UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2010ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934
                        For the Transition Period from                      toCommission file number 000-27719  d26423_proxy.jpg
 Southern First Bancshares, Inc. (Exact name of registrant as specified in its charter) South Carolina
                           
                           
                           
                           
                           
                           58-2459561(State or other jurisdiction of incorporation)
                           
                           
                           
                           
                           
                           (I.R.S. Employer Identification No.)100 Verdae Boulevard, Suite 100Greenville, S.C.
                           
                           
                           
                           
                           
                           29606(Address of principal executive offices)
                           
                           
                           
                           
                           
                           (Zip Code) 864-679-9000(Registrant's telephone number, including area code)Not Applicable(Former name, former address, and former fiscal year, if changed
                     since last report) Indicate by check mark whether the registrant (1) has filed all
                     reports required to be filed by Section 13 or 15(d) of the 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 o Indicate by check mark whether the registrant has submitted
                     electronically and posted on its corporate Web site, if any, every
                     Interactive Data File required to be submitted and posted pursuant to
                     Rule 405 of Regulation S-T (§232.405 of this chapter) during the
                     preceding12 months (or for such shorter period that the registrant
                     was required to submit and post such files).
                      Yes o  No o Indicate by check mark whether the registrant is a large accelerated
                     filer, an accelerated filer, or a non-accelerated filer. See
                     definitions of "accelerated filer" and "large accelerated filer" in
                     Rule 12b-2 of the Exchange Act). Large accelerated filer  o
                           
                           
                           Accelerated filer                 oNon-accelerated filer    o
                           
                           
                           Smaller Reporting Company  x Indicate by check mark whether the registrant is a shell company (as
                     defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuer's
                     classes of common stock, as of the latest practicable date: 3,143,181
                     shares of common stock, $.01 par value per share, were issued and
                     outstanding as of October 20, 2010.


PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data) September 30,2010
                           
                           
                           
                           
                           
                           December 31,2009(Unaudited)
                           
                           
                           
                           
                           
                           (Audited)ASSETSCash and cash equivalents:Cash and due from banks
                           
                           $
                           4,381
                           
                           
                           
                           
                           $
                           5,620Federal funds sold
                           
                           
                           28,525
                           
                           
                           
                           
                           
                           6,462Total cash and cash equivalents
                           
                           
                           32,906
                           
                           
                           
                           
                           
                           12,082Investment securities:Investment securities available for sale
                           
                           
                           82,702
                           
                           
                           
                           
                           
                           76,195Investment securities held to maturity (fair value $109 and $9,516)
                           
                           
                           104
                           
                           
                           
                           
                           
                           9,225Other investments, at cost
                           
                           
                           9,318
                           
                           
                           
                           
                           
                           9,213Total investment securities
                           
                           
                           92,124
                           
                           
                           
                           
                           
                           94,633Loans
                           
                           
                           579,848
                           
                           
                           
                           
                           
                           574,270Less allowance for loan losses
                           
                           
                           (8,411
                           )
                           
                           
                           
                           
                           (7,760
                           )Loans, net
                           
                           
                           571,437
                           
                           
                           
                           
                           
                           566,510Bank owned life insurance
                           
                           
                           14,408
                           
                           
                           
                           
                           
                           13,974Property and equipment, net
                           
                           
                           15,965
                           
                           
                           
                           
                           
                           16,410Deferred income taxes
                           
                           
                           3,480
                           
                           
                           
                           
                           
                           3,486Other assets
                           
                           
                           13,568
                           
                           
                           
                           
                           
                           12,202Total assets
                           
                           $
                           743,888
                           
                           
                           
                           
                           $
                           719,297LIABILITIES AND SHAREHOLDERS' EQUITYDeposits
                           
                           $
                           542,742
                           
                           
                           
                           
                           $
                           494,084Federal Home Loan Bank advances and related debt
                           
                           
                           122,700
                           
                           
                           
                           
                           
                           142,700Note payable
                           
                           
                           -
                           
                           
                           
                           
                           
                           4,250Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           13,403Other liabilities
                           
                           
                           4,937
                           
                           
                           
                           
                           
                           5,019Total liabilities
                           
                           
                           683,782
                           
                           
                           
                           
                           
                           659,456Shareholders' equity:Preferred stock, par value $.01 per share, 10,000,000 shares
                              authorized, 17,299 shares issued and outstanding
                           
                           
                           15,076
                           
                           
                           
                           
                           
                           15,432Common stock, par value $.01 per share, 10,000,000 shares authorized,
                              3,143,181 and 3,094,481 shares issued and outstanding at September
                              30, 2010 and December 31, 2009, respectively
                           
                           
                           31
                           
                           
                           
                           
                           
                           31Nonvested restricted stock
                           
                           
                           (4
                           )
                           
                           
                           
                           
                           (14
                           )Additional paid-in capital
                           
                           
                           34,920
                           
                           
                           
                           
                           
                           34,097Accumulated other comprehensive income
                           
                           
                           471
                           
                           
                           
                           
                           
                           484Retained earnings
                           
                           
                           9,612
                           
                           
                           
                           
                           
                           9,811Total shareholders' equity
                           
                           
                           60,106
                           
                           
                           
                           
                           
                           59,841Total liabilities and shareholders' equity
                           
                           $
                           743,888
                           
                           
                           
                           
                           $
                           719,297  See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 2


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME (LOSS)(dollars in thousands, except share data) For the three months endedSeptember 30,
                           
                           
                           
                           
                           
                           For the nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Interest income
                           
                           
                           (Unaudited)Loans
                           
                           $
                           8,318
                           
                           
                           
                           
                           $
                           7,977
                           
                           
                           
                           
                           $
                           24,355
                           
                           
                           
                           
                           $
                           23,685Investment securities
                           
                           
                           661
                           
                           
                           
                           
                           
                           1,129
                           
                           
                           
                           
                           
                           2,402
                           
                           
                           
                           
                           
                           3,390Federal funds sold
                           
                           
                           13
                           
                           
                           
                           
                           
                           9
                           
                           
                           
                           
                           
                           34
                           
                           
                           
                           
                           
                           17Total interest income
                           
                           
                           8,992
                           
                           
                           
                           
                           
                           9,115
                           
                           
                           
                           
                           
                           26,791
                           
                           
                           
                           
                           
                           27,092Interest expenseDeposits
                           
                           
                           2,357
                           
                           
                           
                           
                           
                           2,386
                           
                           
                           
                           
                           
                           7,243
                           
                           
                           
                           
                           
                           7,621Borrowings
                           
                           
                           1,404
                           
                           
                           
                           
                           
                           1,779
                           
                           
                           
                           
                           
                           4,639
                           
                           
                           
                           
                           
                           5,141Total interest expense
                           
                           
                           3,761
                           
                           
                           
                           
                           
                           4,165
                           
                           
                           
                           
                           
                           11,882
                           
                           
                           
                           
                           
                           12,762Net interest income
                           
                           
                           5,231
                           
                           
                           
                           
                           
                           4,950
                           
                           
                           
                           
                           
                           14,909
                           
                           
                           
                           
                           
                           14,330Provision for loan losses
                           
                           
                           1,275
                           
                           
                           
                           
                           
                           1,085
                           
                           
                           
                           
                           
                           4,975
                           
                           
                           
                           
                           
                           2,810Net interest income after provision for loan losses
                           
                           
                           3,956
                           
                           
                           
                           
                           
                           3,865
                           
                           
                           
                           
                           
                           9,934
                           
                           
                           
                           
                           
                           11,520Noninterest incomeLoan fee income
                           
                           
                           190
                           
                           
                           
                           
                           
                           138
                           
                           
                           
                           
                           
                           416
                           
                           
                           
                           
                           
                           297Service fees on deposit accounts
                           
                           
                           155
                           
                           
                           
                           
                           
                           199
                           
                           
                           
                           
                           
                           444
                           
                           
                           
                           
                           
                           551Income from bank owned life insurance
                           
                           
                           134
                           
                           
                           
                           
                           
                           213
                           
                           
                           
                           
                           
                           434
                           
                           
                           
                           
                           
                           459Gain on sale of investment securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           34
                           
                           
                           
                           
                           
                           1,104
                           
                           
                           
                           
                           
                           34Gain on sale of property and equipment
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Other than temporary impairment on investments
                           
                           
                           (450
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (450
                           )
                           
                           
                           
                           
                           -Real estate owned activity
                           
                           
                           (60
                           )
                           
                           
                           
                           
                           (148
                           )
                           
                           
                           
                           
                           (63
                           )
                           
                           
                           
                           
                           (152
                           )Other income
                           
                           
                           118
                           
                           
                           
                           
                           
                           97
                           
                           
                           
                           
                           
                           340
                           
                           
                           
                           
                           
                           277Total noninterest income
                           
                           
                           87
                           
                           
                           
                           
                           
                           533
                           
                           
                           
                           
                           
                           2,243
                           
                           
                           
                           
                           
                           1,466Noninterest expensesCompensation and benefits
                           
                           
                           1,700
                           
                           
                           
                           
                           
                           1,980
                           
                           
                           
                           
                           
                           5,974
                           
                           
                           
                           
                           
                           5,867Professional fees
                           
                           
                           134
                           
                           
                           
                           
                           
                           186
                           
                           
                           
                           
                           
                           464
                           
                           
                           
                           
                           
                           478Marketing
                           
                           
                           151
                           
                           
                           
                           
                           
                           176
                           
                           
                           
                           
                           
                           547
                           
                           
                           
                           
                           
                           495Insurance
                           
                           
                           436
                           
                           
                           
                           
                           
                           352
                           
                           
                           
                           
                           
                           1,116
                           
                           
                           
                           
                           
                           1,143Occupancy
                           
                           
                           535
                           
                           
                           
                           
                           
                           550
                           
                           
                           
                           
                           
                           1,646
                           
                           
                           
                           
                           
                           1,407Data processing and related costs
                           
                           
                           421
                           
                           
                           
                           
                           
                           358
                           
                           
                           
                           
                           
                           1,208
                           
                           
                           
                           
                           
                           1,077Telephone
                           
                           
                           74
                           
                           
                           
                           
                           
                           76
                           
                           
                           
                           
                           
                           228
                           
                           
                           
                           
                           
                           186Other
                           
                           
                           145
                           
                           
                           
                           
                           
                           187
                           
                           
                           
                           
                           
                           532
                           
                           
                           
                           
                           
                           605Total noninterest expenses
                           
                           
                           3,596
                           
                           
                           
                           
                           
                           3,865
                           
                           
                           
                           
                           
                           11,715
                           
                           
                           
                           
                           
                           11,258Income before income tax expense
                           
                           
                           447
                           
                           
                           
                           
                           
                           533
                           
                           
                           
                           
                           
                           462
                           
                           
                           
                           
                           
                           1,728Income tax expense
                           
                           
                           110
                           
                           
                           
                           
                           
                           109
                           
                           
                           
                           
                           
                           12
                           
                           
                           
                           
                           
                           461Net income
                           
                           $
                           337
                           
                           
                           
                           
                           $
                           424
                           
                           
                           
                           
                           $
                           450
                           
                           
                           
                           
                           $
                           1,267Preferred stock dividend
                           
                           
                           216
                           
                           
                           
                           
                           
                           218
                           
                           
                           
                           
                           
                           649
                           
                           
                           
                           
                           
                           512Dividend accretion
                           
                           
                           116
                           
                           
                           
                           
                           
                           127
                           
                           
                           
                           
                           
                           356
                           
                           
                           
                           
                           
                           297Net income (loss) available to common shareholders
                           
                           $
                           5
                           
                           
                           
                           
                           $
                           79
                           
                           
                           
                           
                           $
                           (555
                           )
                           
                           
                           
                           $
                           458Earnings (loss) per common shareBasic
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           0.03
                           
                           
                           
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.15Diluted
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           0.03
                           
                           
                           
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.15Weighted average common shares outstandingBasic
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,048,959
                           
                           
                           
                           
                           
                           3,138,301
                           
                           
                           
                           
                           
                           3,046,228Diluted
                           
                           
                           3,144,089
                           
                           
                           
                           
                           
                           3,109,708
                           
                           
                           
                           
                           
                           3,138,301
                           
                           
                           
                           
                           
                           3,069,794 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 3


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYAND COMPREHENSIVE INCOMEFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009(Unaudited)(dollars in thousands, except share data) Common stock
                           
                           
                           Preferred
                           
                           
                           Nonvestedrestricted
                           
                           
                           Additionalpaid-in
                           
                           
                           Accumulatedothercomprehensive
                           
                           
                           Retained
                           
                           
                           Totalshare-holders'Shares
                           
                           
                           Amount
                           
                           
                           stock
                           
                           
                           stock
                           
                           
                           capital
                           
                           
                           income(loss)
                           
                           
                           Earnings
                           
                           
                           equityDecember 31, 2008
                           
                           
                           3,044,863
                           
                           $
                           30
                           
                           $
                           -
                           
                           $
                           (27
                           )
                           $
                           31,850
                           
                           $
                           (1,079
                           )
                           $
                           9,012
                           
                           $
                           39,786Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,267
                           
                           
                           1,267Comprehensive income, net of tax -Unrealized holding gain on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,069
                           
                           
                           -
                           
                           
                           2,069Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           3,336Preferred stock transactions:Proceeds from issuance of 17,299 shares of preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856Proceeds from issuance of common stock warrants
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418Cash dividends on Series T preferred at annual dividend rate of 5%
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (404
                           )
                           
                           (404
                           )Dividend accretion
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (297
                           )
                           
                           -
                           
                           
                           297
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Proceeds from exercise of stock warrants
                           
                           
                           24,897
                           
                           
                           1
                           
                           
                           -
                           
                           
                           -
                           
                           
                           150
                           
                           
                           -
                           
                           
                           -
                           
                           
                           151Amortization of deferred compensation on restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           10
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           10Compensation expense related to stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           79
                           
                           
                           -
                           
                           
                           -
                           
                           
                           79September 30, 2009
                           
                           
                           3,069,760
                           
                           $
                           31
                           
                           $
                           15,559
                           
                           $
                           (17
                           )
                           $
                           33,794
                           
                           $
                           990
                           
                           $
                           9,875
                           
                           $
                           60,232December 31, 2009
                           
                           
                           3,094,481
                           
                           $
                           31
                           
                           $
                           15,432
                           
                           $
                           (14
                           )
                           $
                           34,097
                           
                           $
                           484
                           
                           $
                           9,811
                           
                           $
                           59,841Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           450
                           
                           
                           450Comprehensive income, net of tax -Unrealized holding gain on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           716
                           
                           
                           -
                           
                           
                           716Reclassification adjustment included in net income, net of tax
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           (729
                           )
                           
                           
                           
                           
                           (729
                           )Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           437Preferred stock transactions:Cash dividends on Series T preferred at annual dividend rate of 5%
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (649
                           )
                           
                           (649
                           )Dividend accretion
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (356
                           )
                           
                           -
                           
                           
                           356
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Proceeds from exercise of stock warrants and options
                           
                           
                           48,700
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           295
                           
                           
                           -
                           
                           
                           -
                           
                           
                           295Amortization of deferred compensation on restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           10
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           10Compensation expense related to stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           172
                           
                           
                           -
                           
                           
                           -
                           
                           
                           172September 30, 2010
                           
                           
                           3,143,181
                           
                           $
                           31
                           
                           $
                           15,076
                           
                           $
                           (4
                           )
                           $
                           34,920
                           
                           $
                           471
                           
                           $
                           9,612
                           
                           $
                           60,106 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 4


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands) For the nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009(Unaudited)Operating activitiesNet income
                           
                           $
                           450
                           
                           
                           
                           
                           $
                           1,267Adjustments to reconcile net income to cashprovided by operating activities:Provision for loan losses
                           
                           
                           4,975
                           
                           
                           
                           
                           
                           2,810Depreciation and other amortization
                           
                           
                           659
                           
                           
                           
                           
                           
                           494Accretion and amortization of securities discounts and premium, net
                           
                           
                           716
                           
                           
                           
                           
                           
                           286Gain on sale of investment securities
                           
                           
                           (1,104
                           )
                           
                           
                           
                           
                           (34
                           )Gain on sale of property and equipment
                           
                           
                           (18
                           )
                           
                           
                           
                           
                           -Loss (gain) on sale of real estate
                           
                           
                           60
                           
                           
                           
                           
                           
                           (4
                           )Write-down of real estate owned
                           
                           
                           10
                           
                           
                           
                           
                           
                           202Other than temporary impairment on investment
                           
                           
                           450
                           
                           
                           
                           
                           
                           -Compensation expense related to stock options and grants
                           
                           
                           182
                           
                           
                           
                           
                           
                           89Increase in cash surrender value of bank owned life insurance
                           
                           
                           (434
                           )
                           
                           
                           
                           
                           (459
                           )Decrease (increase) in deferred tax asset
                           
                           
                           12
                           
                           
                           
                           
                           
                           (302
                           )Decrease in other assets, net
                           
                           
                           1,244
                           
                           
                           
                           
                           
                           243Increase in other liabilities, net
                           
                           
                           (82
                           )
                           
                           
                           
                           
                           (784
                           )Net cash provided by operating activities
                           
                           
                           7,120
                           
                           
                           
                           
                           
                           3,808Investing activitiesIncrease (decrease) in cash realized from:Origination of loans, net
                           
                           
                           (13,079
                           )
                           
                           
                           
                           
                           (9,242
                           )Purchase of property and equipment
                           
                           
                           (195
                           )
                           
                           
                           
                           
                           (4,913
                           )Purchase of investment securities:Available for sale
                           
                           
                           (86,241
                           )
                           
                           
                           
                           
                           (37,118
                           )Other investments
                           
                           
                           (750
                           )
                           
                           
                           
                           
                           (894
                           )Payments and maturity of investment securities:Available for sale
                           
                           
                           16,469
                           
                           
                           
                           
                           
                           23,675Held to maturity
                           
                           
                           1,096
                           
                           
                           
                           
                           
                           2,698Other investments
                           
                           
                           138
                           
                           
                           
                           
                           
                           266Proceeds from sale of investment securities
                           
                           
                           71,717
                           
                           
                           
                           
                           
                           -Proceeds from sale of property and equipment
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Proceeds from sale of real estate acquired in settlement of loans
                           
                           
                           477
                           
                           
                           
                           
                           
                           389Net cash used for investing activities
                           
                           
                           (10,350
                           )
                           
                           
                           
                           
                           (25,139
                           )Financing activitiesIncrease (decrease) in cash realized from:Increase in deposits, net
                           
                           
                           48,658
                           
                           
                           
                           
                           
                           25,279Increase in short-term repurchase agreements
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,000Decrease in note payable
                           
                           
                           (4,250
                           )
                           
                           
                           
                           
                           (10,250
                           )Decrease in Federal Home Loan Bank advances and related debt
                           
                           
                           (20,000
                           )
                           
                           
                           
                           
                           -Proceeds from the issuance of preferred stock
                           
                           
                           -
                           
                           
                           
                           
                           
                           15,856Proceeds from the issuance of stock warrant
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,418Cash dividend on preferred stock
                           
                           
                           (649
                           )
                           
                           
                           
                           
                           (404
                           )Proceeds from the exercise of stock options and warrants
                           
                           
                           295
                           
                           
                           
                           
                           
                           151Net cash provided by financing activities
                           
                           
                           24,054
                           
                           
                           
                           
                           
                           37,050Net increase in cash and cash equivalents
                           
                           
                           20,824
                           
                           
                           
                           
                           
                           15,719Cash and cash equivalents at beginning of the period
                           
                           
                           12,082
                           
                           
                           
                           
                           
                           13,160Cash and cash equivalents at end of the period
                           
                           $
                           32,906
                           
                           
                           
                           
                           $
                           28,879
 5


For the nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009(Unaudited)Supplemental informationCash paid forInterest
                           
                           $
                           11,814
                           
                           
                           
                           
                           $
                           13,052Income taxes
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           605Schedule of non-cash transactionsReal estate acquired in settlement of loans
                           
                           $
                           3,177
                           
                           
                           
                           
                           $
                           4,263Transfer from real estate acquired in settlement of loans to real
                              estate held for investment
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           1,700Unrealized gain on securities, net of income taxes
                           
                           $
                           716
                           
                           
                           
                           
                           $
                           2,069  See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 6


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Nature of Business and Basis of Presentation Business activity Southern First Bancshares, Inc. (the "Company") is a South Carolina corporation that owns all of the
                     capital stock of Southern First Bank, N.A. (the "Bank") and all of
                     the stock of Greenville First Statutory Trust I and II (collectively,
                     the "Trusts"). On July 2, 2007, the Company and Bank changed their
                     names to Southern First Bancshares, Inc. and Southern First Bank,
                     N.A., respectively. The Bank is a national bank organized under the
                     laws of the United States located in Greenville County, South
                     Carolina. The Bank is primarily engaged in the business of accepting
                     demand deposits and savings deposits insured by the Federal Deposit
                     Insurance Corporation (the "FDIC"), and providing commercial,
                     consumer and mortgage loans to the general public. The Trusts are
                     special purpose subsidiaries organized for the sole purpose of
                     issuing trust preferred securities. Basis of Presentation The accompanying consolidated financial statements have been prepared
                     in accordance with generally accepted accounting principles for
                     interim financial information and with the instructions to Form 10-Q.
                     Accordingly, they do not include all the information and footnotes
                     required by accounting principles generally accepted in the United
                     States of America for complete financial statements. In the opinion
                     of management, all adjustments (consisting of normal recurring
                     accruals) considered necessary for a fair presentation have been
                     included. Operating results for the three and nine month periods
                     ended September 30, 2010 are not necessarily indicative of the
                     results that may be expected for the year ending December 31, 2010.
                     For further information, refer to the consolidated financial
                     statements and footnotes thereto included in the Company's Annual
                     Report on Form 10-K for the year ended December 31, 2009
                     (Registration Number 000-27719) as filed with the Securities and
                     Exchange Commission. The consolidated financial statements include
                     the accounts of the Company, and its wholly owned subsidiary, the
                     Bank. In accordance with Financial Accounting Standards Board
                     ("FASB") Accounting Standards Codification ("ASC") 810,
                     "Consolidation," the financial statements related to the special
                     purpose subsidiaries, the Trusts, have not been consolidated. Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, cash and
                     federal funds sold are included in "cash and cash equivalents." These
                     assets have contractual maturities of less than three months. Reclassifications Certain amounts, previously reported, have been reclassified to state
                     all periods on a comparable basis that had no effect on shareholders'
                     equity or net income. Subsequent Events Subsequent events are events or transactions that occur after the
                     balance sheet date but before financial statements are issued.
                     Recognized subsequent events are events or transactions that provide
                     additional evidence about conditions that existed at the date of the
                     balance sheet, including the estimates inherent in the process of
                     preparing financial statements. Non-recognized subsequent events are
                     events that provide evidence about conditions that did not exist at
                     the date of the balance sheet but arose after that date. Management
                     performed an evaluation to determine whether or not there have been
                     any subsequent events since the balance sheet date and no subsequent
                     events occurred requiring accrual or disclosure. Formal Agreement with the Office of the Comptroller of the Currency On June 8, 2010, the Bank entered into a formal agreement (the
                     "Formal Agreement") with its primary regulator, the Office of the
                     Comptroller of the Currency (the "OCC"). The Formal Agreement seeks
                     to enhance the Bank's existing practices and procedures in the areas
                     of credit risk management, credit underwriting, liquidity, and funds
                     management. In addition, the OCC has established Individual Minimum
                     Capital Ratio levels of Tier 1 and total capital for the Bank that
                     are higher than the minimum and well capitalized ratios applicable to
                     all banks. Specifically, we must maintain total risk-based capital of
                     at least 12%, Tier 1 capital of at least 10%, and a leverage ratio of
                     at least 9%. The Board of Directors and management of the Bank have
                     aggressively worked to improve these practices and procedures and
                     believe the Company is currently in compliance with
 7


substantially all of the requirements of the Formal Agreement. See
                     "Management's Discussion and Analysis of Financial Condition and
                     Results of Operations" for more discussion of the Formal Agreement. NOTE 2. Note Payable The Company had a $4.3 million term note with Silverton Bridge Bank,
                     N.A. ("Silverton") at December 31, 2009, bearing interest at the
                     prime rate plus 0.5% with a floor rate of 4.0% and maturing on April
                     30, 2014. On August 10, 2010, the Company repaid the note payable
                     in full. NOTE 3. Preferred Stock Issuance On February 27, 2009, as part of the U.S. Treasury Department's
                     Capital Purchase Program ("CPP"), the Company entered into a Letter
                     Agreement and a Securities Purchase Agreement (collectively, the "CPP
                     Purchase Agreement") with the Treasury Department, pursuant to which
                     the Company sold 17,299 shares of its Fixed Rate Cumulative Perpetual
                     Preferred Stock, Series T (the "Series T Preferred Stock") and a
                     warrant (the "CPP Warrant") to purchase 330,554 shares of the
                     Company's common stock for an aggregate purchase price of $17.3
                     million in cash. The Series T Preferred Stock qualifies as Tier 1
                     capital and is entitled to cumulative dividends at a rate of 5% per
                     annum for the first five years, and 9% per annum thereafter. The
                     Company is current on its dividend obligations. The Company must
                     consult with the OCC before it may redeem the Series T Preferred
                     Stock but, contrary to the original restrictions in the Emergency
                     Economic Stabilization Act of 2008 (the "EESA"), will not necessarily
                     be required to raise additional equity capital in order to redeem
                     this stock. The CPP Warrant has a 10-year term and is immediately
                     exercisable upon its issuance, with an exercise price, subject to
                     anti-dilution adjustments equal to $7.85 per share of the common
                     stock. The fair value allocation of the $17.3 million between the
                     shares of Series T Preferred Stock and the CPP Warrant resulted in
                     $15.9 million allocated to the shares of Series T Preferred Stock and
                     $1.4 million allocated to the CPP Warrant. NOTE 4. Earnings (loss) per Common Share The following schedule reconciles the numerators and denominators of
                     the basic and diluted earnings (loss) per share computations for the
                     three and nine month periods ended September 30, 2010 and 2009.
                     Dilutive common shares arise from the potentially dilutive effect of
                     the Company's stock options and warrants that are outstanding. The
                     assumed conversion of stock options and warrants can create a
                     difference between basic and dilutive net income per common share. At September 30, 2010 and 2009, 684,929 and 442,079 options,
                     respectively, were anti-dilutive in the calculation of earnings per
                     share as their exercise price exceeded the fair market value. Three months ended September 30,2010
                           
