Report on Form 10-K.

**SIGNATURES**

                In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934 (the "Exchange Act"), the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

                                                                                                **GREENVILLEFIRST BANCSHARES, INC**.

Date:   March 20, 2007                                         By:         /s/ R. Arthur Seaver, Jr.      

                                                                                                Presidentand Chief Executive Officer

                KNOW ALL MEN BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints R. Arthur Seaver, Jr.,his true and lawful attorney-in-fact and agent, with full power of substitutionand resubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto attorney-in-fact and agent full power and authority to do and perform eachand every act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that attorney-in-fact and agent, orhis substitute or substitutes, may lawfully do or cause to be done by virtuehereof.

81

          

    In accordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant in the capacities and on the datesindicated.

 

Signature                                                                               Title                                                                        Date        

 

 /s/ JamesM. Austin, III                                                                                                                                     

James M.Austin, III                                                            ChiefFinancial Officer,                                        March 20, 2007

                                                                                                (*PrincipalFinancial and*

*                                                                                                AccountingOfficer)*

 

 /s/ Andrew B. Cajka, Jr.                                      

Andrew B.Cajka, Jr.                                                            Director                                                                  March20, 2007

 

 /s/ Mark A.Cothran                                           

Mark A.Cothran                                                                  Director                                                                  March20, 2007

 

 /s/Leighton M. Cubbage                                  

Leighton M. Cubbage                                                        Director                                                                 March 20, 2007

 

 /s/ David G. Ellison                                             

David G.Ellison                                                                    Director                                                                 March20, 2007

 

                                                                                

Anne S.Ellefson                                                                  Director                                                                  March20, 2007

 

 /s/ FredGilmer, Jr.                                               

Fred Gilmer,Jr.                                                                      Director,Senior Vice-                                          March 20, 2007

President

 

 /s/ Tecumseh Hooper, Jr.                                   

TecumsehHooper, Jr.                                                         Director                                                                  March20, 2007

 

 /s/ RudolphG. Johnstone, III, M.D. 

Rudolph G.Johnstone, III, M.D.                                       Director                                                                  March20, 2007

 

 /s/James B. Orders, III                                        

James B.Orders, III                                                              Director,Chairman                                               March 20, 2007

 

 /s/ WilliamB. Sturgis                                          

William B.Sturgis                                                                Director                                                                  March20, 2007

 

 /s/ R.Arthur Seaver, Jr.                                      

R. ArthurSeaver, Jr.                                                            Director,Chief Executive                                     March20, 2007 

                                                                                               Officer

                                                                                                (P*rincipalExecutive Officer*)

 

                                                                                

F. Justin Strickland                                                              President                                                                March20, 2007 

                                                                                       

82

**EXHIBITINDEX**

3.1.          Articles of Incorporation, as amended(incorporated by reference to Exhibit 3.1 of the Registration Statement on FormSB-2, File No. 333-83851).

3.2.          Bylaws (incorporated by reference to Exhibit3.2 of the Registration Statement on Form SB-2, File No. 333-83851).

4.1.          See Exhibits 3.1 and 3.2 for provisions inGreenville First Bancshares's Articles of Incorporation and Bylaws defining therights of holders of the common stock (incorporated by reference to Exhibit 4.1of the Registration Statement on Form SB-2, File No. 333-83851).

4.2.          Form of certificate of common stock(incorporated by reference to Exhibit 4.2 of the Registration Statement on FormSB-2, File No. 333-83851).

10.1.        Employment Agreement dated July 27, 1999between Greenville First Bancshares and Art Seaver (incorporated by referenceto Exhibit 10.1 of the Registration Statement on Form SB-2, File No. 333-83851).*

10.2.        Lease Agreement incorporated by referencebetween Greenville First Bank and Halton Properties, LLC, formerly CothranProperties, LLC (incorporated by reference to Exhibit 10.2 of Form 10-K filedon March 28, 2000).

10.3         DataProcessing Services Agreement dated June 28, 1999 between Greenville FirstBancshares and the Intercept Group (incorporated by reference to Exhibit 10.3of the Registration Statement on Form SB-2, File No. 333-83851).

10.4         Form of Stock Warrant Agreement (incorporatedby reference to Exhibit 10.4 of the Registration Statement on Form SB-2, FileNo. 333-83851).*

10.5         2000 Greenville First Bancshares, Inc.Stock Incentive Plan and Form of Option Agreement (incorporated by reference toExhibit 10.7 to the company's Form 10-QSB for the period ended March 31, 2000).*

10.6         Employment Agreement dated April 1, 2004between Greenville First Bank, N.A., Greenville First Bancshares, Inc.,and James M. Austin, III (incorporated by reference to Exhibit 10.1to the company's Form 10-QSB for the period ended June 30, 2004).*

10.7         Employment Agreement dated April 1, 2004between Greenville First Bank, N.A. and Frederick Gilmer, III(incorporated by reference to Exhibit 10.2 to the company's Form 10-QSB for theperiod ended June 30, 2004).*

10.8         Employment Agreement dated April 1, 2004between Greenville First Bank, N.A. and J. Edward Terrell (incorporated byreference to Exhibit 10.3 to the company's Form 10-QSB for the period endedJune 30, 2004).*

10.9         Consulting Services Agreement betweenGreenville First Bank, N.A. and Cothran Properties, LLC dated January 12,2004 (incorporated by reference to Exhibit 10.4 to the company's Form 10-QSBfor the period ended June 30, 2004).

10.10       Consulting Services Agreement between GreenvilleFirst Bank, N.A. and Cothran Properties, LLC dated June 14, 2004(incorporated by reference to Exhibit 10.5 to the company's Form 10-QSB for theperiod ended June 30, 2004).

10.11       Sublease Agreement between Greenville FirstBank, N.A. and Augusta Road Holdings, LLC dated February 26, 2004(incorporated by reference to Exhibit 10.6 to the company's Form 10-QSB for theperiod ended June 30, 2004).

10.12       Bonaventure I Office Lease Agreement withGreenville First Bank, N.A., dated September 20, 2005 (incorporated byreference to Exhibit 10.1 to the company's Form 10-Q for the period endedSeptember 30, 2005).

10.13      First Amendment to Office Lease Agreement withGreenville First Bank, N.A., dated September 20, 2005 (incorporated byreference to Exhibit 10.2 to the company's Form 10-Q for the period endedSeptember 30, 2005).

83

10.14       Employment Agreementdated November 2, 2006 between Greenville First Bank, N.A. and F. JustinStrickland (incorporated by reference to Exhibit 10.1 to the company's Form 8-Kfor the period ended December 12, 2006).*

21            Subsidiaries.

23            Consentof Independent Registered Public Accounting Firm

24            Powerof Attorney (contained herein as part of the signature pages).

31.1         Rule13a-14(a) Certification of the Chief Executive Officer.

31.2         Rule13a-14(a) Certification of the Chief Financial Officer.
32            Section 1350 Certifications.
84