                           
                           
                           
                           
                           2009Numerator:Net income
                           
                           $
                           337
                           
                           
                           
                           
                           $
                           424Less:
                           
                           
                           Preferred stock dividend
                           
                           
                           216
                           
                           
                           
                           
                           
                           218Dividend accretion (1)
                           
                           
                           116
                           
                           
                           
                           
                           
                           127Net income available to common shareholders
                           
                           $
                           5
                           
                           
                           
                           
                           $
                           79Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,048,959Common stock equivalents
                           
                           
                           908
                           
                           
                           
                           
                           
                           60,749Weighted-average common shares outstanding - diluted
                           
                           
                           3,144,089
                           
                           
                           
                           
                           
                           3,109,708Earnings per common share:Basic
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           0.03Diluted
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           0.03
 8


Nine months ended September 30,2010
                           
                           
                           
                           
                           
                           2009Numerator:Net income
                           
                           $
                           450
                           
                           
                           
                           
                           $
                           1,267Less:
                           
                           
                           Preferred stock dividend
                           
                           
                           649
                           
                           
                           
                           
                           
                           512Dividend accretion (1)
                           
                           
                           356
                           
                           
                           
                           
                           
                           297Net income (loss) available to common shareholders
                           
                           $
                           (555
                           )
                           
                           
                           
                           $
                           458Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,138,301
                           
                           
                           
                           
                           
                           3,046,228Common stock equivalents
                           
                           
                           -
                           
                           
                           
                           
                           
                           23,566Weighted-average common shares outstanding - diluted
                           
                           
                           3,138,301
                           
                           
                           
                           
                           
                           3,069,794Earnings (loss) per common share:Basic
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.15Diluted
                           
                           
                           
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.15 (1) Preferred stock dividend required to be accreted over estimated
                     life of warrant issued in conjunction with preferred stock. NOTE 5. Stock Based Compensation The Company has a stock-based employee compensation plan. On January
                     1, 2006, the Company adopted the fair value recognition provisions of
                     FASB ASC 718, "Compensation - Stock Compensation," to account for
                     compensation costs under its stock option plan. In adopting FASB ASC 718, the Company elected to use the modified
                     prospective method to account for the transition from the intrinsic
                     value method to the fair value recognition method. Under the modified
                     prospective method, compensation cost is recognized from the adoption
                     date forward for all new stock options granted and for any
                     outstanding unvested awards as if the fair value method had been
                     applied to those awards as of the date of grant. The fair value of the option grant is estimated on the date of grant
                     using the Black-Scholes option-pricing model. The following
                     assumptions were used for grants: expected volatility of 26.76% for
                     2010 and 2009, risk-free interest rate of 3.25% for 2010 and 2.59%
                     for 2009, expected lives of the options were 10 years, and the
                     assumed dividend rate was zero. NOTE 6. Fair Value Accounting As of June 30, 2009, the Company adopted FASB ASC 820, "Fair Value
                     Measurement and Disclosures," "Determining Fair Value When the Volume
                     and Level of Activity for the Asset or Liability Have Significantly
                     Decreased and Identifying Transactions That Are Not Orderly." FASB
                     ASC 820 is intended to determine the fair value when there is no
                     active market or where the inputs being used represent distressed
                     sales. FASB ASC 820, "Fair Value Measurement and Disclosures," defines fair
                     value as the exchange price that would be received for an asset or
                     paid to transfer a liability (an exit price) in the principal or most
                     advantageous market for the asset or liability in an orderly
                     transaction between market participants on the measurement date. FASB
                     ASC 820 also establishes a fair value hierarchy which requires an
                     entity to maximize the use of observable inputs and minimize the use
                     of unobservable inputs when measuring fair value. The standard
                     describes three levels of inputs that may be used to measure
                     fair value: Level 1Quoted prices in active markets for identical assets or liabilities.
                              Level 1 assets and liabilities include certain debt and equity
                              securities and derivative contracts that are traded in an active
                              exchange market.Level 2Observable inputs other than Level 1 prices such as quoted prices for
                              similar assets or liabilities; quoted prices in markets that are not
                              active; or other inputs that are observable or can be corroborated by
                              observable market data for substantially the full term of the assets
                              or liabilities. Level 2 assets and liabilities include fixed income
                              securities and mortgage-backed securities that are held in the
                              Company's available-for-sale portfolio, certain derivative contracts
                              and impaired loans.
 9


Level 3Unobservable inputs that are supported by little or no market
                              activity and that are significant to the fair value of the assets or
                              liabilities. Level 3 assets and liabilities include financial
                              instruments whose value is determined using pricing models,
                              discounted cash flow methodologies, or similar techniques, as well as
                              instruments for which the determination of fair value requires
                              significant management judgment or estimation. These methodologies
                              may result in a significant portion of the fair value being derived
                              from unobservable data. Following is a description of valuation methodologies used for assets
                     recorded at fair value. Investment Securities Securities available for sale are valued on a recurring basis at
                     quoted market prices where available.  If quoted market prices are
                     not available, fair values are based on quoted market prices of
                     comparable securities.  Level 1 securities include those traded on an
                     active exchange, such as the New York Stock Exchange or U.S. Treasury
                     securities that are traded by dealers or brokers in active
                     over-the-counter markets and money market funds.  Level 2 securities
                     include mortgage-backed securities and debentures issued by
                     government sponsored entities, municipal bonds and corporate debt
                     securities.  In certain cases where there is limited activity or less
                     transparency around inputs to valuations, securities are classified
                     as Level 3 within the valuation hierarchy. Securities held to
                     maturity are valued at quoted market prices or dealer quotes similar
                     to securities available for sale.  The carrying value of Other
                     Investments, such as Federal Reserve Bank and Federal Home Loan Bank
                     ("FHLB") stock, approximates fair value based on their redemption
                     provisions. Loans The Company does not record loans at fair value on a recurring basis.
                     However, from time to time, a loan may be considered impaired and an
                     allowance for loan losses may be established.  Loans for which it is
                     probable that payment of interest and principal will not be made in
                     accordance with the contractual terms of the loan agreement are
                     considered impaired. Once a loan is identified as individually
                     impaired, management measures the impairment in accordance with FASB
                     ASC 310, "Receivables." The fair value of impaired loans is estimated
                     using one of several methods, including collateral value, market
                     value of similar debt, enterprise value, liquidation value and
                     discounted cash flows.  Those impaired loans not requiring an
                     allowance represent loans for which the fair value of the expected
                     repayments or collateral exceed the recorded investments in such
                     loans.  At September 30, 2010, substantially all of the impaired
                     loans were evaluated based on the fair value of the collateral.  In
                     accordance with FASB ASC 820, "Fair Value Measurement and
                     Disclosures," impaired loans where an allowance is established based
                     on the fair value of collateral require classification in the fair
                     value hierarchy.  When the fair value of the collateral is based on
                     an observable market price or a current appraised value, the Company
                     considers the impaired loan as nonrecurring Level 2. When an
                     appraised value is not available or management determines the fair
                     value of the collateral is further impaired below the appraised value
                     and there is no observable market price, the Company considers the
                     impaired loan as nonrecurring Level 3. Other Real Estate Owned ("OREO") OREO, consisting of properties obtained through foreclosure or in
                     satisfaction of loans, is reported at the lower of cost or fair
                     value, determined on the basis of current appraisals, comparable
                     sales, and other estimates of value obtained principally from
                     independent sources, adjusted for estimated selling costs (Level 2). 
                     At the time of foreclosure, any excess of the loan balance over the
                     fair value of the real estate held as collateral is treated as a
                     charge against the allowance for loan losses.  Gains or losses on
                     sale and generally any subsequent adjustments to the value are
                     recorded as a component of OREO expense. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below presents the recorded amount of assets and
                     liabilities measured at fair value on a recurring basis (dollars in
                     thousands). Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of September 30, 2010:Securities available for sale:State and political subdivisions
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           10,778
                           
                           
                           
                           
                           $
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           66,576
                           
                           
                           
                           
                           
                           5,348Other investments
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           9,318Total
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           77,354
                           
                           
                           
                           
                           $
                           14,666
 10


Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of December 31, 2009:Securities available for sale:Government sponsored enterprises
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           11,540
                           
                           
                           
                           
                           $
                           -State and political subdivisions
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,309
                           
                           
                           
                           
                           
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           52,688
                           
                           
                           
                           
                           
                           6,658Other investments
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           9,213Total
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           69,537
                           
                           
                           
                           
                           $
                           15,871 The Company has no liabilities carried at fair value or measured at
                     fair value on a recurring or nonrecurring basis. The table below presents a reconciliation for the period of January
                     1, 2010 to September 30, 2010 for all Level 3 assets that are
                     measured at fair value on a recurring basis (dollars in thousands). Collateralizedmortgageobligations
                           
                           
                           
                           
                           
                           OtherinvestmentsBeginning balance
                           
                           
                           
                           
                           $
                           6,658
                           
                           
                           
                           
                           $
                           9,213Total realized and unrealized gains or losses:Included in earnings
                           
                           
                           
                           
                           
                           (450
                           )
                           
                           
                           
                           
                           -Included in other comprehensive income
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -Purchases, sales and principal reductions
                           
                           
                           
                           
                           
                           (860
                           )
                           
                           
                           
                           
                           (105
                           )Transfers in and/or out of Level 3
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -Ending Balance
                           
                           
                           
                           
                           $
                           5,348
                           
                           
                           
                           
                           $
                           9,318 Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate
                     serving as collateral on approximately 79.3% of loans. Loans which
                     are deemed to be impaired and real estate acquired in settlement of
                     loans are valued on a nonrecurring basis at the lower of cost or
                     market value of the underlying real estate collateral. Such market
                     values are generally obtained using independent appraisals, which the
                     Company considers to be level 2 inputs. The table below presents the
                     recorded amount of assets and liabilities measured at fair value on a
                     nonrecurring basis (dollars in thousands). Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of September 30, 2010:Impaired loans
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           8,175
                           
                           
                           
                           
                           $
                           -Other Real Estate Owned
                           
                           
                           -
                           
                           
                           
                           
                           
                           6,334
                           
                           
                           
                           
                           
                           -  Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of December 31, 2009:Impaired loans
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           9,823
                           
                           
                           
                           
                           $
                           -Other real estate owned
                           
                           
                           -
                           
                           
                           
                           
                           
                           3,704
                           
                           
                           
                           
                           
                           - Fair Value of Financial Instruments Financial instruments require disclosure of fair value information,
                     whether or not recognized in the consolidated balance sheets, when it
                     is practical to estimate the fair value. A financial instrument is
                     defined as cash, evidence of an ownership interest in an entity or
                     contractual obligations which require the exchange of cash. Certain
                     items are specifically excluded from the disclosure requirements,
                     including the Company's common stock, premises and equipment and
                     other assets and liabilities.
 11


The following is a description of valuation methodologies used to
                     estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial
                     instruments due to the short-term nature of the instrument: cash and
                     due from banks, federal funds sold, federal funds purchased, and
                     securities sold under agreement to repurchase. Bank Owned Life InsuranceThe cash surrender value of bank owned life insurance policies held
                     by the Bank approximates fair values of the policies. Deposit Liabilities -Fair value for demand deposit accounts and interest-bearing accounts
                     with no fixed maturity date is equal to the carrying value. The fair
                     value of certificate of deposit accounts are estimated by discounting
                     cash flows from expected maturities using current interest rates on
                     similar instruments. FHLB Advances and Other Borrowings -Fair value for FHLB advances and other borrowings are estimated by
                     discounting cash flows from expected maturities using current
                     interest rates on similar instruments. The Company has used management's best estimate of fair value based
                     on the above assumptions. Thus, the fair values presented may not be
                     the amounts that could be 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 sale or settlement, are not
                     taken into consideration in the fair value presented. The estimated fair values of the Company's financial instruments at
                     September 30, 2010 and December 31, 2009 are as follows (dollars in
                     thousands): September 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009CarryingAmount
                           
                           
                           
                           
                           
                           FairValue
                           
                           
                           
                           
                           
                           CarryingAmount
                           
                           
                           
                           
                           
                           FairValueFinancial Assets:Cash and cash equivalents
                           
                           $
                           32,906
                           
                           
                           
                           
                           $
                           32,906
                           
                           
                           
                           
                           $
                           12,082
                           
                           
                           
                           
                           $
                           12,082Investment securities available for sale
                           
                           
                           82,702
                           
                           
                           
                           
                           
                           82,702
                           
                           
                           
                           
                           
                           76,195
                           
                           
                           
                           
                           
                           76,195Investment securities held to maturity
                           
                           
                           104
                           
                           
                           
                           
                           
                           109
                           
                           
                           
                           
                           
                           9,225
                           
                           
                           
                           
                           
                           9,516Other investments
                           
                           
                           9,318
                           
                           
                           
                           
                           
                           9,318
                           
                           
                           
                           
                           
                           9,213
                           
                           
                           
                           
                           
                           9,213Loans, net
                           
                           
                           571,437
                           
                           
                           
                           
                           
                           582,536
                           
                           
                           
                           
                           
                           566,510
                           
                           
                           
                           
                           
                           575,396Bank owned life insurance
                           
                           
                           14,408
                           
                           
                           
                           
                           
                           14,408
                           
                           
                           
                           
                           
                           13,974
                           
                           
                           
                           
                           
                           13,974Financial Liabilities:Deposits
                           
                           
                           542,742
                           
                           
                           
                           
                           
                           513,022
                           
                           
                           
                           
                           
                           494,084
                           
                           
                           
                           
                           
                           461,744Federal Home Loan Bank advances and related debt
                           
                           
                           122,700
                           
                           
                           
                           
                           
                           142,530
                           
                           
                           
                           
                           
                           142,700
                           
                           
                           
                           
                           
                           163,818Note payable
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           4,250
                           
                           
                           
                           
                           
                           4,603Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           3,784
                           
                           
                           
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           4,139 Item 2. Management's Discussion and Analysis of Financial Condition
                        and Results of Operations. The following discussion reviews our results of operations for the
                        three and nine month periods ended September 30, 2010 and assesses
                        our financial condition as of September 30, 2010. You should read the
                        following discussion and analysis in conjunction with the
                        accompanying consolidated financial statements and the related notes
                        and the consolidated financial statements and the related notes for
                        the year ended December 31, 2009 included in our Annual Report on
                        Form 10-K for that period. Results for the three and nine month
                        periods ended September 30, 2010 are not necessarily indicative of
                        the results for the year ending December 31, 2010 or any future
                        period. DISCUSSION OF FORWARD-LOOKING STATEMENTS This report, including information included or incorporated by reference in this
                     document, contains statements which constitute forward-looking
                     statements within the meaning of Section 27A of the Securities Act of
                     1933 and Section 21E of the Securities Exchange Act of 1934.
                     Forward-looking statements may relate to our financial condition,
                     results of operation, plans, objectives, or future performance. These
                     statements are based on many assumptions and estimates and are not
                     guarantees of future performance. Our actual results may differ
                     materially from those anticipated in any forward-looking statements,
                     as they will depend on many factors about which we are unsure,
                     including many factors which are beyond our control. The words "may,"
                     "would," "could," "should," "will," "expect," "anticipate,"
                     "predict," "project," "potential," "believe," "continue," "assume,"
                     "intend," "plan," and "estimate," as well as similar expressions, are
                     meant to identify such forward-looking statements. Potential
 12


risks and uncertainties that could cause our actual results to differ
                     from those anticipated in any forward-looking statements include, but
                     are not limited to, those described below under Item 1A- Risk Factors
                     and the following: reduced earnings due to higher credit losses generally and
                        specifically because losses in the sectors of our loan portfolio
                        secured by real estate are greater than expected due to economic
                        factors, including, but not
                        limited to, declining real estate values, increasing interest rates,
                        increasing unemployment, or changes in payment behavior or other
                        factors;
                     reduced earnings due to higher credit losses because our loans are
                        concentrated by loan type, industry segment, borrower type, or
                        location of the borrower or collateral;
                     the high concentration of our real estate-based loans collateralized by real estate in a weak commercial real estate market;
                     our ability to comply with our Formal Agreement and potential
                        regulatory actions if we fail to comply;
                     restrictions or conditions imposed by our regulators on our
                        operations may make it more difficult for us to achieve our goals;
                     significant increases in competitive pressure in the banking and
                        financial services industries;
                     changes in the interest rate environment which could reduce anticipated margins;
                     changes in political conditions or the legislative or regulatory
                        environment, including the effect of recent financial reform
                        legislation on the banking industry;
                     general economic conditions, either nationally or regionally and
                        especially in our primary service area,
                        being less favorable than expected, resulting in, among other things,
                        a deterioration in credit quality;
                     changes occurring in business conditions and inflation;
                     changes in deposit flows;
                     changes in technology;
                     changes in monetary and tax policies;
                     adequacy of the level of our allowance for loan losses;
                     the rate of delinquencies and amount of loans charged-off;
                     the rate of loan growth;
                     adverse changes in asset quality and resulting credit risk-related
                        losses and expenses;
                     loss of consumer confidence and economic disruptions resulting from
                        terrorist activities;
                     changes in the securities markets; and
                     other risks and uncertainties detailed from time to time in our
                        filings with the Securities and Exchange Commission (the "SEC"). All forward-looking statements in this report are based on
                     information available to us as of the date of this report. Although
                     we believe that the expectations reflected in our forward-looking
                     statements are reasonable, we cannot guarantee you that these
                     expectations will be achieved. We undertake no obligation to publicly
                     update or otherwise revise any forward-looking statements, whether as
                     a result of new information, future events, or otherwise. These risks are exacerbated by the recent developments in national
                     and international financial markets, and we are unable to predict
                     what effect these uncertain market conditions will have on our
                     Company. Beginning in 2008 and continuing through the first nine
                     months of 2010, the capital and credit markets experienced
                     unprecedented levels of volatility and disruption. There can be no
                     assurance that these unprecedented developments will not materially
                     and adversely affect our business, financial condition and results of
                     operations. Overview We were incorporated in March 1999 to organize and serve as the
                     holding company for Greenville First Bank, N.A. On July 2, 2007, we
                     changed the name of our company and bank to Southern First
                     Bancshares, Inc. and Southern First Bank, N.A., respectively. Since
                     we opened our bank in January 2000, we have experienced growth in
                     total assets, loans, deposits, and shareholders' equity.
 13


Like most community banks, we derive the majority of our income from
                     interest received on our loans and investments. Our primary source of
                     funds for making these loans and investments is our deposits, on
                     which we pay interest. Consequently, one of the key measures of our
                     success is our amount of net interest income, or the difference
                     between the income on our interest-earning assets, such as loans and
                     investments, and the expense on our interest-bearing liabilities,
                     such as deposits and borrowings. Another key measure is the spread
                     between the yield we earn on these interest-earning assets and the
                     rate we pay on our interest-bearing liabilities, which is called our
                     net interest spread. There are risks inherent in all loans, so we maintain an allowance
                     for loan losses to absorb probable losses on existing loans that may
                     become uncollectible. We maintain this allowance by charging a
                     provision for loan losses against our operating earnings for each
                     period. We have included a detailed discussion of this process, as
                     well as several tables describing our allowance for loan losses. In addition to earning interest on our loans and investments, we earn
                     income through fees and other charges to our clients. We have also
                     included a discussion of the various components of this noninterest
                     income, as well as of our noninterest expense. Economic conditions, competition, and the monetary and fiscal
                     policies of the Federal government significantly affect most
                     financial institutions, including the Bank. Lending and deposit
                     activities and fee income generation are influenced by levels of
                     business spending and investment, consumer income, consumer spending
                     and savings, capital market activities, and competition among
                     financial institutions, as well as customer preferences, interest
                     rate conditions and prevailing market rates on competing products in
                     our market areas. Our business model continues to be client-focused, utilizing
                     relationship teams to provide our clients with a specific banker
                     contact and support team responsible for all of their banking needs.
                     The purpose of this structure is to provide a consistent and superior
                     level of professional service, and we believe it provides us with a
                     distinct competitive advantage. We consider exceptional client
                     service to be a critical part of our culture, which we refer to as
                     "ClientFIRST." The following discussion and analysis also identifies significant
                     factors that have affected our financial position and operating
                     results during the periods included in the accompanying financial
                     statements. We encourage you to read this discussion and analysis in
                     conjunction with our financial statements and the other statistical
                     information included in our filings with the Securities and Exchange
                     Commission. Recent Regulatory Developments On June 8, 2010, the Bank entered into a formal agreement (the
                     "Formal Agreement") with its primary regulator, the Office of the
                     Comptroller of the Currency (the "OCC"). The Formal Agreement is
                     based on the findings of the OCC during their on-site examination of
                     the Bank as of March 31, 2009.  The Formal Agreement seeks to enhance
                     the Bank's existing practices and procedures in the areas of credit
                     risk management, credit underwriting, liquidity, and funds
                     management. Specifically, under the terms of the Formal Agreement,
                     the Bank is required to (i) protect its interest in assets criticized
                     by the OCC; (ii) develop, implement, and adhere to a written program
                     to reduce the high level of credit risk; (iii) obtain credit
                     information on all loans lacking such information and ensure proper
                     collateral documentation is in place; (iv) engage the services of an
                     independent appraiser to provide updated appraisals for certain loans
                     where the most recent appraisal is more than 12 months old; (v)
                     update and implement written policies/programs addressing loan
                     policy, allowance for loan and lease losses, and other real estate
                     owned; (vi) continue to improve its liquidity position and maintain
                     adequate sources of funding; (vii) obtain prior written determination
                     of no supervisory objection from the OCC before accepting, renewing,
                     or rolling over brokered deposits in excess of 25% of total deposits;
                     (viii) update and adhere to its profit plan designed to improve the
                     condition of the Bank; and (ix) submit periodic reports to the OCC
                     regarding various aspects of the foregoing actions. The Formal Agreement with the OCC also requires the establishment of
                     certain plans and programs within various time periods.   In
                     addition, the Formal Agreement requires that various reports be
                     submitted to the OC on a quarterly basis until the Formal Agreement
                     is terminated. After having completed the requirements set forth
                     below, management believes that the Bank is in compliance with
                     substantially all of the conditions established in the Formal
                     Agreement. However, no assurance can be given that the OCC will
                     concur with management's assessment until we receive formal OCC
                     approval, which we have not received. The Bank has established a compliance committee of its Board of
                        Directors to oversee management's response to all sections of the
                        Formal Agreement.   The committee consists of all 11 members of the
                        Bank's Board of Directors and meets at least monthly to receive
                        written progress reports from management on the results and status of
                        actions needed to achieve full compliance with each article of the
                        Formal Agreement.
                     Policies and procedures were revised or established and approved
                        relating to the following issues:
 14


(1) Loan policies and procedures.(2) Certain policies, procedures and programs relating to reducing
                              criticized assets.(3) Policies related to managing OREO.(4) Procedures for maintaining an adequate allowance for loan losses.(5) Appraisal policy to ensure appraisals conform to appraisal
                              standards and regulations. Current and satisfactory credit information was obtained on all loans
                        lacking such information to ensure proper collateral documentation is
                        in place;
                     We received and evaluated current independent appraisals or updated
                        appraisals on loans secured by certain properties;
                     The Bank's liquidity position was enhanced. We reduced our level of
                        brokered deposits to comply with the OCC agreed upon levels.
                     A profit plan was updated to improve the financial condition of the Bank. If the Bank does not satisfy and maintain adherence with each of the
                     requirements listed above, the Bank will not be in compliance with
                     the Formal Agreement.  Failure to comply with the Formal Agreement
                     could result in regulators taking additional enforcement actions
                     against the Bank.  The Bank's ability to meet the goals set forth in
                     the Formal Agreement is contingent in part upon the stabilization of
                     the local real estate markets and on its financial performance. In addition, we have agreed with the OCC that the Bank will maintain
                     a total risk-based capital ratio of at least 12%, Tier 1 capital of
                     at least 10%, and a leverage ratio of at least 9%. As of September
                     30, 2010, our capital ratios exceed these ratios and we remain "well
                     capitalized." See "Management's Discussion and Analysis - Results of
                     Operations - Capital Resources" for more discussion of the Minimum
                     Capital Ratio levels established by the OCC and our capital ratios as
                     of September 30, 2010. Critical Accounting Policies We have adopted various accounting policies that govern the
                     application of accounting principles generally accepted in the United
                     States and with general practices within the banking industry in the
                     preparation of our financial statements. Our significant accounting
                     policies are described in the footnotes to our audited consolidated
                     financial statements as of December 31, 2009, as filed in our Annual
                     Report on Form 10-K. Certain accounting policies involve significant judgments and
                     assumptions by us that have a material impact on the carrying value
                     of certain assets and liabilities. We consider these accounting
                     policies to be critical accounting policies. The judgment and
                     assumptions we use are based on historical experience and other
                     factors, which we believe to be reasonable under the circumstances.
                     Because of the nature of the judgment and assumptions we make, actual
                     results could differ from these judgments and estimates that could
                     have a material impact on the carrying values of our assets and
                     liabilities and our results of operations. Allowance for Loan Losses We believe the allowance for loan losses is the critical accounting
                     policy that requires the most significant judgment and estimates used
                     in preparation of our consolidated financial statements. Some of the
                     more critical judgments supporting the amount of our allowance for
                     loan losses include judgments about the credit worthiness of
                     borrowers, the estimated value of the underlying collateral,
                     assumptions about cash flow, determination of loss factors for
                     estimating credit losses, and the impact of current events,
                     conditions, and other factors impacting the level of probable
                     inherent losses. Under different conditions, the actual amount of
                     credit losses incurred by us may be different from management's
                     estimates provided in our consolidated financial statements. Refer to
                     the portion of this discussion that addresses our allowance for loan
                     losses for a more complete discussion of our processes and
                     methodology for determining our allowance for loan losses. Real Estate Acquired in Settlement of Loans Real estate acquired through foreclosure is initially recorded at the
                     lower of cost or estimated fair value. Subsequent to the date of
                     acquisition, it is carried at the lower of cost or fair value,
                     adjusted for net selling costs. Fair values of real estate owned are
                     reviewed regularly and writedowns are recorded when it is determined
                     that the carrying value of real estate exceeds the fair value less
                     estimated costs to sell. Costs relating to the development and
                     improvement of such property are capitalized, whereas those costs
                     relating to holding the property are expensed.
 15


Income Taxes The financial statements have been prepared on the accrual basis.
                     When income and expenses are recognized in different periods for
                     financial reporting purposes versus for the purposes of computing
                     income taxes currently payable, deferred taxes are provided on such
                     temporary differences. Under ASC 740, "Income Taxes," deferred tax
                     assets and liabilities are recognized for the expected future tax
                     consequences of events that have been recognized in the consolidated
                     financial statements or tax returns. Deferred tax assets and
                     liabilities are measured using the enacted tax rates expected to
                     apply to taxable income in the years in which those temporary
                     differences are expected to be realized or settled. The Company
                     believes that the income tax filing positions taken or expected to be
                     taken in its tax returns will more likely than not be sustained upon
                     audit by the taxing authorities and does not anticipate any
                     adjustments that would result in a material adverse impact on the
                     Company's financial condition, results of operations, or cash flow.
                     Therefore, no reserves for uncertain income tax positions have been
                     recorded pursuant to ASC 740. Effect of Economic Trends The first nine months of 2010 continue to reflect the tumultuous
                     economic conditions which have negatively impacted our clients'
                     liquidity and credit quality. Concerns regarding increased credit
                     losses from the weakening economy have negatively affected capital
                     and earnings of most financial institutions. Financial institutions
                     have experienced significant declines in the value of collateral for
                     real estate loans and heightened credit losses, which have resulted
                     in record levels of non-performing assets, charge-offs and
                     foreclosures. Liquidity in the debt markets remains low in spite of efforts by the
                     U.S. Department of the Treasury ("Treasury") and the Federal Reserve
                     Bank ("Federal Reserve") to inject capital into financial
                     institutions. The federal funds rate set by the Federal Reserve has
                     remained at 0.25% since December 2008, following a decline from 4.25%
                     to 0.25% during 2008 through a series of seven rate reductions. Treasury, the Federal Deposit Insurance Corporation (the "FDIC") and
                     other governmental agencies continue to enact rules and regulations
                     to implement the Emergency Economic Stabilization Act of 2008
                     ("EESA"), the Troubled Asset Relief Program ("TARP"), the Financial
                     Stability Plan, the American Recovery and Reinvestment Act ("ARRA"),
                     the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
                     (the "Dodd-Frank Act"), and related economic recovery programs, many
                     of which contain limitations on the ability of financial institutions
                     to take certain actions or to engage in certain activities if the
                     financial institution is a participant in the TARP Capital Purchase
                     Program ("CPP") or related programs. Future regulations, or
                     enforcement of the terms of programs already in place, may require
                     financial institutions to raise additional capital and result in the
                     conversion of preferred equity issued under TARP or other programs to
                     common equity. There can be no assurance as to the actual impact of
                     the EESA, the FDIC programs or any other governmental program on the
                     financial markets. The weak economic conditions are expected to continue through the
                     remainder of 2010. Financial institutions likely will continue to
                     experience heightened credit losses and higher levels of
                     non-performing assets, charge-offs and foreclosures. In light of
                     these conditions, financial institutions also face heightened levels
                     of scrutiny from federal and state regulators. These factors
                     negatively influenced, and likely will continue to negatively
                     influence, earning asset yields at a time when the market for
                     deposits is intensely competitive. As a result, financial
                     institutions experienced, and are expected to continue to experience,
                     pressure on credit costs, loan yields, deposit and other borrowing
                     costs, liquidity, and capital. Recent Legislative and Regulatory Initiatives to Address Financial
                        and Economic Crises Markets in the United States and elsewhere have experienced extreme
                     volatility and disruption over the past three years. These
                     circumstances have exerted significant downward pressure on prices of
                     equity securities and virtually all other asset classes, and have
                     resulted in substantially increased market volatility, severely
                     constrained credit and capital markets, particularly for financial
                     institutions, and an overall loss of investor confidence. Loan
                     portfolio performances have deteriorated at many institutions
                     resulting from, among other factors, a weak economy and a decline in
                     the value of the collateral supporting their loans. Dramatic
                     slowdowns in the housing industry, due in part to falling home prices
                     and increasing foreclosures and unemployment, have created strains on
                     financial institutions. Many borrowers are now unable to repay their
                     loans, and the collateral securing these loans has, in some cases,
                     declined below the loan balance. In response to the recent challenges
                     facing the financial services sector,
                     several regulatory and governmental actions have been announced including:
 16


In October 2008, the EESA was enacted. The EESA authorizes the
                                    Treasury to purchase from financial institutions and their holding
                                    companies up to $700 billion in mortgage loans, mortgage-related
                                    securities and certain other financial instruments, including debt
                                    and equity securities issued by financial institutions and their
                                    holding companies in TARP.  The purpose of TARP is to restore
                                    confidence and stability to the U.S. banking system and to encourage
                                    financial institutions to increase their lending to customers and to
                                    each other.  The Treasury has allocated $250 billion towards the TARP
                                    CPP.  Under the CPP, the Treasury purchased debt or equity securities
                                    from participating institutions.  TARP also includes direct purchases
                                    or guarantees of troubled assets of financial
                                    institutions. Participants in the CPP are subject to executive
                                    compensation limits and are encouraged to expand their lending and
                                    mortgage loan modifications.On February 27, 2009, as part of the CPP, we entered into a Letter
                                    Agreement and Securities Purchase Agreement (collectively, the "CPP
                                    Purchase Agreement") with the Treasury, pursuant to which we sold (i)
                                    17,299 shares of our Fixed Rate Cumulative Perpetual Preferred Stock,
                                    Series T (the "Series T Preferred Stock") and (ii) a warrant (the
                                    "CPP Warrant") to purchase 330,554 shares of our common stock for an
                                    aggregate purchase price of $17.3 million in cash. The Series T
                                    Preferred Stock qualifies as Tier 1 capital and is entitled to
                                    cumulative dividends at a rate of 5% per annum for the first five
                                    years, and 9% per annum thereafter. We must consult with the OCC
                                    before we may redeem the Series T Preferred Stock but, contrary to
                                    the original restrictions in the EESA, will not necessarily be
                                    required to raise additional equity capital in order to redeem
                                    this stock. The Warrant has a 10-year term and is immediately
                                    exercisable upon its issuance, with an exercise price, subject to
                                    anti-dilution adjustments, equal to $7.85 per share of the common
                                    stock.On October 7, 2008, the FDIC approved a plan to increase the rates
                                    banks pay for deposit insurance.On October 14, 2008, the FDIC established the Temporary Liquidity
                                    Guarantee Program ("TLGP"), which seeks to strengthen confidence and
                                    encourage liquidity in the banking system.  The TLGP has two primary
                                    components that are available on a voluntary basis to financial
                                    institutions: (i) guarantee of newly-issued senior unsecured debt;
                                    the guarantee would apply to new debt issued on or before October 31,
                                    2009 and would provide protection until December 31, 2012; issuers
                                    electing to participate would pay a 75 basis point fee for the
                                    guarantee (the "Debt Guarantee Program"); and (ii) unlimited deposit
                                    insurance for non-interest bearing deposit transaction accounts;
                                    financial institutions electing to participate will pay a 10 basis
                                    point premium in addition to the insurance premiums paid for standard
                                    deposit insurance (the "Transaction Account Guarantee Program"). We
                                    are participating in the Transaction Account Guarantee Program (the
                                    "TAGP") and have opted out of the Debt Guarantee Program (the "DGP"). On February 10, 2009, the Treasury announced the Financial Stability
                                    Plan, which earmarked $350
                                    billion of the TARP funds authorized under EESA. Among other things,
                                    the Financial Stability Plan includes:A capital assistance program that invested in mandatory convertible
                                    preferred stock of
                                    certain qualifying institutions determined on a basis and through a
                                    process similar to the
                                     Capital Purchase Program;A consumer and business lending initiative to fund new consumer
                                    loans, small business loans and commercial mortgage asset-backed
                                    securities issuances;A public-private investment fund program that is intended to leverage
                                    public and private capital with public financing to purchase up to
                                    $500 billion to $1 trillion of legacy "toxic assets" from financial
                                    institutions; andAssistance for homeowners by providing up to $75 billion to reduce
                                    mortgage payments and interest rates and establishing loan
                                    modification guidelines for government and private programs.On February 17, 2009, the ARRA was signed into law in an effort to,
                                    among other things, create jobs and stimulate growth in the United
                                    States economy. The ARRA specifies appropriations of approximately
                                    $787 billion for a wide range of Federal programs and will increase
                                    or extend certain benefits payable under the Medicaid, unemployment
                                    compensation, and nutrition assistance programs. The ARRA also
                                    reduces individual and corporate income tax collections and makes a
                                    variety of other changes to tax laws. The ARRA also imposes certain
                                    limitations on compensation paid by participants in the TARP CPP.On March 23, 2009, the Treasury, in conjunction with the FDIC and the
                                    Federal Reserve, announced the Public-Private Partnership Investment
                                    Program for Legacy Assets which consists of two separate plans,
                                    addressing two distinct asset groups:The first plan is the Legacy Loan Program, which has a primary
                                    purpose to facilitate the sale of troubled mortgage loans by eligible
                                    institutions, including FDIC-insured federal or state banks and
                                    savings associations. Eligible assets are not strictly limited to
                                    loans; however, what constitutes an eligible asset will be determined
                                    by participating banks, their primary regulators, the FDIC and the
                                    Treasury.
 17


The second plan is the Securities Program, which is administered by
                                 the Treasury and involves the creation of public-private investment
                                 funds ("PPIFs") to target investments in eligible residential
                                 mortgage-backed securities and commercial mortgage-backed securities
                                 issued before 2009 that originally were rated AAA or the equivalent
                                 by two or more nationally recognized statistical rating
                                 organizations, without regard to rating enhancements (collectively,
                                 "Legacy Securities"). Legacy Securities must be directly secured by
                                 actual mortgage loans, leases or other assets, and may be purchased
                                 only from financial institutions that meet TARP eligibility
                                 requirements. The U.S. Treasury received over 100 unique applications
                                 to participate in the Legacy Securities PPIP and in July 2009
                                 selected nine PPIF managers. As of September 30, 2010, the PPIFs had
                                 completed their fundraising and have closed on approximately $7.4
                                 billion of private sector equity capital, which was matched 100
                                 percent by Treasury, representing $14.7 billion of total equity
                                 capital. The U.S. Treasury has also provided $14.7 billion of debt
                                 capital, representing $29.4 billion of total purchasing power. As of
                                 September 30, 2010, PPIFs have drawn-down approximately $18.6 billion
                                 of total capital which has been invested in eligible assets and cash
                                 equivalents pending investment.On May 22, 2009, the FDIC levied a one-time special assessment on all
                                 banks due on September 30, 2009.On November 12, 2009, the FDIC issued a final rule to require banks
                                 to prepay their estimated quarterly risk-based assessments for the
                                 fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to
                                 increase assessment rates effective on January 1, 2011.On July 21, 2010, the U.S. President signed into law the Dodd-Frank
                                 Act, a comprehensive regulatory framework that will affect every
                                 financial institution in the U.S. The Dodd-Frank Act includes, among
                                 other measures, changes to the deposit insurance and financial
                                 regulatory systems, enhanced bank capital requirements, and
                                 provisions designed to protect consumers in financial transactions.
                                 The Dodd-Frank Act also alters certain corporate governance matters
                                 affecting public companies. Over the next 6 to 18 months, regulatory
                                 agencies will implement new regulations which will establish the
                                 parameters of the new regulatory framework and provide a clearer
                                 understanding of the legislation's effect on banks.Internationally, both the Basel Committee on Banking Supervision (the
                                 "Basel Committee") and the Financial Stability Board (established in
                                 April 2009 by the Group of Twenty ("G-20") Finance Ministers and
                                 Central Bank Governors to take action to strengthen regulation and
                                 supervision of the financial system with greater international
                                 consistency, cooperation, and transparency) have committed to raise
                                 capital standards and liquidity buffers within the banking system
                                 ("Basel III"). On September 12, 2010, the Group of Governors and
                                 Heads of Supervision agreed to the calibration and phase-in of the
                                 Basel III minimum capital requirements (raising the minimum Tier 1
                                 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%,
                                 with full implementation by January 2015) and introducing a capital
                                 conservation buffer of common equity of an additional 2.5% with
                                 implementation by January 2019. The U.S. federal banking agencies
                                 support this agreement. The Basel Committee is expected to finalize
                                 the new capital and liquidity standard later this year and to present
                                 them for approval of the G-20 Finance Minister and Central Bank
                                 Governors in November 2010.On September 27, 2010, the U.S. President signed into law the Small
                                 Business Jobs and Credit Act which, among other things, creates a $30
                                 billion fund to provide capital for banks with assets under $10
                                 billion to increase their small-business lending. The U.S. Treasury
                                 is currently working to finalize terms of participation for this fund. In response to the above regulatory initiatives, we entered into the
                     CPP Purchase Agreement described above. We have chosen to participate
                     in the TAGP and have opted out of the DGP. On April 13, 2010, the
                     FDIC approved an interim rule that extends the TAGP to December 31,
                     2010. We have elected to continue our voluntary participation in the
                     program. Coverage under the program is in addition to and separate
                     from the basic coverage available under the FDIC's general deposit
                     insurance rules. We believe participation in the program is enhancing
                     our ability to retain customer deposits. As a result of the
                     enhancements to deposit insurance protection and the expectation that
                     there will be demands on the FDIC's deposit insurance fund, our
                     deposit insurance costs increased significantly. Although the TAGP expires on December 31, 2010, a provision of the
                     Dodd-Frank Act requires the FDIC to provide unlimited deposit
                     insurance for all deposits in non-interest-bearing transaction
                     accounts. This deposit insurance mandate created by the Dodd-Frank
                     Act will take effect on December 31, 2010, and will continue through
                     December 31, 2012. The deposit insurance mandate created by the
                     Dodd-Frank Act is not an extension of the TAGP. Although the TAGP and
                     the Dodd-Frank Act establish unlimited deposit insurance for certain
                     types of non-interest-bearing deposit accounts, unlike the TAGP, the
                     coverage provided by the Dodd-Frank Act does not apply to NOW
                     accounts or IOLTAs and will be funded through general FDIC
                     assessments, not special assessments. Although it is likely that further regulatory actions will arise as
                     the Federal government attempts to address the economic situation, we
                     cannot predict the continuing effect that fiscal or monetary
                     policies, economic control, or new federal or state legislation may
                     have on our business and earnings in the future.
 18


RESULTS OF OPERATIONS Income Statement Review Summary Three months ended September 30, 2010 and 2009 Our net income was $337,000 and $424,000 for the three months ended
                     September 30, 2010 and 2009, respectively, a decrease of $87,000, or
                     20.5%. The decrease in net income resulted primarily from a $190,000
                     increase in the provision for loan losses and a $450,000 impairment
                     charge on an investment security, partially offset by a $281,000
                     increase in net interest income and a $269,000 decrease in
                     noninterest expenses. After our dividend payment to the US Treasury
                     as our preferred shareholder, net income to common shareholders for
                     the third quarter of 2010 was $5,000. Our efficiency ratio, excluding
                     the gain on sale of investments, impairment charge, and real estate
                     owned activity, was 61.7% for the three months ended September 30,
                     2010 compared to 69.1% for the same period in 2009. The improvement
                     in the efficiency ratio relates primarily to the increase in net
                     interest income and decrease in compensation costs during the third
                     quarter 2010. Nine months ended September 30, 2010 and 2009 Our net income was $450,000 and $1.3 million for the nine months
                     ended September 30, 2010 and 2009, respectively, a decrease of
                     $817,000, or 64.5%. The decrease in net income resulted primarily
                     from a $2.2 million increase in the provision for loan losses and
                     $450,000 impairment charge on an investment security, partially
                     offset by a $1.1 million gain on sale of investment securities. In
                     addition, net interest income increased by $579,000 and noninterest
                     income, excluding the gain on sale and impairment charge on
                     investment securities, increased by $123,000, while income tax
                     expense decreased by $449,000. Offsetting these increases in income
                     was a $457,000 increase in noninterest expenses. After our dividend
                     payments to the US Treasury as our preferred shareholder, the net
                     loss to common shareholders for the first nine months of 2010 was
                     $555,000. Our efficiency ratio, excluding the gain on sale of
                     investments, impairment charge, and real estate owned activity, was
                     70.7% for the nine months ended September 30, 2010 compared to 70.8%
                     for the same period in 2009. The efficiency ratio remained virtually
                     unchanged for the nine months ended September 30, 2010 compared the
                     same period in 2009 as the increase in net interest income for the
                     2010 period was offset by additional general and administrative
                     expenses during the same time period. Net Interest Income Our level of net interest income is determined by the level of
                     earning assets and the management of our net interest margin. For
                     each of the three month periods ended September 30, 2010 and 2009 our
                     net interest income was $5.2 million and $5.0 million, respectively.
                     Our average earning assets increased $10.5 million during the three
                     months ended September 30, 2010 compared to the average for the three
                     months ended September 30, 2009, while our interest bearing
                     liabilities increased only $2.8 million due to the majority of our
                     deposit growth being in non-interest bearing liabilities. The
                     increase in average earning assets is primarily related to a $10.0
                     million increase in our average loans while the increase in average
                     interest-bearing liabilities is related to a $42.7 million increase
                     in interest bearing deposits, partially offset by a $39.9 million
                     decrease in notes payable and other borrowings. Our net interest income was $14.9 million and $14.3 million for the
                     nine month periods ended September 30, 2010 and 2009, respectively.
                     During the nine months ended September 30, 2010, our average earning
                     assets increased $19.3 million and our average interest bearing
                     liabilities increased only $10.3 million compared to the nine months
                     ended September 30, 2009 due to the majority of our deposit growth
                     being in non-interest bearing liabilities. The increase in average
                     earning assets is primarily related to a $12.3 million increase in
                     our average loans and a $7.9 million increase in federal funds sold,
                     while the increase in average interest-bearing liabilities is related
                     to a $37.5 million increase in interest bearing deposits, partially
                     offset by a $27.2 million decrease in notes payable and other
                     borrowings. We have included a number of tables to assist in our description of
                     various measures of our financial performance. For example, the
                     "Average Balances, Income and Expenses, Yields and Rates" table shows
                     the average balance of each category of our assets and liabilities as
                     well as the yield we earned or the rate we paid with respect to each
                     category during the three and nine month periods ended September 30,
                     2010 and 2009. A review of this table shows that our loans typically
                     provide higher interest yields than do other types of
                     interest-earning assets, which is why we direct a substantial
                     percentage of our earning assets into our loan portfolio. Similarly,
                     the "Rate/Volume Analysis" table demonstrates the effect of changing
                     interest rates and changing volume of assets and liabilities on our
                     financial condition during the periods shown. We also track the
                     sensitivity of our various categories of assets and liabilities to
                     changes in interest rates, and we have included tables to illustrate
                     our interest
 19


rate sensitivity with respect to interest-earning accounts and
                     interest-bearing accounts. Finally, we have included various tables
                     that provide detail about our investment securities, our loans, our
                     deposits, and other borrowings. The following tables set forth information related to our average
                     balance sheets, average yields on assets, and average costs of
                     liabilities (dollars in thousands). We derived these yields by
                     dividing income or expense by the average balance of the
                     corresponding assets or liabilities. We derived average balances from
                     the daily balances throughout the periods indicated. During the three
                     and nine month periods ended September 30, 2010 and 2009, we had only
                     $100,000 in interest-bearing deposits at another bank and had no
                     securities purchased with agreements to resell. All investments owned
                     have an original maturity of over one year. Nonaccrual loans are
                     included in the following tables. Loan yields have been reduced to
                     reflect the negative impact on our earnings of loans on nonaccrual
                     status. The net of capitalized loan costs and fees are amortized into
                     interest income on loans. Average Balances, Income and Expenses, Yields and RatesFor the Three Months Ended September 30,2010
                           
                           
                           2009AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)
                           
                           
                           AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)EarningsFederal funds sold
                           
                           $
                           22,103
                           
                           $
                           13
                           
                           
                           0.23
                           %
                           $
                           18,228
                           
                           $
                           9
                           
                           
                           0.20
                           %Investment securities, taxable
                           
                           
                           86,700
                           
                           
                           576
                           
                           
                           2.64
                           %
                           
                           96,754
                           
                           
                           1,093
                           
                           
                           4.48
                           %Investment securities, nontaxable (2)
                           
                           
                           10,504
                           
                           
                           137
                           
                           
                           5.18
                           %
                           
                           3,774
                           
                           
                           58
                           
                           
                           6.10
                           %Loans
                           
                           
                           580,236
                           
                           
                           8,318
                           
                           
                           5.69
                           %
                           
                           570,244
                           
                           
                           7,977
                           
                           
                           5.55
                           %Total interest-earning assets
                           
                           
                           699,543
                           
                           
                           9,044
                           
                           
                           5.13
                           %
                           
                           689,000
                           
                           
                           9,137
                           
                           
                           5.26
                           %Noninterest-earning assets
                           
                           
                           43,229
                           
                           
                           
                           
                           
                           
                           
                           
                           39,539Total assets
                           
                           $
                           742,772
                           
                           
                           
                           
                           
                           
                           
                           $
                           728,539Interest-bearing liabilitiesNOW accounts
                           
                           $
                           113,119
                           
                           
                           393
                           
                           
                           1.38
                           %
                           $
                           44,001
                           
                           
                           77
                           
                           
                           0.69
                           %Savings & money market
                           
                           
                           94,783
                           
                           
                           225
                           
                           
                           0.94
                           %
                           
                           86,181
                           
                           
                           241
                           
                           
                           1.11
                           %Time deposits
                           
                           
                           282,061
                           
                           
                           1,739
                           
                           
                           2.45
                           %
                           
                           317,059
                           
                           
                           2,068
                           
                           
                           2.59
                           %Total interest-bearing deposits
                           
                           
                           489,963
                           
                           
                           2,357
                           
                           
                           1.91
                           %
                           
                           447,241
                           
                           
                           2,386
                           
                           
                           2.12
                           %Note payable and other borrowings
                           
                           
                           124,382
                           
                           
                           1,309
                           
                           
                           4.18
                           %
                           
                           164,318
                           
                           
                           1,681
                           
                           
                           4.06
                           %Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           95
                           
                           
                           2.81
                           %
                           
                           13,403
                           
                           
                           98
                           
                           
                           2.90
                           %Total interest-bearing liabilities
                           
                           
                           627,748
                           
                           
                           3,761
                           
                           
                           2.38
                           %
                           
                           624,962
                           
                           
                           4,165
                           
                           
                           2.64
                           %Noninterest-bearing liabilities
                           
                           
                           54,454
                           
                           
                           
                           
                           
                           
                           
                           
                           43,436Shareholders' equity
                           
                           
                           60,570
                           
                           
                           
                           
                           
                           
                           
                           
                           60,141Total liabilities and shareholders' equity
                           
                           $
                           742,772
                           
                           
                           
                           
                           
                           
                           
                           $
                           728,539Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.75
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.62
                           %Net interest income (tax equivalent) / margin
                           
                           
                           
                           
                           $
                           5,283
                           
                           
                           3.00
                           %
                           
                           
                           
                           $
                           4,972
                           
                           
                           2.86
                           %Less: tax-equivalent adjustment (2)
                           
                           
                           
                           
                           
                           52
                           
                           
                           
                           
                           
                           
                           
                           
                           22Net interest income
                           
                           
                           
                           
                           $
                           5,231
                           
                           
                           
                           
                           
                           
                           
                           $
                           4,950 (1) Annualized for the three month period.(2) The tax-equivalent adjustment to net interest income adjusts the
                     yield for assets earning tax-exempt income to a comparable yield on a
                     taxable basis. Our net interest margin is calculated as net interest income, on an
                     annualized basis, divided by average interest-earning assets. Our net
                     interest margin, on a tax-equivalent basis, for the three months
                     ended September 30, 2010 was 3.00% compared to 2.86% for the three
                     months ended September 30, 2009. Our net interest spread was 2.75%
                     for the three months ended September 30, 2010 compared to 2.62% for
                     the three months ended September 30, 2009. The net interest spread is
                     the difference between the yield we earn on our interest-earning
                     assets and the rate we pay on our interest-bearing liabilities. The increase in net interest margin resulted primarily from the 13
                     basis point increase in our net interest spread. The increase in the
                     net interest spread is primarily due to the fact that more of our
                     rate-sensitive liabilities repriced downward than our rate-sensitive
                     assets during the twelve months ended September 30, 2010. While our
                     loan yield increased 14 basis points for
 20


the three months ended September 30, 2010 compared to the three
                     months ended September 30, 2009, our investment yield decreased 163
                     basis points, causing the yield on our interest-earning assets to
                     decrease by 13 basis points during the same period. However, the
                     decrease in our interest-earning asset yield was offset by a 26 basis
                     point decrease in the cost of our interest bearing liabilities.
                     During the third quarter of 2010 the cost of our interest-bearing
                     deposits decreased by 21 basis points compared to the same period in
                     2009 while the cost of our borrowings increased by 7 basis points due
                     to the maturity of several lower costing instruments. As of September
                     30, 2010, substantially all of our Federal Home Loan Bank ("FHLB")
                     advances were at fixed rates, while all of our other borrowings,
                     including notes payable and junior subordinated debt, had variable
                     rates. The $3.7 million increase in average noninterest-earning assets
                     during the three months ended September 30, 2010 compared to the same
                     period in 2009 is due primarily to increases of $2.3 million in both
                     prepaid FDIC insurance and real estate owned. In addition, average
                     noninterest-bearing liabilities increased $11.0 million during the
                     2010 period, primarily due to increased noninterest bearing deposits. Average Balances, Income and Expenses, Yields and RatesFor the Nine Months Ended September 30,2010
                           
                           
                           2009AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)
                           
                           
                           AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)EarningsFederal funds sold
                           
                           $
                           20,564
                           
                           $
                           34
                           
                           
                           0.22
                           %
                           $
                           12,713
                           
                           $
                           17
                           
                           
                           0.18
                           %Investment securities, taxable
                           
                           
                           91,118
                           
                           
                           2,216
                           
                           
                           3.25
                           %
                           
                           95,357
                           
                           
                           3,282
                           
                           
                           4.61
                           %Investment securities, nontaxable (2)
                           
                           
                           7,164
                           
                           
                           300
                           
                           
                           5.60
                           %
                           
                           3,791
                           
                           
                           174
                           
                           
                           6.16
                           %Loans
                           
                           
                           580,258
                           
                           
                           24,355
                           
                           
                           5.61
                           %
                           
                           567,921
                           
                           
                           23,685
                           
                           
                           5.59
                           %Total interest earning assets
                           
                           
                           699,104
                           
                           
                           26,905
                           
                           
                           5.15
                           %
                           
                           679,782
                           
                           
                           27,158
                           
                           
                           5.36
                           %Non-interest earning assets
                           
                           
                           43,359
                           
                           
                           
                           
                           
                           
                           
                           
                           38,153Total assets
                           
                           $
                           742,463
                           
                           
                           
                           
                           
                           
                           
                           $
                           717,935Interest bearing liabilitiesNOW accounts
                           
                           $
                           86,207
                           
                           
                           782
                           
                           
                           1.21
                           %
                           $
                           43,015
                           
                           
                           220
                           
                           
                           0.69
                           %Savings & money market
                           
                           
                           94,217
                           
                           
                           716
                           
                           
                           1.02
                           %
                           
                           85,639
                           
                           
                           723
                           
                           
                           1.13
                           %Time deposits
                           
                           
                           303,285
                           
                           
                           5,745
                           
                           
                           2.53
                           %
                           
                           317,516
                           
                           
                           6,678
                           
                           
                           2.82
                           %Total interest-bearing deposits
                           
                           
                           483,709
                           
                           
                           7,243
                           
                           
                           2.00
                           %
                           
                           446,170
                           
                           
                           7,621
                           
                           
                           2.29
                           %Note payable and other borrowings
                           
                           
                           135,260
                           
                           
                           4,373
                           
                           
                           4.32
                           %
                           
                           162,489
                           
                           
                           4,803
                           
                           
                           3.96
                           %Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           266
                           
                           
                           2.65
                           %
                           
                           13,403
                           
                           
                           338
                           
                           
                           3.38
                           %Total interest bearing liabilities
                           
                           
                           632,372
                           
                           
                           11,882
                           
                           
                           2.51
                           %
                           
                           622,062
                           
                           
                           12,762
                           
                           
                           2.75
                           %Non-interest bearing liabilities
                           
                           
                           49,433
                           
                           
                           
                           
                           
                           
                           
                           
                           40,803Shareholders' equity
                           
                           
                           60,658
                           
                           
                           
                           
                           
                           
                           
                           
                           55,070Total liabilities and shareholders' equity
                           
                           $
                           742,463
                           
                           
                           
                           
                           
                           
                           
                           $
                           717,935Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.63
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.61
                           %Net interest income (tax equivalent) / margin
                           
                           
                           
                           
                           $
                           15,023
                           
                           
                           2.87
                           %
                           
                           
                           
                           $
                           14,396
                           
                           
                           2.84
                           %Less: tax-equivalent adjustment (2)
                           
                           
                           
                           
                           
                           114
                           
                           
                           
                           
                           
                           
                           
                           
                           66Net interest income / margin
                           
                           
                           
                           
                           $
                           14,909
                           
                           
                           
                           
                           
                           
                           
                           $
                           14,330 (1) Annualized for the nine month period.(2) The tax-equivalent adjustment to net interest income adjusts the
                     yield for assets earning tax-exempt income to a comparable yield on a
                     taxable basis. Our net interest margin, on a tax-equivalent basis, for the nine
                     months ended September 30, 2010 was 2.87% compared to 2.84% for the
                     nine months ended September 30, 2009. During the first nine months of
                     2010, interest-earning assets averaged $699.1 million compared to
                     $679.8 million during the same period of 2009. Our net interest
                     spread was 2.63% for the nine months ended September 30, 2010
                     compared to 2.61% for the nine months ended September 30, 2009. The slight increase in the net interest spread is primarily due to
                     the fact that more of our rate-sensitive liabilities repriced
                     downward than our rate-sensitive assets during the twelve months
                     ended September 30, 2010. While our loan yield increased slightly by
                     2 basis points for the nine months ended September 30, 2010 compared
                     to the same period in 2009, our investment yield decreased 125 basis
                     points, resulting in a 21 basis point decrease in the yield on our
                     interest earning assets during the same period. However, the decrease
                     in our interest earning asset yield was offset by a 24 basis point
                     decrease in the cost of our interest-bearing liabilities. During the
                     first nine months of 2010, the cost of our interest bearing deposits
                     decreased by 29 basis points compared to the first nine months of
                     2009, while the cost of our borrowings
 21


increased by 26 basis points due to the maturity of several lower
                     costing borrowing instruments. As of September 30, 2010,
                     substantially all of our FHLB advances were at fixed rates, while all
                     of our other borrowings, including notes payable and junior
                     subordinated debt, had variable rates. The $5.2 million increase in average noninterest-earning assets
                     during the nine months ended September 30, 2010 compared to the same
                     period in 2009 is due to a $2.3 million increase in property and
                     equipment related to the construction of our new regional
                     headquarters facility in Columbia, South Carolina as well as
                     increases in both prepaid FDIC insurance and other real estate owned.
                     Average noninterest-bearing liabilities increased $8.6 million during
                     the 2010 period, primarily due to increased noninterest bearing
                     deposits. In addition, the $5.6 million increase in shareholders'
                     equity during the 2010 period is primarily related to the $17.3
                     million received in February 2009 for the issuance of the Series T
                     Preferred Stock under the TARP CPP. Rate/Volume Analysis Net interest income can be analyzed in terms of the impact of
                     changing interest rates and changing volume. The following tables set
                     forth the effect which the varying levels of interest-earning assets
                     and interest-bearing liabilities and the applicable rates have had on
                     changes in net interest income for the periods presented (dollars in
                     thousands). Three Months EndedSeptember 30, 2010 vs. 2009
                           
                           
                           
                           
                           
                           September 30, 2009 vs. 2008Increase (Decrease) Due to
                           
                           
                           
                           
                           
                           Increase (Decrease) Due toVolume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           Total
                           
                           
                           
                           
                           
                           Volume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           138
                           
                           
                           
                           
                           $
                           199
                           
                           
                           
                           
                           $
                           4
                           
                           
                           
                           
                           $
                           341
                           
                           
                           
                           
                           $
                           273
                           
                           
                           
                           
                           $
                           (984
                           )
                           
                           
                           
                           $
                           (32
                           )
                           
                           
                           
                           $
                           (743
                           )Investment securities
                           
                           
                           (37
                           )
                           
                           
                           
                           
                           (446
                           )
                           
                           
                           
                           
                           15
                           
                           
                           
                           
                           
                           (468
                           )
                           
                           
                           
                           
                           86
                           
                           
                           
                           
                           
                           (224
                           )
                           
                           
                           
                           
                           (15
                           )
                           
                           
                           
                           
                           (153
                           )Federal funds sold
                           
                           
                           3
                           
                           
                           
                           
                           
                           1
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           32
                           
                           
                           
                           
                           
                           (51
                           )
                           
                           
                           
                           
                           (29
                           )
                           
                           
                           
                           
                           (48
                           )Total interest income
                           
                           
                           104
                           
                           
                           
                           
                           
                           (246
                           )
                           
                           
                           
                           
                           19
                           
                           
                           
                           
                           
                           (123
                           )
                           
                           
                           
                           
                           391
                           
                           
                           
                           
                           
                           (1,259
                           )
                           
                           
                           
                           
                           (76
                           )
                           
                           
                           
                           
                           (944
                           )Interest expenseDeposits
                           
                           
                           347
                           
                           
                           
                           
                           
                           (339
                           )
                           
                           
                           
                           
                           (37
                           )
                           
                           
                           
                           
                           (29
                           )
                           
                           
                           
                           
                           108
                           
                           
                           
                           
                           
                           (1,216
                           )
                           
                           
                           
                           
                           (37
                           )
                           
                           
                           
                           
                           (1,145
                           )Note payable and other
                           
                           
                           (410
                           )
                           
                           
                           
                           
                           50
                           
                           
                           
                           
                           
                           (12
                           )
                           
                           
                           
                           
                           (372
                           )
                           
                           
                           
                           
                           45
                           
                           
                           
                           
                           
                           120
                           
                           
                           
                           
                           
                           3
                           
                           
                           
                           
                           
                           168Junior subordinated debt
                           
                           
                           -
                           
                           
                           
                           
                           
                           (3
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (3
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (74
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (74
                           )Total interest expense
                           
                           
                           (63
                           )
                           
                           
                           
                           
                           (292
                           )
                           
                           
                           
                           
                           (49
                           )
                           
                           
                           
                           
                           (404
                           )
                           
                           
                           
                           
                           153
                           
                           
                           
                           
                           
                           (1,170
                           )
                           
                           
                           
                           
                           (34
                           )
                           
                           
                           
                           
                           (1,051
                           )Net interest income
                           
                           $
                           167
                           
                           
                           
                           
                           $
                           46
                           
                           
                           
                           
                           $
                           68
                           
                           
                           
                           
                           $
                           281
                           
                           
                           
                           
                           $
                           238
                           
                           
                           
                           
                           $
                           (89
                           )
                           
                           
                           
                           $
                           (42
                           )
                           
                           
                           
                           $
                           107 Nine Months EndedSeptember 30, 2010 vs. 2009
                           
                           
                           
                           
                           
                           September 30, 2009 vs. 2008Increase (Decrease) Due to
                           
                           
                           
                           
                           
                           Increase (Decrease) Due toVolume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           Total
                           
                           
                           
                           
                           
                           Volume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           574
                           
                           
                           
                           
                           $
                           94
                           
                           
                           
                           
                           $
                           2
                           
                           
                           
                           
                           $
                           670
                           
                           
                           
                           
                           $
                           1,274
                           
                           
                           
                           
                           $
                           (4,032
                           )
                           
                           
                           
                           $
                           (187
                           )
                           
                           
                           
                           $
                           (2,945
                           )Investment securities
                           
                           
                           (30
                           )
                           
                           
                           
                           
                           (966
                           )
                           
                           
                           
                           
                           8
                           
                           
                           
                           
                           
                           (988
                           )
                           
                           
                           
                           
                           143
                           
                           
                           
                           
                           
                           (569
                           )
                           
                           
                           
                           
                           (21
                           )
                           
                           
                           
                           
                           (447
                           )Federal funds sold
                           
                           
                           11
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           17
                           
                           
                           
                           
                           
                           (19
                           )
                           
                           
                           
                           
                           (219
                           )
                           
                           
                           
                           
                           17
                           
                           
                           
                           
                           
                           (221
                           )Total interest income
                           
                           
                           555
                           
                           
                           
                           
                           
                           (868
                           )
                           
                           
                           
                           
                           12
                           
                           
                           
                           
                           
                           (301
                           )
                           
                           
                           
                           
                           1,398
                           
                           
                           
                           
                           
                           (4,820
                           )
                           
                           
                           
                           
                           (191
                           )
                           
                           
                           
                           
                           (3,613
                           )Interest expenseDeposits
                           
                           
                           670
                           
                           
                           
                           
                           
                           (956
                           )
                           
                           
                           
                           
                           (92
                           )
                           
                           
                           
                           
                           (378
                           )
                           
                           
                           
                           
                           497
                           
                           
                           
                           
                           
                           (4,191
                           )
                           
                           
                           
                           
                           (180
                           )
                           
                           
                           
                           
                           (3,874
                           )Note payable and other
                           
                           
                           (786
                           )
                           
                           
                           
                           
                           427
                           
                           
                           
                           
                           
                           (71
                           )
                           
                           
                           
                           
                           (430
                           )
                           
                           
                           
                           
                           119
                           
                           
                           
                           
                           
                           56
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           177Junior subordinated debt
                           
                           
                           -
                           
                           
                           
                           
                           
                           (72
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (72
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (231
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (231
                           )Total interest expense
                           
                           
                           (116
                           )
                           
                           
                           
                           
                           (601
                           )
                           
                           
                           
                           
                           (163
                           )
                           
                           
                           
                           
                           (880
                           )
                           
                           
                           
                           
                           616
                           
                           
                           
                           
                           
                           (4,366
                           )
                           
                           
                           
                           
                           (178
                           )
                           
                           
                           
                           
                           (3,928
                           )Net interest income
                           
                           $
                           671
                           
                           
                           
                           
                           $
                           (267
                           )
                           
                           
                           
                           $
                           175
                           
                           
                           
                           
                           $
                           579
                           
                           
                           
                           
                           $
                           782
                           
                           
                           
                           
                           $
                           (454
                           )
                           
                           
                           
                           $
                           (13
                           )
                           
                           
                           
                           $
                           315
 22


Net interest income, the largest component of our income, was $5.2
                     million for the three month period ended September 30, 2010 and $5.0
                     million for the three months ended September 30, 2009. Average
                     interest-earning assets were $10.5 million higher during the three
                     months ended September 30, 2010 compared to the same period in 2009,
                     while average interest-bearing liabilities increased $2.8 million.
                     The higher average balances resulted in $167,000 of additional net
                     interest income for the three months ended September 30, 2010, while
                     lower rates on these average balances produced additional net
                     interest income of $46,000. In addition, net interest income was $14.9 million and $14.3 million
                     for the nine months ended September 30, 2010 and 2009, respectively.
                     The increase in the 2010 period related primarily to the net effect
                     of higher levels of both average interest-earning assets and
                     interest-bearing liabilities. Average interest-earning assets were
                     $19.3 million higher during the nine months ended September 30, 2010
                     compared to the same period in 2009, while average interest-bearing
                     liabilities increased $10.3 million. The higher average balances
                     resulted in $671,000 of additional net interest income for the nine
                     months ended September 30, 2010; however, lower rates on the average
                     balances reduced net interest income by $267,000. Three months ended September 30, 2010 and 2009 Interest income for the three months ended September 30, 2010 was
                     $9.0 million, consisting of $8.3 million on loans, $661,000 on
                     investments, and $13,000 on federal funds sold. Interest income for
                     the three months ended September 30, 2009 was $9.1 million,
                     consisting of $8.0 million on loans, $1.1 million on investments, and
                     $9,000 on federal funds sold. Interest on loans for the three months
                     ended September 30, 2010 and 2009 represented 92.5% and 87.5%,
                     respectively, of total interest income, while income from investments
                     and federal funds sold represented only 7.5% and 12.5%, respectively,
                     of total interest income. The high percentage of interest income from
                     loans relates to our strategy to maintain a significant portion of
                     our assets in higher earning loans compared to lower yielding
                     investments. Average loans represented 82.9% and 82.8% of average
                     interest-earning assets for the three months ended September 30, 2010
                     and 2009, respectively. Included in interest income on loans for the
                     three months ended September 30, 2010 and 2009 was $112,000 and
                     $145,000, respectively, related to the net amortization of loan fees
                     and capitalized loan origination costs. Interest expense for the three months ended September 30, 2010 was
                     $3.8 million, consisting of $2.4 million related to deposits and $1.4
                     million related to other borrowings. Interest expense for the three
                     months ended September 30, 2009 was $4.2 million, consisting of $2.4
                     million related to deposits and $1.8 million related to other
                     borrowings. Interest expense on deposits for the three months ended
                     September 30, 2010 and 2009 represented 62.7% and 57.3%,
                     respectively, of total interest expense, while interest expense on
                     other borrowings represented 37.3% and 42.7%, respectively, of total
                     interest expense for the same three month periods. During the three
                     months ended September 30, 2010, average interest-bearing deposits
                     increased by $42.7 million over the same period in 2009, while our
                     notes payable and other borrowings decreased $39.9 million during the
                     three months ended September 30, 2010 over the same period in 2009. Nine months ended September 30, 2010 and 2009 Interest income for the nine months ended September 30, 2010 was
                     $26.8 million, consisting of $24.4 million on loans, $2.4 million on
                     investments, and $34,000 on federal funds sold. Interest income for
                     the nine months ended September 30, 2009 was $27.1 million,
                     consisting of $23.7 million on loans, $3.4 million on investments,
                     and $17,000 on federal funds sold. Interest income on loans for the
                     nine months ended September 30, 2010 and 2009 represented 90.9% and
                     87.4%, respectively, of total interest income, while income from
                     investments and federal funds sold represented only 9.1% and 12.6%,
                     respectively, of total interest income. The high percentage of
                     interest income from loans relates to our strategy to maintain a
                     significant portion of our assets in higher earning loans compared to
                     lower yielding investments. Average loans represented 83.0% and 83.5%
                     of average interest-earning assets for the nine months ended
                     September 30, 2010 and 2009, respectively. Included in interest
                     income on loans for the nine months ended September 30, 2010 and 2009
                     was $344,000 and $462,000, respectively, related to the net
                     amortization of loan fees and capitalized loan origination costs. Interest expense for the nine months ended September 30, 2010 was
                     $11.9 million, consisting of $7.2 million related to deposits and
                     $4.6 million related to borrowings. Interest expense for the nine
                     months ended September 30, 2009 was $12.8 million, consisting of $7.6
                     million related to deposits and $5.1 million related to borrowings.
                     Interest expense on deposits for the nine months ended September 30,
                     2010 and 2009 represented 61.0% and 59.7%, respectively, of total
                     interest expense, while interest expense on other borrowings
                     represented 39.0% and 40.3%, respectively, of total interest expense
                     for the same nine month periods. During the nine months ended
                     September 30, 2010, average interest-bearing deposits increased by
                     $37.5 million over the same period in 2009, while our notes payable
                     and other borrowings decreased $27.2 million during the nine months
                     ended September 30, 2010 over the same period in 2009.
 23


Provision for Loan Losses We have established an allowance for loan losses through a provision
                     for loan losses charged as an expense on our statement of income. We
                     review our loan portfolio periodically to evaluate our outstanding
                     loans and to measure both the performance of the portfolio and the
                     adequacy of the allowance for loan losses. Please see the discussion
                     below under "Balance Sheet Review - Provision and Allowance for Loan
                     Losses" for a description of the factors we consider in determining
                     the amount of the provision we expense each period to maintain this
                     allowance. Three and nine months ended September 30, 2010 and 2009 For the three months ended September 30, 2010 and 2009, we incurred a
                     noncash expense related to the provision for loan losses of $1.3
                     million and $1.1 million, respectively, bringing the allowance for
                     loan losses to $8.4 million and $7.9 million, respectively. The
                     allowance represented 1.45% of gross loans at September 30, 2010 and
                     1.39% of gross loans at September 30, 2009. During the three months
                     ended September 30, 2010, we charged-off $1.2 million of loans and
                     recorded $6,000 of recoveries on loans previously charged-off. During
                     the three months ended September 30, 2009, we charged-off $1.0
                     million of loans and recorded $91,000 of recoveries on loans
                     previously charged-off. The $1.2 million and $909,000 net charge-offs
                     during the third quarters of 2010 and 2009, respectively, represented
                     0.83% and 0.63% of the average outstanding loan portfolio for the
                     three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010, we incurred a noncash
                     expense related to the provision for loan losses of $5.0 million,
                     bringing the allowance for loan losses to $8.4 million, or 1.45% of
                     gross loans, as of September 30, 2010. The $5.0 million provision for
                     the nine months ended September 30, 2010 related to the $4.5 million
                     of loans charged-off, partially offset by $127,000 of recoveries on
                     loans previously charged-off. In contrast, for the nine months ended
                     September 30, 2009, we added $2.8 million to the provision for loan
                     losses, resulting in an allowance of $7.9 million at September 30,
                     2009. We charged-off $2.0 million of loans and recorded $95,000 of
                     recoveries on loans previously charged-off during the nine months
                     ended September 30, 2009. The $4.3 million and $1.9 million net
                     charge-offs during the first nine months of 2010 and 2009,
                     respectively, represented 1.00% and 0.45% of the average outstanding
                     loan portfolio for the nine months ended September 30, 2010 and 2009,
                     respectively. At September 30, 2010 and 2009, the allowance for loan losses
                     represented 81.3% and 80.2% of the amount of non-performing loans. A
                     significant portion, or 81.6%, of nonperforming loans at September
                     30, 2010 is secured by real estate. Our nonperforming loans have been
                     written down to approximately 64% of their original nonperforming
                     balance. We have evaluated the underlying collateral on these loans
                     and believe that the collateral on these loans is sufficient to
                     minimize future losses. As a result of this level of coverage on
                     non-performing loans, we believe the provision of $5.0 million for
                     the nine months ended September 30, 2010 to be adequate. Noninterest Income The following table sets forth information related to our noninterest
                     income (dollars in thousands). Three months endedSeptember 30,
                           
                           
                           
                           
                           
                           Nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Loan fee income
                           
                           $
                           190
                           
                           
                           
                           
                           $
                           138
                           
                           
                           
                           
                           $
                           416
                           
                           
                           
                           
                           $
                           297Service fees on deposit accounts
                           
                           
                           155
                           
                           
                           
                           
                           
                           199
                           
                           
                           
                           
                           
                           444
                           
                           
                           
                           
                           
                           551Income from bank owned life insurance
                           
                           
                           134
                           
                           
                           
                           
                           
                           213
                           
                           
                           
                           
                           
                           434
                           
                           
                           
                           
                           
                           459Gain on sale investment securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           34
                           
                           
                           
                           
                           
                           1,104
                           
                           
                           
                           
                           
                           34Gain on sale of property and equipment
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Other than temporary impairment on investment
                           
                           
                           (450
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (450
                           )
                           
                           
                           
                           
                           -Real estate owned activity
                           
                           
                           (60
                           )
                           
                           
                           
                           
                           (148
                           )
                           
                           
                           
                           
                           (63
                           )
                           
                           
                           
                           
                           (152
                           )Other income
                           
                           
                           118
                           
                           
                           
                           
                           
                           97
                           
                           
                           
                           
                           
                           340
                           
                           
                           
                           
                           
                           277Total noninterest income
                           
                           $
                           87
                           
                           
                           
                           
                           $
                           533
                           
                           
                           
                           
                           $
                           2,243
                           
                           
                           
                           
                           $
                           1,466 Three months ended September 30, 2010 and 2009 Noninterest income for the three month period ended September 30,
                     2010 was $87,000, a decrease of 83.7% over noninterest income of
                     $533,000 for the same period of 2009. The $446,000 decrease during
                     the 2010 period is related primarily to a $450,000 impairment charge
                     on an investment security. Partially offsetting the impairment charge
                     were increases of $52,000
 24


in loan fee income, $88,000 in real estate owned activity, and
                     $21,000 from other income. In addition, noninterest income decreased
                     by $44,000 related to service fees on deposit accounts and $79,000 in
                     income from bank owned life insurance. Loan fee income was $190,000 and $138,000 for the three months ended
                     September 30, 2010 and 2009, respectively, consisting primarily of
                     late charge fees, fees from issuance of lines and letters of credit,
                     and mortgage origination fees we receive on residential loans funded
                     and closed by a third party. The $52,000 increase in loan fee income
                     third quarter of 2010 compared to the same period in 2009 related
                     primarily to the $63,000 increase in mortgage origination fees.
                     Mortgage origination fees were $159,000 for the three months ended
                     September 30, 2010 compared to $96,000 for the same period in 2009.
                     Income related to fees received from the issuance of lines and
                     letters of credit was $10,000 for the third quarter of 2010 and
                     $12,000 for the third quarter of 2009, while late charge fees were
                     $21,000 and $30,000 for the three month periods ended September 30,
                     2010 and 2009, respectively. Service fees on deposit accounts consist primarily of service charges
                     on our checking, money market, and savings accounts and the fee
                     income received from client non-sufficient funds ("NSF")
                     transactions. Deposit fees were $155,000 and $199,000 for the three
                     months ended September 30, 2010 and 2009, respectively. The $44,000
                     decrease is primarily related to a $52,000 decrease in NSF fees and a
                     $2,000 decrease in overdraft and returned item fees, partially offset
                     by a $10,000 increase in deposit related fees such as service
                     charges. Service charge fees were $77,000 and $67,000 for the three
                     months ended September 30, 2010 and 2009, respectively, while other
                     fees such as overdraft and returned item fees were $12,000 and
                     $14,000 for the same periods in 2010 and 2009, respectively. NSF fee
                     income was $66,000 and $118,000 for the third quarters of 2010 and
                     2009, respectively, representing 42.6% of total service fees on
                     deposits in the 2010 period compared to 59.3% of total service fees
                     on deposits in the 2009 period. Income derived from bank owned life insurance was $134,000 and
                     $213,000 for the three months ended September 30, 2010 and 2009,
                     respectively. The $79,000 decrease in income from life insurance is
                     due to reduced rates of return on the insurance policies due to the
                     current market environment. We recorded a $450,000 other-than-temporary impairment charge on one
                     of our private-label collateralized mortgage obligations during the
                     three months ended September 30, 2010. Real estate owned activity includes income and expenses from property
                     held for sale and other real estate we own, including real estate
                     acquired in settlement of loans. For the three months ended September
                     30, 2010, our expenses related to the properties we owned exceeded
                     income received on the real estate by $60,000. Rental income was
                     $39,000 for the third quarter of 2010 and expenses such as
                     maintenance, legal and property taxes were $34,000. In addition, the
                     loss on the sale of real estate owned properties was $65,000 during
                     the three months ended September 30, 2010. Comparatively, during the
                     third quarter of 2009, income from real estate owned was $75,000 and
                     expenses related to owning the real estate were $31,000. In addition,
                     we recorded a $192,000 write-down on a property for a net loss of
                     $148,000 for the three months ended September 30, 2009. Other income consists primarily of fees received on debit card
                     transactions, sale of customer checks, and wire transfers. Other
                     income was $118,000 and $97,000 for the three months ended September
                     30, 2010 and 2009, respectively. The $21,000 increase related
                     primarily to an $19,000 increase in debit card transaction fees and a
                     $2,000 increase in other client service related fees. Debit card
                     transaction fees were $88,000 and $69,000 for the three months ended
                     September 30, 2010 and 2009, respectively, and represented 74.6% and
                     71.1% of total other income for the third quarters of 2010 and 2009,
                     respectively. The corresponding transaction costs associated with
                     debit card transactions are included in noninterest data processing
                     and related costs. The debit card transaction costs were $35,000 and
                     $27,000 for the three months ended September 30, 2010 and 2009,
                     respectively. The net impact of the fees received and the related
                     cost of the debit card transactions on earnings for the three months
                     ended September 30, 2010 and 2009 was $53,000 and $42,000,
                     respectively. Wire transfer and other deposit related fees were
                     $30,000 and $28,000 for the third quarters ended September 30, 2010
                     and 2009, respectively. As previously reported, on July 21, 2010, the U.S. President signed
                     into law the Dodd-Frank Act. The Dodd-Frank Act calls for new limits
                     on interchange transaction fees that banks receive from merchants via
                     card networks like Visa, Inc. and MasterCard, Inc. when a customer
                     uses a debit card. The results of this proposed legislation may
                     impact our other income from debit card transactions in the future. Nine months ended September 30, 2010 and 2009 Noninterest income in the nine month period ended September 30, 2010
                     was $2.2 million, an increase of 53.0% over noninterest income of
                     $1.5 million in the same period of 2009. The $777,000 increase in
                     noninterest income is related primarily to a $1.1 million gain on
                     sale of investment securities, partially offset by a $450,000
                     impairment charge on an investment security. In addition, noninterest
                     income also increased by $119,000 from loan fee income, $89,000 from
                     real estate owned
 25


activity, and $63,000 from other income. However, these increases
                     were partially offset by a $107,000 decrease in service fees on
                     deposit accounts and $25,000 decrease in income from bank owned life
                     insurance. Loan fee income was $416,000 and $297,000 for the nine months ended
                     September 30, 2010 and 2009, respectively, consisting primarily of
                     late charge fees, fees from issuance of lines and letters of credit,
                     and mortgage origination fees we receive on residential loans funded
                     and closed by a third party. The $119,000 increase for the nine
                     months ended September 30, 2010 compared to the same period in 2009
                     related primarily to an increase of $131,000 in mortgage origination
                     fees, partially offset by a decrease of $4,000 in late charge fees
                     and $8,000 in fees from issuance of lines and letters of credit.
                     Mortgage origination fees were $316,000 and $185,000 for the nine
                     months ended September 30, 2010 and 2009, respectively. Late charge
                     fees were $73,000 and $77,000 for the first nine months of 2010 and
                     2009, respectively, while income related to issuance of lines and
                     letters of credit was $27,000 and $35,000 for the same periods in
                     2010 and 2009, respectively. Service fees on deposit accounts consist primarily of service charges
                     on our checking, money market, and savings accounts and the fee
                     income received from client NSF transactions. Deposit fees were
                     $444,000 and $551,000 for the nine months ended September 30, 2010
                     and 2009, respectively. The $107,000 decrease is primarily related to
                     a $132,000 decrease in NSF fees, partially offset by a $29,000
                     increase in deposit related fees. NSF income decreased $132,000 to
                     $197,000 for the nine months ended September 30, 2010 from $329,000
                     for the same period in 2009, representing 44.4% of total service fees
                     on deposits in the 2010 period compared to 59.7% of total service
                     fees on deposits in the 2009 period. Service charge fees were
                     $211,000 and $182,000 for the nine months ended September 30, 2010
                     and 2009, respectively, while other fees such as overdraft and
                     returned item fees were $36,000 and $40,000, respectively. Income derived from life insurance was $434,000 and $459,000 for the
                     nine months ended September 30, 2010 and 2009, respectively. The
                     $25,000 decrease in income from life insurance is due to reduced
                     rates of return on the insurance policies due to the current market
                     environment. We recorded a $1.1 million gain on sale of investment securities
                     during the nine months ended September 30, 2010. We sold $59.2
                     million of securities and purchased $58.2 million of securities,
                     allowing us to reposition our investment portfolio to better match
                     our anticipated future cashflow needs. The gain on sale also assisted
                     us in meeting our higher regulatory capital requirements. In
                     addition, we recorded a $450,000 other-than-temporary impairment
                     charge on one of our private-label collateralized mortgage
                     obligations during the nine months ended September 30, 2010.
                     Comparatively, we recorded a $34,000 gain on sale of investment
                     securities during the nine months ended September 30, 2009. Real estate owned activity includes income and expenses from property
                     held for sale and other real estate we own, including real estate
                     acquired in settlement of loans. For the nine months ended September
                     30, 2010 and 2009, our expenses related to owning the real estate
                     exceeded income received on the properties by $63,000 and $152,000
                     respectively. Rental income was $114,000 for the nine months of 2010
                     and expenses such as maintenance, legal and property taxes were
                     $107,000. In addition, we recorded a $60,000 loss on sale and $10,000
                     write-down on real estate owned during the first nine months of 2010.
                     For the first nine months of 2009, income on real estate owned was
                     $124,000 and expenses related to owning the real estate were $78,000.
                     In addition, we recorded a $4,000 gain on the sale of real estate
                     owned and write-downs of $202,000 during the nine months ending
                     September 30, 2009 for a net loss of $152,000. Other income consists primarily of fees received on debit card
                     transactions, sale of customer checks, and wire transfers. Other
                     income was $340,000 and $277,000 for the nine months ended September
                     30, 2010 and 2009, respectively. The $63,000 increase relates
                     primarily to a $52,000 increase in debit card transaction fees and an
                     $11,000 increase in other client service related fees. Debit card
                     transaction fees were $249,000 and $197,000 for the nine months ended
                     September 30, 2010 and 2009, respectively and represented 73.2% and
                     71.1% of total other income for the first nine months of 2010 and
                     2009, respectively. The corresponding transaction costs associated
                     with debit card transactions are included in noninterest data
                     processing and related costs. The debit card transaction costs were
                     $94,000 and $75,000 for the nine months ended September 30, 2010 and
                     2009, respectively. The net impact of the fees received and the
                     related cost of the debit card transactions on earnings for the nine
                     months ended September 30, 2010 and 2009 was $155,000 and $122,000,
                     respectively. As previously reported, on July 21, 2010, the U.S. President signed
                     into law the Dodd-Frank Act. The Dodd-Frank Act calls for new limits
                     on interchange transaction fees that banks receive from merchants via
                     card networks like Visa, Inc. and MasterCard, Inc. when a customer
                     uses a debit card. The results of this proposed legislation may
                     impact our other income from debit card transactions in the future.
 26


Noninterest expenses The following table sets forth information related to our noninterest
                     expenses (dollars in thousands). Three months endedSeptember 30,
                           
                           
                           
                           
                           
                           Nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Compensation and benefits
                           
                           $
                           1,700
                           
                           
                           
                           
                           
                           1,980
                           
                           
                           
                           
                           $
                           5,974
                           
                           
                           
                           
                           $
                           5,867Professional fees
                           
                           
                           134
                           
                           
                           
                           
                           
                           186
                           
                           
                           
                           
                           
                           464
                           
                           
                           
                           
                           
                           478Marketing
                           
                           
                           151
                           
                           
                           
                           
                           
                           176
                           
                           
                           
                           
                           
                           547
                           
                           
                           
                           
                           
                           495Insurance
                           
                           
                           436
                           
                           
                           
                           
                           
                           352
                           
                           
                           
                           
                           
                           1,116
                           
                           
                           
                           
                           
                           1,143Occupancy
                           
                           
                           535
                           
                           
                           
                           
                           
                           550
                           
                           
                           
                           
                           
                           1,646
                           
                           
                           
                           
                           
                           1,407Data processing and related costs
                           
                           
                           421
                           
                           
                           
                           
                           
                           358
                           
                           
                           
                           
                           
                           1,208
                           
                           
                           
                           
                           
                           1,077Telephone
                           
                           
                           74
                           
                           
                           
                           
                           
                           76
                           
                           
                           
                           
                           
                           228
                           
                           
                           
                           
                           
                           186Other
                           
                           
                           145
                           
                           
                           
                           
                           
                           187
                           
                           
                           
                           
                           
                           532
                           
                           
                           
                           
                           
                           605Total noninterest expenses
                           
                           $
                           3,596
                           
                           
                           
                           
                           
                           3,865
                           
                           
                           
                           
                           $
                           11,715
                           
                           
                           
                           
                           $
                           11,258 Three months ended September 30, 2010 and 2009 We incurred noninterest expenses of $3.6 million for the three months
                     ended September 30, 2010 compared to $3.9 million for the three
                     months ended September 30, 2009, an decrease of $269,000 or 7.0%. Noninterest expense as a percentage of noninterest income and net
                     interest income, excluding the gain on sale and impairment charge on
                     investments and real estate owned activity, or the efficiency ratio,
                     was 61.7% for the three months ended September 30, 2010 compared to
                     69.1% for the same period in 2009. The improvement in the efficiency
                     ratio relates primarily to the increase in net interest income and
                     decrease in compensation costs during the third quarter 2010. For the three months ended September 30, 2010, compensation and
                     benefits, occupancy, and data processing and related costs
                     represented 73.9% of the total noninterest expense compared to 74.7%
                     for the same period in 2009. Nine months ended September 30, 2010 and 2009 We incurred noninterest expenses of $11.7 million for the nine months
                     ended September 30, 2010 compared to $11.3 million for the nine
                     months ended September 30, 2009, an increase of $457,000, or 4.1%. The efficiency ratio, or noninterest expense as a percentage of
                     noninterest income and net interest income, excluding the gain on
                     sale and impairment charge on investments and real estate owned
                     activity, was 70.7% for the nine months ended September 30, 2010
                     compared to 70.8% for the same period in 2009. The efficiency ratio
                     remained virtually unchanged for the nine months ended September 30,
                     2010 compared the same period in 2009 as the increase in net interest
                     income for the 2010 period was offset by additional general and
                     administrative expenses during the same time period. For the nine months ended September 30, 2010, compensation and
                     benefits, occupancy, and data processing and related costs
                     represented 75.4% of the total noninterest expense compared to 74.2%
                     for the same period in 2009. The following table sets forth information related to our
                     compensation and benefits (dollars in thousands). Three months endedSeptember 30,
                           
                           
                           
                           
                           
                           Nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Base compensation
                           
                           $
                           1,618
                           
                           
                           
                           
                           $
                           1,536
                           
                           
                           
                           
                           $
                           4,773
                           
                           
                           
                           
                           
                           4,284Incentive compensation
                           
                           
                           (92
                           )
                           
                           
                           
                           
                           121
                           
                           
                           
                           
                           
                           214
                           
                           
                           
                           
                           
                           563Total compensation
                           
                           
                           1,526
                           
                           
                           
                           
                           
                           1,657
                           
                           
                           
                           
                           
                           4,987
                           
                           
                           
                           
                           
                           4,847Benefits
                           
                           
                           208
                           
                           
                           
                           
                           
                           360
                           
                           
                           
                           
                           
                           1,088
                           
                           
                           
                           
                           
                           1,126Capitalized loan origination costs
                           
                           
                           (34
                           )
                           
                           
                           
                           
                           (37
                           )
                           
                           
                           
                           
                           (101
                           )
                           
                           
                           
                           
                           (106
                           )Total compensation and benefits
                           
                           $
                           1,700
                           
                           
                           
                           
                           $
                           1,980
                           
                           
                           
                           
                           $
                           5,974
                           
                           
                           
                           
                           
                           5,867
 27


Three months ended September 30, 2010 and 2009 Total compensation and benefits expense was $1.7 million and $2.0
                     million for the three months ended September 30, 2010 and 2009,
                     respectively. Compensation and benefits represented 47.3% and 51.2%
                     of our total noninterest expense for the three months ended September
                     30, 2010 and 2009, respectively. The $280,000 decrease in
                     compensation and benefits in the third quarter of 2010 compared to
                     the same period in 2009 resulted from decreases of $213,000 in
                     incentive compensation and $152,000 in benefits expense, partially
                     offset by an increase of $82,000 in base compensation expense. In
                     addition, loan origination compensation expense, which is required to
                     be capitalized and amortized over the life of the loan as a reduction
                     of loan interest income, decreased by $3,000. The $82,000 increase in base compensation expense related primarily
                     to the cost of two additional full-time employees as we have added
                     two positions in our information technology and support departments.
                     Incentive compensation represented (5.4%) and 6.1% of total
                     compensation and benefits for the three months ended September 30,
                     2010 and 2009, respectively. The incentive compensation expense
                     recorded for the third quarters of 2010 and 2009 represented an
                     accrual of the estimated incentive compensation earned during the
                     third quarter of the respective year. Benefits expense decreased
                     $152,000 in the third quarter of 2010 compared to the same period in
                     2009. The decrease in benefit expense is related to a reduction in
                     the accrual related to our executive retirement plan. Benefits
                     expense represented 13.6% and 21.7% of the total compensation for the
                     three months ended September 30, 2010 and 2009, respectively. Nine months ended September 30, 2010 and 2009 Total compensation and benefits expense was $6.0 million and $5.9
                     million for the nine months ended September 30, 2010 and 2009,
                     respectively. Compensation and benefits represented 51.0% and 52.1%
                     of our total noninterest expense for the nine months ended September
                     30, 2010 and 2009, respectively. The $107,000 increase in
                     compensation and benefits in the first nine months of 2010 compared
                     to the same period in 2009 resulted from increases of $489,000 in
                     base compensation, partially offset by a reduction of $349,000 in
                     incentive compensation, and $38,000 in benefits expense. In addition,
                     loan origination compensation expense, which is required to be
                     capitalized and amortized over the life of the loan as a reduction of
                     loan interest income, decreased by $5,000. The $489,000 increase in base compensation expense related primarily
                     to the cost of the additional employees hired to staff our new
                     regional headquarters in Columbia, South Carolina. We have also added
                     positions in client services, deposit operations, and information
                     technology and support during the past twelve months. Incentive
                     compensation represented 3.6% and 9.6% of total compensation and
                     benefits for the nine months ended September 30, 2010 and 2009,
                     respectively. The incentive compensation expense recorded for the
                     first nine months of 2010 and 2009 represented an accrual of the
                     estimated incentive compensation earned during the first nine months
                     of the respective year. Benefits expense decreased $38,000 in the
                     first nine months of 2010 compared to the same period in 2009. The
                     decrease in benefit expense is related to a reduction in the accrual
                     related to our executive retirement plan. Benefits expense
                     represented 21.8% and 23.2% of the total compensation for the nine
                     months ended September 30, 2010 and 2009, respectively. The following tables set forth information related to our data
                     processing and related costs (dollars in thousands). Three months endedSeptember 30,
                           
                           
                           
                           
                           
                           Nine months endedSeptember 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Data processing costs
                           
                           $
                           318
                           
                           
                           
                           
                           $
                           259
                           
                           
                           
                           
                           $
                           909
                           
                           
                           
                           
                           $
                           810Debit card transaction expense
                           
                           
                           35
                           
                           
                           
                           
                           
                           27
                           
                           
                           
                           
                           
                           94
                           
                           
                           
                           
                           
                           75Courier expense
                           
                           
                           27
                           
                           
                           
                           
                           
                           28
                           
                           
                           
                           
                           
                           81
                           
                           
                           
                           
                           
                           82Other expenses
                           
                           
                           41
                           
                           
                           
                           
                           
                           44
                           
                           
                           
                           
                           
                           124
                           
                           
                           
                           
                           
                           110Total data processing and related costs
                           
                           $
                           421
                           
                           
                           
                           
                           $
                           358
                           
                           
                           
                           
                           $
                           1,208
                           
                           
                           
                           
                           $
                           1,077 Three and nine months ended September 30, 2010 and 2009 Total data processing and related costs were $421,000 and $358,000,
                     an increase of $63,000, or 17.6%, for the three months ended
                     September 30, 2010 and 2009, respectively. During the first nine
                     months of 2010 and the same period of 2009, our data processing and
                     related costs were $1.2 million and $1.1 million, respectively, an
                     increase of $131,000, or 12.2%. We have contracted with an outside computer service company to
                     provide our core data processing services. Our core data processing
                     costs increased $59,000, or 22.8%, from $259,000 to $318,000 for the
                     three months ended September 30, 2010 compared to the same period in
                     2009. A significant portion of the fee charged by the third party
                     processor is directly related to the number of loan and deposit
                     accounts and the related number of transactions. Our electronic
                     banking and credit bureau
 28


fees, specifically, have increased as we have grown our client base
                     during the nine months ended September 30, 2010. During the nine
                     months ended September 30, 2010 and 2009, data processing costs for
                     our core processing system were $909,000 and $810,000, respectively,
                     an increase of $99,000, or 12.2%. We receive income from debit card transactions performed by our
                     clients. Since we outsource this service, we are charged related
                     transaction expenses from our merchant service provider. Debit card
                     transaction expense was $35,000 and $27,000 for the three months
                     ended September 30, 2010 and 2009, respectively, and $94,000 and
                     $75,000 for the nine months ended September 30, 2010 and 2009,
                     respectively. Occupancy expense represented 14.9% and 14.2% of total noninterest
                     expense for the three months ended September 30, 2010 and 2009,
                     respectively. Occupancy expense decreased by $15,000 for the three
                     months ended September 30, 2010 to $535,000 from $550,000 for the
                     same period ended September 30, 2009. For the nine months ended
                     September 30, 2010, occupancy expense increased $239,000 to $1.7
                     million from $1.4 million for the same period ended September 30,
                     2009. The increase during the nine month period is due primarily to
                     the expenses related to our new regional headquarters which was
                     opened in August 2009. Occupancy expense represented 14.1% and 12.5%
                     of total noninterest expense for the first nine months of 2010 and
                     2009, respectively. The remaining noninterest expenses represent a $37,000 decrease for
                     the three month period ended September 30, 2010 compared to the same
                     period in 2009 resulting primarily from decreases of $52,000 in
                     professional fees, $25,000 in marketing expenses, and $42,000 in
                     other noninterest expenses, partially offset by an $84,000 increase
                     in insurance expense. The decrease in professional fees is primarily
                     related to reduced legal expenses during the 2010 period while the
                     reduction in marketing and other noninterest expenses is primarily
                     related to the additional marketing and other costs associated with
                     opening our regional headquarters in Columbia, South Carolina during
                     the third quarter of 2009. The increase in insurance expense is due
                     to the increased cost of FDIC insurance premiums resulting from our
                     Formal Agreement with the OCC. For the nine month period ended September 30, 2010, remaining
                     noninterest expenses decreased $20,000 from the same period in 2009.
                     During this period, professional fees decreased by $14,000, insurance
                     expenses by $27,000, and other noninterest expenses by $73,000;
                     however, these decreases were partially offset by a $52,000 increase
                     in marketing expenses and $42,000 in telephone expenses. The decrease
                     in professional fees is primarily related to reduced legal and
                     accounting fees during the first nine months of 2010, while the
                     decrease in insurance expenses is due to the FDIC's special
                     assessment of approximately $300,000 during the second quarter of
                     2009, partially offset by increased premiums during the second and
                     third quarters of 2010. The increases in marketing and telephone
                     expenses are essentially due to increased community support and
                     additional marketing efforts in our two primary markets and to
                     additional communication costs associated with our new regional
                     headquarters in Columbia, South Carolina. In addition, the $73,000
                     decrease in other expenses is primarily due to decreases of $43,000
                     in office supplies and forms and $52,000 in collection expenses,
                     partially offset by a $34,000 increase in deposit account losses. We incurred income tax expense of $110,000 for the three months ended
                     September 30, 2010 compared to $109,000 during the same period in
                     2009. For the nine months ended September 30, 2010, our income tax
                     expense was $12,000 compared to $461,000 for the same period in 2009.
                     The lower income tax expense for the nine month period resulted from
                     our tax exempt income approximating our pre-tax net income. Balance Sheet ReviewGeneral At September 30, 2010, we had total assets of $743.9 million,
                     consisting principally of $571.4 million in net loans, $92.1 million
                     in investments, $28.5 million in federal funds sold, $14.4 million in
                     bank owned life insurance, and $16.0 million in property and
                     equipment. Our liabilities at September 30, 2010 totaled $683.8
                     million, which consisted principally of $542.7 million in deposits,
                     $122.7 million in other borrowings, and $13.4 million in junior
                     subordinated debentures. At September 30, 2010, our shareholders'
                     equity was $60.1 million. At December 31, 2009, we had total assets of $719.3 million,
                     consisting principally of $566.5 million in net loans, $94.6 million
                     in investments, $6.5 million in federal funds sold, $14.0 million in
                     bank owned life insurance, and $16.4 million in property and
                     equipment. Our liabilities at December 31, 2009 totaled $659.5
                     million, consisting principally of $494.1 million in deposits, $147.0
                     million in notes payable and other borrowings, and $13.4 million of
                     junior subordinated debentures. At December 31, 2009, our
                     shareholders' equity was $59.8 million. Federal Funds Sold At September 30, 2010, our federal funds sold were $28.5 million, or
                     3.8% of total assets. At December 31, 2009, our $6.5 million in
                     short-term investments in federal funds sold on an overnight basis
                     comprised 0.9% of total assets.
 29


Investments At September 30, 2010, the $92.1 million in our investment securities
                     portfolio represented approximately 12.4% of our total assets. We
                     held government sponsored enterprise securities, municipal
                     securities, and mortgage-backed securities with a fair value of $82.8
                     million and an amortized cost of $82.1 million for an unrealized gain
                     of $719,000. The amortized costs and fair value of investment securities available
                     for sale and held to maturity are as follows (dollars in thousands): September 30, 2010Amortized
                           
                           
                           
                           
                           
                           Gross Unrealized
                           
                           
                           
                           
                           
                           FairCost
                           
                           
                           
                           
                           
                           Gains
                           
                           
                           
                           
                           
                           Losses
                           
                           
                           
                           
                           
                           ValueAvailable for saleState and political subdivisions
                           
                           $
                           10,358
                           
                           
                           
                           
                           $
                           420
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           10,778Mortgage-backed securitiesFHLMC
                           
                           
                           20,263
                           
                           
                           
                           
                           
                           460
                           
                           
                           
                           
                           
                           122
                           
                           
                           
                           
                           
                           20,601FNMA
                           
                           
                           41,643
                           
                           
                           
                           
                           
                           307
                           
                           
                           
                           
                           
                           138
                           
                           
                           
                           
                           
                           41,812GNMA
                           
                           
                           4,026
                           
                           
                           
                           
                           
                           137
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           4,163Collateralized mortgage obligations
                           
                           
                           5,698
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           350
                           
                           
                           
                           
                           
                           5,34871,630
                           
                           
                           
                           
                           
                           904
                           
                           
                           
                           
                           
                           610
                           
                           
                           
                           
                           
                           71,924Total
                           
                           $
                           81,988
                           
                           
                           
                           
                           $
                           1,324
                           
                           
                           
                           
                           $
                           610
                           
                           
                           
                           
                           $
                           82,702Held to maturityMortgage-backed securitiesFNMA
                           
                           $
                           104
                           
                           
                           
                           
                           $
                           5
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           109 December 31, 2009Amortized
                           
                           
                           
                           
                           
                           Gross Unrealized
                           
                           
                           
                           
                           
                           FairCost
                           
                           
                           
                           
                           
                           Gains
                           
                           
                           
                           
                           
                           Losses
                           
                           
                           
                           
                           
                           ValueAvailable for saleGovernment sponsored enterprises
                           
                           $
                           11,615
                           
                           
                           
                           
                           $
                           1
                           
                           
                           
                           
                           $
                           76
                           
                           
                           
                           
                           $
                           11,540State and political subdivisions
                           
                           
                           5,267
                           
                           
                           
                           
                           
                           46
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           5,30916,882
                           
                           
                           
                           
                           
                           47
                           
                           
                           
                           
                           
                           80
                           
                           
                           
                           
                           
                           16,849Mortgage-backed securitiesFHLMC
                           
                           
                           13,540
                           
                           
                           
                           
                           
                           362
                           
                           
                           
                           
                           
                           15
                           
                           
                           
                           
                           
                           13,887FNMA
                           
                           
                           32,910
                           
                           
                           
                           
                           
                           807
                           
                           
                           
                           
                           
                           150
                           
                           
                           
                           
                           
                           33,567GNMA
                           
                           
                           5,122
                           
                           
                           
                           
                           
                           112
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,234Collateralized mortgage obligations
                           
                           
                           7,008
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           350
                           
                           
                           
                           
                           
                           6,65858,580
                           
                           
                           
                           
                           
                           1,281
                           
                           
                           
                           
                           
                           515
                           
                           
                           
                           
                           
                           59,346Total
                           
                           $
                           75,462
                           
                           
                           
                           
                           $
                           1,328
                           
                           
                           
                           
                           $
                           595
                           
                           
                           
                           
                           $
                           76,195Held to maturityMortgage-backed securitiesFHLMC
                           
                           $
                           1,830
                           
                           
                           
                           
                           $
                           76
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           1,906FNMA
                           
                           
                           7,395
                           
                           
                           
                           
                           
                           215
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           7,610$
                           9,225
                           
                           
                           
                           
                           $
                           291
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           9,516 Contractual maturities and yields on our investments that are
                     available for sale and are held to maturity at September 30, 2010 are
                     shown in the following table (dollars in thousands). Expected
                     maturities may differ from contractual maturities because issuers may
                     have the right to call or prepay obligations with or without call or
                     prepayment penalties. We had no securities with maturities less than
                     one year at September 30, 2010.
 30


One to Five Years
                           
                           
                           Five to Ten Years
                           
                           
                           Over Ten Years
                           
                           
                           TotalAmount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           YieldAvailable for SaleState and political subdivisions
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           8,789
                           
                           
                           3.25
                           %
                           $
                           1,989
                           
                           
                           3.87
                           %
                           $
                           10,778
                           
                           
                           3.37
                           %Mortgage-backed securities
                           
                           
                           156
                           
                           
                           4.71
                           %
                           
                           1,618
                           
                           
                           2.38
                           %
                           
                           70,150
                           
                           
                           3.26
                           %
                           
                           71,924
                           
                           
                           3.24
                           %Total
                           
                           $
                           156
                           
                           
                           4.71
                           %
                           $
                           10,407
                           
                           
                           3.11
                           %
                           $
                           72,139
                           
                           
                           3.28
                           %
                           $
                           82,702
                           
                           
                           3.26
                           %Held to MaturityMortgage-backed securities
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           104
                           
                           
                           3.94
                           %
                           $
                           -
                           
                           
                           -
                           
                           $
                           104
                           
                           
                           3.94
                           % The tables below summarize gross unrealized losses on investment
                     securities and the fair market value of the related securities,
                     aggregated by investment category and length of time that individual
                     securities have been in a continuous unrealized loss position, at
                     September 30, 2010 and December 31, 2009 (dollars in thousands). Less than 12 months
                           
                           
                           12 months or longer
                           
                           
                           Total#
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           UnrealizedlossesAs of September 30, 2010Available for saleMortgage-backedFHLMC
                           
                           
                           4
                           
                           $
                           16,544
                           
                           $
                           122
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           4
                           
                           $
                           16,544
                           
                           $
                           122FNMA
                           
                           
                           6
                           
                           
                           27,886
                           
                           
                           138
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           6
                           
                           
                           27,886
                           
                           
                           138Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           2,354
                           
                           
                           350
                           
                           
                           1
                           
                           
                           2,354
                           
                           
                           35010
                           
                           $
                           44,430
                           
                           $
                           260
                           
                           
                           1
                           
                           $
                           2,354
                           
                           $
                           350
                           
                           
                           11
                           
                           $
                           46,784
                           
                           $
                           610  Less than 12 months
                           
                           
                           12 months or longer
                           
                           
                           Total#
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           UnrealizedlossesAs of December 31, 2009Available for saleGovernment sponsored enterprises
                           
                           
                           2
                           
                           $
                           8,908
                           
                           $
                           76
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           2
                           
                           $
                           8,908
                           
                           $
                           76State and political subdivisions
                           
                           
                           2
                           
                           
                           855
                           
                           
                           4
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2
                           
                           
                           855
                           
                           
                           4Mortgage-backedFHLMC
                           
                           
                           1
                           
                           
                           2,028
                           
                           
                           15
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           2,028
                           
                           
                           15FNMA
                           
                           
                           4
                           
                           
                           17,467
                           
                           
                           150
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           4
                           
                           
                           17,467
                           
                           
                           150Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           3,095
                           
                           
                           350
                           
                           
                           1
                           
                           
                           3,095
                           
                           
                           3509
                           
                           $
                           29,258
                           
                           $
                           245
                           
                           
                           1
                           
                           $
                           3,095
                           
                           $
                           350
                           
                           
                           10
                           
                           $
                           32,353
                           
                           $
                           595 At September 30, 2010, the Company had nine individual investments
                     that were in an unrealized loss position for less than 12 months. The
                     unrealized losses were primarily attributable to changes in interest
                     rates, rather than deterioration in credit quality. The majority of
                     these securities are government or agency securities and, therefore,
                     pose minimal credit risk. The Company considers the length of time
                     and extent to which the fair value of available-for-sale debt
                     securities have been less than cost to conclude that such securities
                     were not other-than-temporarily impaired. We also consider other
                     factors such as the financial condition of the issuer including
                     credit ratings and specific events affecting the operations of the
                     issuer, volatility of the security, underlying assets that
                     collateralize the debt security, and other industry and macroeconomic
                     conditions. As the Company has no intent to sell securities with
                     unrealized losses and it is not more-likely-than-not that the Company
                     will be required to sell these securities before recovery of
                     amortized cost, we have concluded that the securities are not
                     impaired on an other-than-temporary basis. At September 30, 2010, we held two private label collateralized
                     mortgage obligations ("CMOs") with a book value of $5.7 million, one
                     of which has been in an unrealized loss position for 12 months or
                     longer. The Company evaluates these securities for
                     other-than-temporary impairment quarterly based on the methodology
                     outlined below. As prescribed by FASB ASC 320-10-35, the Company
                     recognizes the credit component of an other-than-temporary impairment
                     ("OTTI") on debt securities through earnings and the non-credit
                     component in other comprehensive income ("OCI") for those securities
                     in which the Company does not intend to sell the security and it is
                     more-likely-than-not that the Company will not be required to sell
                     the securities prior to recovery.
 31


We utilized the Bloomberg Default model to evaluate our two
                     non-agency CMOs for OTTI which is comprised of five sub-models: Prepayment models
                     Foreclosure models
                     Liquidity models
                     Loss severity models
                     60+ Delinquency rate models Credit risk is prominent for collateralized non-agency mortgage
                     obligations, such as our private-label CMOs, because credit risk is
                     not assumed by any government sponsored agency. Credit risk, arising
                     from borrower default, is especially difficult to quantify given the
                     market's lack of clarity on future home prices as well as the impact
                     of loan attributes. The primary cause of borrower delinquency and
                     default is attributable to the loss of household income due to
                     unemployment. Therefore, the change in unemployment rates is a
                     predictor of the likelihood of mortgage loan delinquency and
                     foreclosures. Prime mortgage borrowers, with secure or steady
                     employment are more likely to stay current on their mortgages, even
                     if home prices drop significantly, as in a period of severe home
                     price depreciation. Subprime borrowers, on the other hand, who only
                     marginally sustained their initial home purchase, are more likely to
                     become delinquent when home prices drop precipitously. Higher
                     unemployment rates and home price depreciation have a positive
                     correlation with higher foreclosure rates. Other factors such as low Fair Isaac Corporation ("FICO") scores
                     which measure a borrower's credit worthiness, limited or reduced
                     documentation at the time a loan is originated, geographic location,
                     and occupancy types such as non-owner occupied, are also strong
                     indicators of future loan performance and higher mortgage delinquency
                     and foreclosure rates. The prepayment and foreclosure models consider loan level inputs
                     including loan to value, loan size, FICO score, loan purpose, loan
                     type, property type, loan documentation, state of origin, and
                     weighted average coupon. In addition, the prepayment and foreclosure
                     models include macro-economic inputs such as interest rate, mortgage
                     rates, home price appreciation and unemployment rates based on the
                     various metropolitan areas. Regression analysis including logistical
                     and survival analysis are used for model development. The liquidation
                     model projections are derived from net foreclosure rates and the
                     transition matrices. The liquidation rates are calculated separately
                     according to judicial and non-judicial states. The loss severity models are calculated based on each loan
                     characteristics and other macro-economic inputs such as: Original loan to value
                     Cumulative home price appreciation
                     Liquidation markdown
                     Back interest owed
                     Property tax owed
                     Broker and lawyer fees Although, the individual loan level data was utilized as of June 30,
                     2010, the home price appreciation assumptions and the future
                     unemployment rate assumptions were as of December 1, 2009. The
                     current home price appreciation assumptions are as follows: Continue to decline at an annual rate of 10% until December of 2009
                     Stays at 0% for two years
                     Increases at an annual rate of 5% for two years
                     Increases at an annual rate of 3% for the remaining periods The unemployment rate assumptions are as follows: Continues to rise to 10.5% until January of 2010
                     Stay at 10.5% for three months
                     Declines to 5.8% over the next five years
                     Continue at 5.8% for the remaining periods
 32


Listed below is various historical data related to our two private label CMOs. CMO- A
                           
                           
                           
                           
                           
                           CMO-BBook value on 9-30-2010 (in thousands)
                           
                           
                           $2,994
                           
                           
                           
                           
                           
                           $2,704Year of origination
                           
                           
                           2006
                           
                           
                           
                           
                           
                           2006Original credit rating
                           
                           
                           Aaa, AAA
                           
                           
                           
                           
                           
                           Aaa,AAACurrent credit rating
                           
                           
                           Ba1, BBB-
                           
                           
                           
                           
                           
                           Ca,CCOriginal credit support
                           
                           
                           15.62
                           
                           
                           
                           
                           
                           13.88Current credit support
                           
                           
                           12.42
                           
                           
                           
                           
                           
                           6.37Current coverage ratio
                           
                           
                           1.5
                           
                           
                           
                           
                           
                           .6Percentage of loans 60+ delinquent
                           
                           
                           25.5%
                           
                           
                           
                           
                           
                           38.9%Severity loss rate - 12 months
                           
                           
                           49%
                           
                           
                           
                           
                           
                           48%Constant prepayment rate:3 months
                           
                           
                           20.8%
                           
                           
                           
                           
                           
                           14.3%6 months
                           
                           
                           17.8
                           
                           
                           
                           
                           
                           18.012 months
                           
                           
                           17.4
                           
                           
                           
                           
                           
                           13.7Collateral:Weighted average coupon
                           
                           
                           6.24%
                           
                           
                           
                           
                           
                           6.10%Months remaining
                           
                           
                           306
                           
                           
                           
                           
                           
                           304Loan size
                           
                           
                           $300,000
                           
                           
                           
                           
                           
                           $512,000Current loan to value
                           
                           
                           79%
                           
                           
                           
                           
                           
                           73%FICO scores:Original
                           
                           
                           736
                           
                           
                           
                           
                           
                           716Current
                           
                           
                           733
                           
                           
                           
                           
                           
                           710Current percentage of limited documents
                           
                           
                           40%
                           
                           
                           
                           
                           
                           63%Geographic concentration
                           
                           
                           GA 78.9% FL 16.2%
                           
                           
                           
                           
                           
                           CA 46.2%, NY 18.0% Although these are not classified as sub-prime obligations or
                     considered the "high risk" tranches, the majority of "structured"
                     investments within all credit markets have been impacted by
                     volatility and credit concerns and economic stresses throughout 2008
                     and 2009 and continuing into 2010. The result has been that the
                     market for these investments has become significantly less liquid and
                     the spread as compared to alternative investments has widened
                     dramatically. Due to this illiquidity, the Company has recorded a
                     liquidity discount in the form of an unrealized loss of $350,000. In
                     addition, one of the CMOs continues to experience increasing
                     deterioration in the credit quality, collateral values and credit
                     support underlying the investment. During the third quarter of 2010,
                     the Company concluded that an other-than-temporary impairment has
                     occurred on the security and based on this evaluation, we have
                     recorded a credit-related OTTI in the amount of $450,000. Other than
                     this impairment charge, the Company believes that it will receive all
                     of the principal and interest in accordance with the original
                     contractual terms of the securities; however we will continue to
                     monitor these securities on a quarterly basis to determine whether
                     additional impairment has occurred. Also, since the Company has no
                     intent to sell these securities and it is not more-likely-than-not
                     that we will be required to sell these securities before recovery of
                     amortized cost, we have concluded that the securities are not
                     impaired on an other-than-temporary basis other than what we have
                     already recorded. Other investments at September 30, 2010, consisted of FHLB stock with
                     a cost of $6.6 million, Federal Reserve Bank stock with a cost of
                     $1.5 million, certificate of deposit investments totaling $849,000,
                     and investments in Greenville First Statutory Trust I and II of
                     $186,000 and $217,000, respectively. At September 30, 2010, our
                     investments included securities issued by Federal Home Loan Mortgage
                     Corporation, Federal National Mortgage Association, and Government
                     National Mortgage Association with carrying values of $24.9 million,
                     $40.5 million, and $1.3 million, respectively. At December 31, 2009, the $94.6 million in our investment securities
                     portfolio represented approximately 13.2% of our total assets. We
                     held Government sponsored enterprise securities, municipal
                     securities, and mortgage-backed securities with a fair value of $85.7
                     million and an amortized cost of $84.7 million for an unrealized gain
                     of $1.0 million. Contractual maturities and yields on our investments at December 31,
                     2009 are shown in the following table (dollars in thousands).
                     Expected maturities may differ from contractual maturities because
                     issuers may have the right to call or prepay obligations with or
                     without call or prepayment penalties. At December 31, 2009, we had no
                     securities with a maturity of less than one year.
 33


One to Five Years
                           
                           
                           
                           
                           
                           Five to Ten Years
                           
                           
                           
                           
                           
                           Over Ten Years
                           
                           
                           
                           
                           
                           TotalAmount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           YieldAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           $
                           4,127
                           
                           
                           
                           
                           
                           3.81
                           %
                           
                           
                           
                           $
                           7,413
                           
                           
                           
                           
                           
                           5.06
                           %
                           
                           
                           
                           $
                           11,540
                           
                           
                           
                           
                           
                           4.62
                           %State and political subdivisions
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2,974
                           
                           
                           
                           
                           
                           3.79
                           %
                           
                           
                           
                           
                           2,335
                           
                           
                           
                           
                           
                           3.86
                           %
                           
                           
                           
                           
                           5,309
                           
                           
                           
                           
                           
                           3.81
                           %Mortgage-backed securities
                           
                           
                           251
                           
                           
                           
                           
                           
                           4.69
                           %
                           
                           
                           
                           
                           2,934
                           
                           
                           
                           
                           
                           3.72
                           %
                           
                           
                           
                           
                           56,161
                           
                           
                           
                           
                           
                           4.72
                           %
                           
                           
                           
                           
                           59,346
                           
                           
                           
                           
                           
                           4.65
                           %Total
                           
                           $
                           251
                           
                           
                           
                           
                           
                           4.69
                           %
                           
                           
                           
                           $
                           10,035
                           
                           
                           
                           
                           
                           3.65
                           %
                           
                           
                           
                           $
                           65,909
                           
                           
                           
                           
                           
                           4.73
                           %
                           
                           
                           
                           $
                           76,195
                           
                           
                           
                           
                           
                           4.59
                           %Held to MaturityMortgage-backed securities
                           
                           $
                           155
                           
                           
                           
                           
                           
                           3.97
                           %
                           
                           
                           
                           $
                           1,830
                           
                           
                           
                           
                           
                           4.35
                           %
                           
                           
                           
                           $
                           7,240
                           
                           
                           
                           
                           
                           4.65
                           %
                           
                           
                           
                           $
                           9,225
                           
                           
                           
                           
                           
                           4.58
                           % Other investments at December 31, 2009 consisted of FHLB stock with a
                     cost of $7.1 million, Federal Reserve Bank stock with a cost of $1.5
                     million, and investments in Greenville First Statutory Trust I and II
                     of $186,000 and $217,000, respectively. Loans Since loans typically provide higher interest yields than other types
                     of interest earning assets, a substantial percentage of our earning
                     assets are invested in our loan portfolio. For the three months ended
                     September 30, 2010 and 2009, average loans were $580.2 million and
                     $570.2 million, respectively. Before the allowance for loan losses,
                     total loans outstanding at September 30, 2010 were $579.9 million.
                     Average loans for the year ended December 31, 2009 were $568.6
                     million. Before the allowance for loan losses, total loans
                     outstanding at December 31, 2009 were $574.3 million. The principal component of our loan portfolio is loans secured by
                     real estate mortgages. Most of our real estate loans are secured by
                     residential or commercial property. We do not generally originate
                     traditional long term residential mortgages, but we do issue
                     traditional second mortgage residential real estate loans and home
                     equity lines of credit. We obtain a security interest in real estate
                     whenever possible, in addition to any other available collateral.
                     This collateral is taken to increase the likelihood of the ultimate
                     repayment of the loan. Generally, we limit the loan-to-value ratio on
                     loans we make to 80%. Due to the short time our portfolio has
                     existed, the current mix may not be indicative of the ongoing
                     portfolio mix. We attempt to maintain a relatively diversified loan
                     portfolio to help reduce the risk inherent in concentration in
                     certain types of collateral. The following table summarizes the composition of our loan portfolio
                     at September 30, 2010 and December 31, 2009 (dollars in thousands). September 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Amount
                           
                           
                           
                           
                           
                           % of Total
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           % of TotalReal estate:Commercial:Owner occupied
                           
                           $
                           135,095
                           
                           
                           
                           
                           
                           23.3
                           %
                           
                           
                           
                           $
                           132,569
                           
                           
                           
                           
                           
                           23.1
                           %Non-owner occupied
                           
                           
                           165,199
                           
                           
                           
                           
                           
                           28.5
                           %
                           
                           
                           
                           
                           160,460
                           
                           
                           
                           
                           
                           27.9
                           %Construction
                           
                           
                           16,305
                           
                           
                           
                           
                           
                           2.8
                           %
                           
                           
                           
                           
                           22,741
                           
                           
                           
                           
                           
                           4.0
                           %Total commercial real estate
                           
                           
                           316,599
                           
                           
                           
                           
                           
                           54.6
                           %
                           
                           
                           
                           
                           315,770
                           
                           
                           
                           
                           
                           55.0
                           %Consumer:Residential
                           
                           
                           55,909
                           
                           
                           
                           
                           
                           9.7
                           %
                           
                           
                           
                           
                           55,377
                           
                           
                           
                           
                           
                           9.6
                           %Home equity
                           
                           
                           81,180
                           
                           
                           
                           
                           
                           14.0
                           %
                           
                           
                           
                           
                           74,348
                           
                           
                           
                           
                           
                           13.0
                           %Construction
                           
                           
                           7,159
                           
                           
                           
                           
                           
                           1.2
                           %
                           
                           
                           
                           
                           7,940
                           
                           
                           
                           
                           
                           1.4
                           %Total consumer real estate
                           
                           
                           144,248
                           
                           
                           
                           
                           
                           24.9
                           %
                           
                           
                           
                           
                           137,665
                           
                           
                           
                           
                           
                           24.0
                           %Total real estate
                           
                           
                           460,847
                           
                           
                           
                           
                           
                           79.5
                           %
                           
                           
                           
                           
                           453,435
                           
                           
                           
                           
                           
                           79.0
                           %Commercial business
                           
                           
                           110,195
                           
                           
                           
                           
                           
                           19.0
                           %
                           
                           
                           
                           
                           110,539
                           
                           
                           
                           
                           
                           19.3
                           %Consumer-other
                           
                           
                           9,408
                           
                           
                           
                           
                           
                           1.6
                           %
                           
                           
                           
                           
                           11,021
                           
                           
                           
                           
                           
                           1.9
                           %Deferred origination fees, net
                           
                           
                           (602
                           )
                           
                           
                           
                           
                           (0.1
                           )%
                           
                           
                           
                           
                           (725
                           )
                           
                           
                           
                           
                           (0.2
                           )%Total gross loans, net of deferred fees
                           
                           
                           579,848
                           
                           
                           
                           
                           
                           100.0
                           %
                           
                           
                           
                           
                           574,270
                           
                           
                           
                           
                           
                           100.0
                           %Lessallowance for loan losses
                           
                           
                           (8,411
                           )
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           (7,760
                           )Total loans, net
                           
                           $
                           571,437
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           566,510
 34


Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables is based on the contractual
                     maturities of individual loans, including loans which may be subject
                     to renewal at their contractual maturity. Renewal of such loans is
                     subject to review and credit approval, as well as modification of
                     terms upon maturity. Actual repayments of loans may differ from the
                     maturities reflected below because borrowers have the right to prepay
                     obligations with or without prepayment penalties. The following table summarizes the loan maturity distribution by type
                     and related interest rate characteristics at September 30, 2010
                     (dollars in thousands). One yearor less
                           
                           
                           
                           
                           
                           After onebut withinfive years
                           
                           
                           
                           
                           
                           After fiveyears
                           
                           
                           
                           
                           
                           TotalReal estate - mortgage
                           
                           $
                           92,073
                           
                           
                           
                           
                           $
                           264,113
                           
                           
                           
                           
                           $
                           81,197
                           
                           
                           
                           
                           $
                           437,383Real estate - construction
                           
                           
                           13,976
                           
                           
                           
                           
                           
                           8,668
                           
                           
                           
                           
                           
                           820
                           
                           
                           
                           
                           
                           23,464Total real estate
                           
                           
                           106,049
                           
                           
                           
                           
                           
                           272,781
                           
                           
                           
                           
                           
                           82,017
                           
                           
                           
                           
                           
                           460,847Commercial business
                           
                           
                           57,907
                           
                           
                           
                           
                           
                           50,291
                           
                           
                           
                           
                           
                           1,997
                           
                           
                           
                           
                           
                           110,195Consumer-other
                           
                           
                           4,830
                           
                           
                           
                           
                           
                           3,981
                           
                           
                           
                           
                           
                           597
                           
                           
                           
                           
                           
                           9,408Deferred origination fees, net
                           
                           
                           (168
                           )
                           
                           
                           
                           
                           (343
                           )
                           
                           
                           
                           
                           (91
                           )
                           
                           
                           
                           
                           (602
                           )Total gross loans, net of deferred fees
                           
                           $
                           168,618
                           
                           
                           
                           
                           $
                           326,710
                           
                           
                           
                           
                           $
                           84,520
                           
                           
                           
                           
                           $
                           579,848Loans maturing after one year with:Fixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           206,314Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           204,916 The following table summarizes the loan maturity distribution by type
                     and related interest rate characteristics at December 31, 2009
                     (dollars in thousands). One yearor less
                           
                           
                           
                           
                           
                           After onebut withinfive years
                           
                           
                           
                           
                           
                           After fiveyears
                           
                           
                           
                           
                           
                           TotalReal estate- mortgage
                           
                           $
                           79,399
                           
                           
                           
                           
                           $
                           258,009
                           
                           
                           
                           
                           $
                           85,346
                           
                           
                           
                           
                           $
                           422,754Real estate- construction
                           
                           
                           14,405
                           
                           
                           
                           
                           
                           13,071
                           
                           
                           
                           
                           
                           3,205
                           
                           
                           
                           
                           
                           30,681Total real estate
                           
                           
                           93,804
                           
                           
                           
                           
                           
                           271,080
                           
                           
                           
                           
                           
                           88,551
                           
                           
                           
                           
                           
                           453,435Commercial
                           
                           
                           61,282
                           
                           
                           
                           
                           
                           47,322
                           
                           
                           
                           
                           
                           1,935
                           
                           
                           
                           
                           
                           110,539Consumer- other
                           
                           
                           6,984
                           
                           
                           
                           
                           
                           3,496
                           
                           
                           
                           
                           
                           541
                           
                           
                           
                           
                           
                           11,021Deferred origination fees, net
                           
                           
                           (198
                           )
                           
                           
                           
                           
                           (407
                           )
                           
                           
                           
                           
                           (120
                           )
                           
                           
                           
                           
                           (725
                           )Total gross loan, net of deferred fees
                           
                           $
                           161,872
                           
                           
                           
                           
                           $
                           321,491
                           
                           
                           
                           
                           $
                           90,907
                           
                           
                           
                           
                           $
                           574,270Loans maturing after one year with:Fixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           208,302Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           204,096 Provision and Allowance for Loan Losses We have established an allowance for loan losses through a provision
                     for loan losses charged as an expense. Loan losses are charged
                     against the allowance when management believes the uncollectibility
                     of a loan balance, either in whole or in part, is confirmed.
                     Subsequent recoveries, if any, are credited to the allowance. In conjunction with the changes in the current economic environment
                     and as required by our Formal Agreement with the OCC, we have revised
                     and updated our allowance for losses policy. Management regularly
                     evaluates the allowance for loan losses and periodically reviews the
                     collectibility of the loans in light of historical experience, the
                     nature and volume of the loan portfolio, adverse situations that may
                     affect the borrower's ability to repay, estimated value of any
                     underlying collateral and prevailing economic conditions. This
                     evaluation is inherently subjective as it requires estimates that are
                     susceptible to significant revision as more information becomes
                     available. Periodically, we adjust the amount of the allowance based
                     on changing circumstances. We maintain an unallocated component of the allowance in order to
                     reflect the margin of imprecision inherent in the underlying
                     assumptions used in the methodologies for estimating specific and
                     general losses in the portfolio. Uncertainties and subjective issues
                     such as changes in the lending policies and procedures, changes in
                     the local/national economy, changes in
 35


volume or type of credits, changes in volume/severity or problem
                     loans, quality of loan review and board of director oversight,
                     concentrations of credit, and peer group comparisons are factors
                     considered in determining the unallocated portion. For loans that are also classified as impaired, an allowance is
                     established when the discounted cash flows (or collateral value or
                     observable market price) of the impaired loan are lower than the
                     carrying value of that loan. A loan is considered impaired when,
                     based on current information and events, it is probable that the
                     Company will be unable to collect the scheduled payments of principal
                     or interest when due according to the contractual terms of the loan
                     agreement. Factors considered by management in determining impairment
                     include payment status, collateral value, and the probability of
                     collecting scheduled principal and interest payments when due. Loans
                     that experience insignificant payment delays and payment shortfalls
                     generally are not classified as impaired. Management determines the
                     significance of payment delays and payment shortfalls on a
                     case-by-case basis, taking into consideration all of the
                     circumstances surrounding the loan and the borrower, including the
                     length of the delay, the reasons for the delay, the borrower's prior
                     payment record, and the amount of the shortfall in relation to the
                     principal and interest owed. Impairment is measured on a loan by loan
                     basis for commercial and construction loans by either the present
                     value of expected future cash flows discounted at the loan's
                     effective interest rate, the loan's obtainable market price, or the
                     fair value of the collateral if the loan is collateral dependent.
                     Large groups of smaller balance homogeneous loans are collectively
                     evaluated for impairment. Accordingly, the Company does not
                     separately identify individual consumer and residential loans for
                     impairment disclosures, unless such loans are the subject of a
                     restructuring agreement. A significant portion of the loans in our loan portfolio have been
                     originated in the past five years. In general, loans do not begin to
                     show signs of credit deterioration or default until they have been
                     outstanding for some period of time, a process known as seasoning.
                     The benefit of having time for loans to "season," is that it allows a
                     company to evaluate how loans perform during different economic
                     cycles. We believe that the recent prolonged recession has allowed us
                     to evaluate the performance of our loan portfolio during "stressful"
                     times. If delinquencies and defaults increase, we may be required to
                     increase our provision for loan losses, which would adversely affect
                     our results of operations and financial condition. We do not allocate the allowance for loan losses to specific
                     categories of loans. Instead, we evaluate the adequacy of the
                     allowance for loan losses on an overall portfolio basis utilizing our
                     credit grading system which we apply to each loan. We have retained
                     an independent consultant to review the loan files on a test basis to
                     assess the grading of each loan. The allowance for loan losses was $8.4 million and $7.9 million at
                     September 30, 2010 and 2009, respectively, or 1.45% and 1.39% of
                     outstanding loans, respectively. At December 31, 2009, our allowance
                     for loan losses was $7.8 million, or 1.35% of outstanding loans, and
                     we had net charged-off loans of $3.6 million for the year ended
                     December 31, 2009. During the nine months ended September 30, 2010
                     and 2009 we had net charge-offs of $4.3 million and $1.9 million,
                     respectively. The increase in the allowance for loan losses is a
                     result, in large part, of the general conditions of the current
                     economic climate, including, among other things, a rise in
                     unemployment, which affects borrowers' ability to repay loans, and a
                     decrease in values in the real estate market, which affects the value
                     of collateral securing certain loans with the Bank.
 36


The following table summarizes the activity related to our allowance
                     for loan losses for the nine months ended September 30, 2010 and 2009
                     (dollars in thousands): September 30,2010
                           
                           
                           2009Balance at beginning of period
                           
                           $
                           7,760
                           
                           $
                           7,005Charge-offs:Commercial
                           
                           
                           (2,712
                           )
                           
                           (538
                           )Real estate-construction
                           
                           
                           (644
                           )
                           
                           (898
                           )Real estate-mortgage
                           
                           
                           (939
                           )
                           
                           (478
                           )Consumer
                           
                           
                           (156
                           )
                           
                           (81
                           )Total charge-offs
                           
                           
                           (4,451
                           )
                           
                           (1,995
                           )Recoveries:Commercial
                           
                           
                           119
                           
                           
                           92Real estate-construction
                           
                           
                           1
                           
                           
                           -Real estate-mortgage
                           
                           
                           5
                           
                           
                           -Consumer
                           
                           
                           2
                           
                           
                           4Total recoveries
                           
                           
                           127
                           
                           
                           96Net loans charged-off
                           
                           $
                           (4,324
                           )
                           $
                           (1,899
                           )Provision for loan losses
                           
                           
                           4,975
                           
                           
                           2,810Balance at end of period
                           
                           $
                           8,411
                           
                           $
                           7,916Allowance for loan losses to gross loans
                           
                           
                           1.45
                           %
                           
                           1.39
                           %Net charge-offs to average loans
                           
                           
                           1.00
                           %
                           
                           0.45
                           % We do not allocate the allowance for loan losses to specific
                     categories of loans. Instead, we evaluate the adequacy of the
                     allowance for loan losses on an overall portfolio basis utilizing our
                     credit grading system which we apply to each loan. We have retained
                     independent consultants to review the loan files on a test basis to
                     confirm the grading of our loans. Nonperforming Assets The following table shows the nonperforming assets and the related
                     percentage of nonperforming assets to total assets and gross loans as
                     of September 30, 2010 and December 31, 2009 (dollars in thousands).
                     Generally, a loan is placed on nonaccrual status when it becomes 90
                     days past due as to principal or interest, or when we believe, after
                     considering economic and business conditions and collection efforts,
                     that the borrower's financial condition is such that collection of
                     the loan is doubtful. A payment of interest on a loan that is
                     classified as nonaccrual is recognized as a reduction in principal
                     when received. September 30,2010
                           
                           
                           
                           
                           
                           December 31,2009Loans on nonaccrual:Mortgage
                           
                           
                           
                           
                           $
                           8,443
                           
                           
                           
                           
                           $
                           7,964Commercial
                           
                           
                           
                           
                           
                           1,901
                           
                           
                           
                           
                           
                           3,702Consumer
                           
                           
                           
                           
                           
                           7
                           
                           
                           
                           
                           
                           75Total nonaccrual loans
                           
                           
                           
                           
                           
                           10,351
                           
                           
                           
                           
                           
                           11,741Real estate acquired in settlement of loans
                           
                           
                           
                           
                           
                           6,334
                           
                           
                           
                           
                           
                           3,704Total nonperforming assets
                           
                           
                           
                           
                           $
                           16,685
                           
                           
                           
                           
                           $
                           15,445Loans over 90 days past due (1)
                           
                           
                           
                           
                           $
                           8,581
                           
                           
                           
                           
                           $
                           4,686Nonperforming assets as a percentage of:Total assets
                           
                           
                           
                           
                           
                           2.24
                           %
                           
                           
                           
                           
                           2.15
                           %Gross loans
                           
                           
                           
                           
                           
                           2.88
                           %
                           
                           
                           
                           
                           2.69
                           % (1) Loans over 90 days are included in nonaccrual loans
 37


At September 30, 2010 nonperforming assets were $16.7 million, or
                     2.24% of total assets and 2.88% of gross loans. Comparatively,
                     nonperforming assets were $15.5 million, or 2.15% of total assets and
                     2.69% of gross loans at December 31, 2009. Nonaccrual loans decreased
                     $1.4 million to $10.4 million at September 30, 2010 from $11.7
                     million at December 31, 2009. This decrease is primarily related the
                     transfer of seven properties totaling $2.8 million to real estate
                     acquired in settlement of loans. The amount of foregone interest
                     income on the nonaccrual loans in the first nine months of 2010 was
                     approximately $354,000. The amount of interest income recorded in the
                     first nine months of 2010 for loans that were on nonaccrual at
                     September 30, 2010 was approximately $19,000. Other nonperforming assets include real estate acquired in settlement
                     of loans which increased by $2.6 million from December 31, 2009.
                     During the first nine months of 2010 we added eight new properties
                     totaling $3.2 million and sold four properties and five lots of
                     another residential property which is under development for a total
                     of $538,000. In addition, we incurred a write-down of $10,000 on one
                     of our properties. The balance at September 30, 2010 includes nine
                     commercial properties totaling $4.4 million and three residential
                     properties for $1.9 million all of which are located in Upstate South
                     Carolina. We believe that these properties are appropriately valued
                     at the lower of cost or market as of September 30, 2010. In
                     conjunction with the changes in the current economic environment and
                     as required by our Formal Agreement with the OCC, we have revised and
                     updated our credit risk policy which addresses treatment of other
                     real estate owned. As a general practice, most of our loans are originated with
                     relatively short maturities of five years or less. As a result, when
                     a loan reaches its maturity we frequently renew the loan and thus
                     extend its maturity using the same credit standards as those used
                     when the loan was first originated. Due to these loan practices, we
                     may, at times, renew loans which are classified as nonperforming
                     after evaluating the loan's collateral value and financial strength
                     of its guarantors. Nonperforming loans are renewed at terms generally
                     consistent with the ultimate source of repayment and rarely at
                     reduced rates. In these cases the Bank will seek additional credit
                     enhancements, such as additional collateral or additional guarantees
                     to further protect the loan. When a loan is no longer performing in
                     accordance with its stated terms, the Bank will typically seek
                     performance under the guarantee. In addition, approximately 80% of our loans are collateralized by
                     real estate and over 95% of our impaired loans are secured by real
                     estate. The Bank utilizes third party appraisers to determine the
                     fair value of collateral dependent loans. Our current loan and
                     appraisal policies require the Bank to obtain updated appraisals on
                     an annual basis, either through a new external appraisal or an
                     appraisal evaluation. Impaired loans are individually reviewed on a
                     quarterly basis to determine the level of impairment. As of September
                     30, 2010, we do not have any impaired loans carried at a value in
                     excess of the appraised value. We typically charge-off a portion or
                     create a specific reserve for impaired loans when we do not expect
                     repayment to occur as agreed upon under the original terms of the
                     loan agreement. At September 30, 2010 and 2009, impaired loans amounted to
                     approximately $9.5 million and $9.9 million, respectively. Specific
                     reserves allocated to these impaired loans totaled $1.4 million and
                     $1.2 million at September 30, 2010 and 2009, respectively. At
                     September 30, 2010, there were approximately $4.1 million of impaired
                     loans with specific reserves and approximately $5.4 million in
                     impaired loans for which no specific reserve had been recognized. The
                     average recorded investment in impaired loans for the quarters ended
                     September 30, 2010 and 2009 was $10.4 million and $9.3 million,
                     respectively. The Company's loan approval process includes review of modifications
                     on all criticized loans greater than $100,000.  A loan is considered
                     to be a troubled debt restructuring ("TDR") when the debtor was
                     experiencing financial difficulties and the Company provided
                     concessions such that we will not collect all principal and interest
                     in accordance with the original terms of the loan agreement.  As of
                     September 30, 2010 and December 31, 2009, we determined that we had
                     two loans totaling $498,000 and $482,000, respectively, which we
                     considered TDRs. These loans are included in the nonaccrual loan
                     amounts in the above table. Deposits and Other Interest-Bearing Liabilities Our primary source of funds for loans and investments is our
                     deposits, advances from the FHLB, and structured repurchase
                     agreements. National and local market trends over the past several
                     years suggest that consumers have moved an increasing percentage of
                     discretionary savings funds into investments such as annuities,
                     stocks, and fixed income mutual funds. Accordingly, it has become
                     more difficult to attract deposits. We have chosen to 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 rates than rates being offered for certificates of
                     deposits in our local market. We also utilize out-of-market deposits
                     in certain instances to obtain longer term deposits than are readily
                     available in our local market. We generally obtain out-of-market time
                     deposits of $100,000 or more through brokers with whom we maintain
                     ongoing relationships. In accordance with our Formal Agreement, we
                     have adopted guidelines regarding our use of brokered CDs that limit
                     our brokered CDs to 25% of total deposits and dictate that
 38


our current interest rate risk profile determines the terms. In
                     addition, we do not obtain time deposits of $100,000 or more through
                     the Internet. These guidelines allow us to take advantage of the
                     attractive terms that wholesale funding can offer while mitigating
                     the inherent related risk. The amount of out-of-market deposits was $92.4 million at September
                     30, 2010 and $147.9 million at December 31, 2009.
                     As our wholesale deposits have matured during the past 12 months, we
                     have successfully replaced them with local deposits. While wholesale
                     deposits decreased $55.4 million during the first nine months of
                     2010, our retail deposits have increased $104.1 million. We
                     anticipate being able to continue to either renew or replace these
                     out-of-market deposits when they mature, although we may not be able
                     to replace them with deposits with the same terms or rates. Our
                     loan-to-deposit ratio was 107% and 116% at September 30, 2010 and
                     December 31, 2009, respectively The following table shows the average balance amounts and the average
                     rates paid on deposits held by us for the nine months ended September
                     30, 2010 and 2009 (dollars in thousands). 2010
                           
                           
                           
                           
                           
                           2009Amount
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           RateNoninterest bearing demand deposits
                           
                           $
                           44,261
                           
                           
                           
                           
                           
                           -
                           %
                           
                           
                           
                           $
                           35,663
                           
                           
                           
                           
                           
                           -
                           %Interest bearing demand deposits
                           
                           
                           86,207
                           
                           
                           
                           
                           
                           1.21
                           %
                           
                           
                           
                           
                           43,015
                           
                           
                           
                           
                           
                           0.69
                           %Money market accounts
                           
                           
                           91,527
                           
                           
                           
                           
                           
                           1.04
                           %
                           
                           
                           
                           
                           83,501
                           
                           
                           
                           
                           
                           1.16
                           %Savings accounts
                           
                           
                           2,690
                           
                           
                           
                           
                           
                           0.19
                           %
                           
                           
                           
                           
                           2,138
                           
                           
                           
                           
                           
                           0.17
                           %Time deposits less than $100,000
                           
                           
                           80,970
                           
                           
                           
                           
                           
                           2.24
                           %
                           
                           
                           
                           
                           45,386
                           
                           
                           
                           
                           
                           3.11
                           %Time deposits greater than $100,000
                           
                           
                           222,315
                           
                           
                           
                           
                           
                           2.64
                           %
                           
                           
                           
                           
                           272,130
                           
                           
                           
                           
                           
                           2.77
                           %Total deposits
                           
                           $
                           527,970
                           
                           
                           
                           
                           
                           1.84
                           %
                           
                           
                           
                           $
                           481,833
                           
                           
                           
                           
                           
                           2.12
                           % The $35.6 million increase in time deposits less than $100,000 for
                     the nine months ended September 30, 2010 compared to the 2009 period
                     and the $49.8 million decrease in time deposits of $100,000 or more
                     is a result of our intense focus to replace our out-of-market
                     deposits with local deposits. Core deposits, which exclude out-of-market deposits and time deposits
                     of $100,000 or more, provide a relatively stable funding source for
                     our loan portfolio and other earning assets. Our core deposits were
                     $351.2 million and $246.8 million at September 30, 2010 and December
                     31, 2009, respectively. All of our time deposits are certificates of deposits. The maturity
                     distribution of our time deposits of $100,000 or more at September
                     30, 2010 was as follows (dollars in thousands): Three months or less
                           
                           $
                           46,105Over three through six months
                           
                           
                           34,766Over six through twelve months
                           
                           
                           42,485Over twelve months
                           
                           
                           67,897Total
                           
                           $
                           191,253 The Dodd-Frank Act also permanently raises the current standard
                     maximum deposit insurance amount to $250,000. The standard maximum
                     insurance amount of $100,000 had been temporarily raised to $250,000
                     until December 31, 2013. The FDIC insurance coverage limit applies
                     per depositor, per insured depository institution for each account
                     ownership category. In addition, we are voluntarily participating in
                     the FDIC's TAGP. Under this program, all noninterest-bearing
                     transaction accounts are fully guaranteed by the FDIC for the entire
                     amount of the account. On April 13, 2010, the FDIC approved an
                     interim rule that extends the TAGP to December 31, 2010. We have
                     elected to continue our voluntary participation in the program.
                     Coverage under the program is in addition to and separate from the
                     basic coverage available under the FDIC's general deposit insurance
                     rules. We believe participation in the program is enhancing our
                     ability to retain customer deposits. On September 1, 2010, we entered into new agreements with the FHLB on
                     three of our FHLB advances totaling $37.5 million.  In accordance
                     with EITF 96-19, we determined that the fair value of the modified
                     advances will not change by more than 10% from the fair value of the
                     original advance. Therefore, the modified FHLB advances are
                     considered to be a restructuring and no gain or loss is recorded. 
                     The original FHLB advances had a weighted rate of 4.65% and an
                     average remaining life of 18 months.  Under the modified
                     arrangements, the $37.5 million in FHLB advances have a weighted
                     average rate of 2.67% and an average remaining life of 43 months.
 39


Capital Resources Total shareholders' equity at September 30, 2010 was $60.1 million.
                     At December 31, 2009, total shareholders' equity was $59.8 million. On February 27, 2009, as part of the CPP, the Company entered into
                     the CPP Purchase Agreement with the Treasury, pursuant to which we
                     sold 17,299 shares of our Series T Preferred Stock and the CPP
                     Warrant to purchase 330,554 shares of our common stock for an
                     aggregate purchase price of $17.3 million in cash. The Series T
                     Preferred Stock is entitled to cumulative dividends at a rate of 5%
                     per annum for the first five years, and 9% per annum thereafter. The
                     CPP Warrant has a 10-year term and is immediately exercisable upon
                     its issuance, with an exercise price, subject to anti-dilution
                     adjustments equal to $7.85 per share of the common stock. Under the CPP, we received $17.3 million through issuance of Series T
                     Preferred Stock and the CPP Warrant for common stock to the Treasury.
                     The Series T Preferred Stock issuance and the related CPP Warrant
                     both qualify for Tier 1 capital and added approximately 300 basis
                     points to that measure. The fair value allocation of the $17.3
                     million between the shares of Series T Preferred Stock and the CPP
                     Warrant resulted in $15.9 million allocated to the shares of Series T
                     Preferred Stock and $1.4 million allocated to the CPP Warrant. See
                     discussion of shareholders' equity above for additional details. The following table shows the return on average assets (net income
                     divided by average total assets), return on average equity (net
                     income divided by average equity), and equity to assets ratio (total
                     equity divided by total assets) annualized for the nine months ended
                     September 30, 2010 and the year ended December 31, 2009. Since our
                     inception, we have not paid cash dividends. September 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Return on average assets
                           
                           
                           0.08
                           %
                           
                           
                           
                           
                           0.20
                           %Return on average equity
                           
                           
                           0.99
                           %
                           
                           
                           
                           
                           2.51
                           %Return on average common equity
                           
                           
                           (1.63
                           %)
                           
                           
                           
                           
                           0.64
                           %Equity to assets ratio
                           
                           
                           8.08
                           %
                           
                           
                           
                           
                           8.32
                           %Common equity to assets ratio
                           
                           
                           6.05
                           %
                           
                           
                           
                           
                           6.17
                           % Our return on average assets was 0.08% for the nine months ended
                     September 30, 2010 compared to 0.20% for the year ended December 31,
                     2009. In addition, our return on average equity decreased to 0.99%
                     from 2.51% for the nine months ended September 30, 2010 and the year
                     ended December 31, 2009, respectively. Our equity to assets ratio at
                     September 30, 2010 was 8.08% compared to 8.32% at December 31, 2009.
                     In addition, our return on average common equity was (1.63%) and our
                     common equity to total assets ratio was 6.05% for the nine months
                     ended September 30, 2010. Under the capital adequacy guidelines, regulatory capital is
                     classified into two tiers. These guidelines require an institution to
                     maintain a certain level of Tier 1 and Tier 2 capital to
                     risk-weighted assets. Tier 1 capital consists of common shareholders'
                     equity, excluding the unrealized gain or loss on securities available
                     for sale, minus certain intangible assets. In determining the amount
                     of risk-weighted assets, all assets, including certain off-balance
                     sheet assets, are multiplied by a risk-weight factor of 0% to 100%
                     based on the risks believed to be inherent in the type of asset. Tier
                     2 capital consists of Tier 1 capital plus the general reserve for
                     loan losses, subject to certain limitations. We are also required to
                     maintain capital at a minimum level based on total average assets,
                     which is known as the Tier 1 leverage ratio. At both the holding company and bank level, we are subject to various
                     regulatory capital requirements administered by the federal banking
                     agencies. To be considered "well-capitalized," we must maintain total
                     risk-based capital of at least 10%, Tier 1 capital of at least 6%,
                     and a leverage ratio of at least 5%. To be considered "adequately
                     capitalized" under these capital guidelines, we must maintain a
                     minimum total risk-based capital of 8%, with at least 4% being Tier 1
                     capital. In addition, we must maintain a minimum Tier 1 leverage
                     ratio of at least 4%. In addition, we have agreed with the OCC that the Bank will maintain
                     total risk-based capital of at least 12%, Tier 1 capital of at least
                     10%, and a leverage ratio of at least 9%.  As of September 30, 2010,
                     our capital ratios exceed these ratios and we remain "well
                     capitalized." However, if we fail to maintain these required capital
                     levels, then the OCC may deem noncompliance to be an unsafe and
                     unsound banking practice which may make the Bank subject to a capital
                     directive, a consent order, or such other administrative actions or
                     sanctions as the OCC considers necessary.  It is uncertain what
                     actions, if any, the OCC would take with respect to noncompliance
                     with these ratios, what action steps the OCC might require the Bank
                     to take to remedy this situation, and whether such actions would be
                     successful.
 40


The following table summarizes the capital amounts and ratios of the
                     Bank and the regulatory minimum requirements at September 30, 2010. Actual
                           
                           
                           OCC RequiredCapital RatioMinimum
                           
                           
                           For capitaladequacy purposesMinimum
                           
                           
                           To be well capitalizedunder promptcorrectiveaction provisionsMinimumAmount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           RatioAs of September 30, 2010Total Capital (to risk weighted assets)
                           
                           $
                           78,252
                           
                           
                           12.90
                           %
                           $
                           72,768
                           
                           
                           12.0
                           %
                           $
                           48,512
                           
                           
                           8.0
                           %
                           $
                           60,640
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           70,662
                           
                           
                           11.65
                           %
                           
                           60,640
                           
                           
                           10.0
                           %
                           
                           24,256
                           
                           
                           4.0
                           %
                           
                           36,384
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           70,662
                           
                           
                           9.53
                           %
                           
                           66,755
                           
                           
                           9.0
                           %
                           
                           29,669
                           
                           
                           4.0
                           %
                           
                           37,086
                           
                           
                           5.0
                           % The ability of the Company to pay cash dividends is dependent upon
                     receiving cash in the form of dividends from the Bank. The dividends
                     that may be paid by the Bank to the Company are subject to legal
                     limitations and regulatory capital requirements. The approval of the
                     OCC is required if the total of all dividends declared by a national
                     bank in any calendar year exceeds the total of its net profits for
                     that year combined with its retained net profits for the preceding
                     two years, less any required transfers to surplus. Further, the
                     Company cannot pay cash dividends on its common stock during any
                     calendar quarter unless full dividends on the Series T preferred
                     stock for the dividend period ending during the calendar quarter have
                     been declared and the Company has not failed to pay a dividend in the
                     full amount of the Series T Preferred Stock with respect to the
                     period in which such dividend payment in respect of its common stock
                     would occur. In addition, the Company must currently obtain
                     preapproval of the Federal Reserve before paying dividends. Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation
                     has not been taken into account in our consolidated financial
                     statements. Rather, our financial statements have been prepared on an
                     historical cost basis in accordance with generally accepted
                     accounting principles. Unlike most industrial companies, our assets and liabilities are
                     primarily monetary in nature. Therefore, the effect of changes in
                     interest rates will have a more significant impact on our performance
                     than will the effect of changing prices and inflation in general. In
                     addition, interest rates may generally increase as the rate of
                     inflation increases, although not necessarily in the same magnitude.
                     As discussed previously, we seek to manage the relationships between
                     interest sensitive assets and liabilities in order to protect against
                     wide rate fluctuations, including those resulting from inflation. Off-Balance Sheet Risk Commitments to extend credit are agreements to lend money to a client
                     as long as the client has not violated any material condition
                     established in the contract. Commitments generally have fixed
                     expiration dates or other termination clauses and may require the
                     payment of a fee. At September 30, 2010, unfunded commitments to
                     extend credit were $85.8 million, of which $11.7 million was at fixed
                     rates and $74.1 million was at variable rates. At December 31, 2009,
                     unfunded commitments to extend credit were $90.5 million, of which
                     approximately $10.6 million was at fixed rates and $79.9 million was
                     at variable rates. A significant portion of the unfunded commitments
                     related to consumer equity lines of credit. Based on historical
                     experience, we anticipate that a significant portion of these lines
                     of credit will not be funded. We evaluate each client's credit
                     worthiness on a case-by-case basis. The amount of collateral
                     obtained, if deemed necessary by us upon extension of credit, is
                     based on our credit evaluation of the borrower. The type of
                     collateral varies but may include accounts receivable, inventory,
                     property, plant and equipment, and commercial and residential
                     real estate. At September 30, 2010, there was a $3.8 million commitment under
                     letters of credit. At December 31, 2009 there was a $5.5 million
                     commitment under letters of credit. The credit risk and collateral
                     involved in issuing letters of credit is essentially the same as that
                     involved in extending loan facilities to customers. Since most of the
                     letters of credit are expected to expire without being drawn upon,
                     they do not necessarily represent future cash requirements. Except as disclosed in this document, we are not involved in
                     off-balance sheet contractual relationships, unconsolidated related
                     entities that have off-balance sheet arrangements or transactions
                     that could result in liquidity needs or other commitments that
                     significantly impact earnings.
 41


Market Risk and Interest Rate Sensitivity Market risk is the risk of loss from adverse changes in market prices
                     and rates, which principally arises from interest rate risk inherent
                     in our lending, investing, deposit gathering, and borrowing
                     activities. Other types of market risks, such as foreign currency
                     exchange rate risk and commodity price risk, do not generally arise
                     in the normal course of our business. We actively monitor and manage our interest rate risk exposure in
                     order to control the mix and maturities of our assets and liabilities
                     utilizing a process we call asset/liability management. The essential
                     purposes of asset/liability management are to ensure adequate
                     liquidity and to maintain an appropriate balance between interest
                     sensitive assets and liabilities in order to minimize potentially
                     adverse impacts on earnings from changes in market interest rates.
                     Our asset/liability management committee ("ALCO") monitors and
                     considers methods of managing exposure to interest rate risk. We have
                     both an internal ALCO consisting of senior management that meets at
                     various times during each month and a board ALCO that meets monthly.
                     The ALCOs are responsible for maintaining the level of interest rate
                     sensitivity of our interest sensitive assets and liabilities within
                     board-approved limits. Our interest rate risk exposure is managed by measuring our interest
                     sensitivity "gap," which is the positive or negative dollar
                     difference between assets and liabilities that are subject to
                     interest rate repricing within a given period of time. Interest rate
                     sensitivity can be managed by repricing assets or liabilities,
                     selling securities available for sale, replacing an asset or
                     liability at maturity, or adjusting the interest rate during the life
                     of an asset or liability. Managing the amount of assets and
                     liabilities repricing in this same time interval helps to hedge the
                     risk and minimize the impact on net interest income of rising or
                     falling interest rates. We generally would benefit from increasing
                     market rates of interest when we have an asset-sensitive gap position
                     and generally would benefit from decreasing market rates of interest
                     when we are liability-sensitive. The following table sets forth information regarding our rate
                     sensitivity as of September 30, 2010 for each of the time intervals
                     indicated (dollars in thousands). Withinthreemonths
                           
                           
                           
                           
                           
                           After three butwithin twelvemonths
                           
                           
                           
                           
                           
                           After one butwithin fiveYears
                           
                           
                           
                           
                           
                           Afterfiveyears
                           
                           
                           
                           
                           
                           TotalInterest-earning assets:Federal funds sold
                           
                           $
                           28,525
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           28,525Investment securities
                           
                           
                           5,230
                           
                           
                           
                           
                           
                           13,605
                           
                           
                           
                           
                           
                           40,982
                           
                           
                           
                           
                           
                           22,989
                           
                           
                           
                           
                           
                           82,806Loans
                           
                           
                           302,020
                           
                           
                           
                           
                           
                           42,669
                           
                           
                           
                           
                           
                           185,133
                           
                           
                           
                           
                           
                           39,845
                           
                           
                           
                           
                           
                           569,667Total earning assets
                           
                           $
                           335,775
                           
                           
                           
                           
                           $
                           56,274
                           
                           
                           
                           
                           $
                           226,115
                           
                           
                           
                           
                           $
                           62,834
                           
                           
                           
                           
                           $
                           680,998Interest-bearing liabilities:Money market and NOW
                           
                           $
                           223,363
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           223,363Regular savings
                           
                           
                           3,000
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           3,000Time deposits
                           
                           
                           76,634
                           
                           
                           
                           
                           
                           109,951
                           
                           
                           
                           
                           
                           80,622
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           267,207Note payable and other borrowings
                           
                           
                           66,600
                           
                           
                           
                           
                           
                           3,600
                           
                           
                           
                           
                           
                           37,500
                           
                           
                           
                           
                           
                           15,000
                           
                           
                           
                           
                           
                           122,700Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           383,000
                           
                           
                           
                           
                           $
                           113,551
                           
                           
                           
                           
                           $
                           118,122
                           
                           
                           
                           
                           $
                           15,000
                           
                           
                           
                           
                           $
                           629,673Period gap
                           
                           $
                           (47,225
                           )
                           
                           
                           
                           $
                           (57,277
                           )
                           
                           
                           
                           $
                           107,993
                           
                           
                           
                           
                           $
                           47,834Cumulative gap
                           
                           
                           (47,225
                           )
                           
                           
                           
                           
                           (104,502
                           )
                           
                           
                           
                           
                           3,491
                           
                           
                           
                           
                           
                           51,325Ratio of cumulative gap to total earning assets
                           
                           
                           (6.9
                           )%
                           
                           
                           
                           
                           (15.3
                           %)
                           
                           
                           
                           
                           0.5
                           %
                           
                           
                           
                           
                           7.5
                           %
 42


The following table sets forth information regarding our rate
                     sensitivity, as of December 31, 2009 at each of the time intervals
                     (dollars in thousands). Withinthreemonths
                           
                           
                           
                           
                           
                           After three butwithin twelvemonths
                           
                           
                           
                           
                           
                           After one butwithin fiveyears
                           
                           
                           
                           
                           
                           Afterfiveyears
                           
                           
                           
                           
                           
                           TotalInterest-earning assets:Federal funds sold
                           
                           $
                           6,462
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           6,462Investment securities
                           
                           
                           4,308
                           
                           
                           
                           
                           
                           11,466
                           
                           
                           
                           
                           
                           34,164
                           
                           
                           
                           
                           
                           35,482
                           
                           
                           
                           
                           
                           85,420Loans
                           
                           
                           297,982
                           
                           
                           
                           
                           
                           36,595
                           
                           
                           
                           
                           
                           175,521
                           
                           
                           
                           
                           
                           52,622
                           
                           
                           
                           
                           
                           562,720Total earning assets
                           
                           $
                           308,752
                           
                           
                           
                           
                           $
                           48,061
                           
                           
                           
                           
                           $
                           209,685
                           
                           
                           
                           
                           $
                           88,104
                           
                           
                           
                           
                           $
                           654,602Interest-bearing liabilities:Money market and NOW
                           
                           $
                           136,776
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           136,776Regular savings
                           
                           
                           2,375
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2,375Time deposits
                           
                           
                           65,093
                           
                           
                           
                           
                           
                           154,740
                           
                           
                           
                           
                           
                           98,923
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           318,756FHLB advances and related debt
                           
                           
                           79,350
                           
                           
                           
                           
                           
                           22,000
                           
                           
                           
                           
                           
                           30,600
                           
                           
                           
                           
                           
                           15,000
                           
                           
                           
                           
                           
                           146,950Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           296,997
                           
                           
                           
                           
                           $
                           176,740
                           
                           
                           
                           
                           $
                           129,523
                           
                           
                           
                           
                           $
                           15,000
                           
                           
                           
                           
                           $
                           618,260Period gap
                           
                           $
                           11,755
                           
                           
                           
                           
                           $
                           (128,679
                           )
                           
                           
                           
                           $
                           80,162
                           
                           
                           
                           
                           $
                           73,104Cumulative Gap
                           
                           
                           11,755
                           
                           
                           
                           
                           
                           (116,924
                           )
                           
                           
                           
                           
                           (36,762
                           )
                           
                           
                           
                           
                           36,342Ratio of cumulative gap to total earning assets
                           
                           
                           1.8
                           %
                           
                           
                           
                           
                           (17.9
                           %)
                           
                           
                           
                           
                           (5.6
                           %)
                           
                           
                           
                           
                           5.6
                           % As measured over the one-year time intervals, we were liability
                     sensitive at both September 30, 2010 and December 31, 2009.  Our
                     variable rate loans and a majority of our deposits reprice over a
                     12-month period. Approximately 50% of our loans were variable rate
                     loans at September 30, 2010 and December 31, 2009. The ratio of
                     cumulative gap to total earning assets after 12 months is (15.3%)
                     because $104.5 million more liabilities will reprice in a 12 month
                     period than assets. However, our gap analysis is not a precise
                     indicator of our interest sensitivity position. The analysis presents
                     only a static view of the timing of maturities and repricing
                     opportunities, without taking into consideration that changes in
                     interest rates do not affect all assets and liabilities equally. For
                     example, rates paid on a substantial portion of core deposits may
                     change contractually within a relatively short time frame, but those
                     rates are viewed by us as significantly less interest-sensitive than
                     market-based rates such as those paid on noncore deposits. Net
                     interest income may be affected by other significant factors in a
                     given interest rate environment, including changes in the volume and
                     mix of interest-earning assets and interest-bearing liabilities. At September 30, 2010, 78.9% of our interest-bearing liabilities were
                     either variable rate or had a maturity of less than one year. Of the
                     $383.0 million of interest-bearing liabilities set to reprice within
                     three months, 59.1% are transaction, money market or savings accounts
                     which are already at or near their lowest rates and provide little
                     opportunity for benefit should market rates continue to decline or
                     stay constant. However, certificates of deposit that are currently
                     maturing or renewing are repricing at lower rates. We expect to
                     benefit as these deposits reprice, even if market rates increase
                     slightly. At September 30, 2010, we had $104.5 million more
                     liabilities than assets that reprice within the next twelve months.
                     Included in our other borrowings are a number of FHLB advances and
                     structured repurchase agreements with callable features as of
                     September 30, 2010. We believe that the optionality on many of these
                     borrowings will not be exercised until interest rates increase
                     significantly. In addition, we believe that the interest rates that
                     we pay on the majority of our interest-bearing transaction accounts,
                     would only be impacted by a portion of any change in market rates.
                     This key assumption is utilized in our overall evaluation of our
                     level of interest sensitivity.
 43


Liquidity Risk Liquidity represents the ability of a company to convert assets into
                     cash or cash equivalents without significant loss, and the ability to
                     raise additional funds by increasing liabilities. Liquidity
                     management involves monitoring our sources and uses of funds in order
                     to meet our day-to-day cash flow requirements while maximizing
                     profits. Liquidity management is made more complicated because
                     different balance sheet components are subject to varying degrees of
                     management control. For example, the timing of maturities of our
                     investment portfolio is fairly predictable and subject to a high
                     degree of control at the time investment decisions are made. However,
                     net deposit inflows and outflows are far less predictable and are not
                     subject to the same degree of control. At September 30, 2010 and December 31, 2009, our liquid assets,
                     consisting of cash and due from banks and federal funds sold,
                     amounted to $32.9 million and $12.1 million, or 4.4% and 1.7% of
                     total assets, respectively. Our investment securities at September
                     30, 2010 and December 31, 2009 amounted to $92.1 million and $94.6
                     million, or 12.4% and 13.2% of total assets, respectively. Investment
                     securities traditionally provide a secondary source of liquidity
                     since they can be converted into cash in a timely manner. However, a
                     substantial portion of these securities are pledged against
                     outstanding debt. Therefore, the related debt would need to be repaid
                     prior to the securities being sold in order for these securities to
                     be converted to cash. Our ability to maintain and expand our deposit base and borrowing
                     capabilities serves as our primary source of liquidity. We plan to
                     meet our future cash needs through the liquidation of temporary
                     investments, the generation of deposits, and from additional
                     borrowings. In addition, we will receive cash upon the maturity and
                     sale of loans and the maturity of investment securities. We maintain
                     three federal funds purchased lines of credit with correspondent
                     banks totaling $30.5 million for which there were no borrowings
                     against the lines at September 30, 2010. We are also a member of the Federal Home Loan Bank of Atlanta, from
                     which applications for borrowings can be made. The FHLB requires that
                     securities, qualifying mortgage loans, and stock of the FHLB owned by
                     the bank be pledged to secure any advances from the FHLB. The unused
                     borrowing capacity currently available from the FHLB at September 30,
                     2010 was $14.0 million, based on the bank's $6.6 million investment
                     in FHLB stock, as well as qualifying mortgages available to secure
                     any future borrowings. However, we are able to pledge additional
                     securities to the FHLB in order to increase our available borrowing
                     capacity. We have a lease on our main office building with a remaining term of
                     eight years. The lease provides for annual lease rate escalations
                     based on cost of living adjustments. We believe that our existing stable base of core deposits, borrowings
                     from the FHLB, and short-term repurchase agreements will enable us to
                     successfully meet our long-term liquidity needs. As a result of the Treasury's CPP, we received $17.3 million of
                     capital on February 27, 2009 in exchange for 17,299 shares of our
                     Series T Preferred Stock and the CPP Warrant to purchase 330,554
                     shares of the Company's common stock to the Treasury. This additional
                     capital should allow us to remain well-capitalized and provide
                     additional liquidity on our balance sheet. Accounting, Reporting, and Regulatory Matters Recently Issued Accounting Standards The following is a summary of recent authoritative pronouncements
                     that affect accounting, reporting, and disclosure of financial
                     information by us: In March 2010, guidance related to derivatives and hedging was
                     amended to exempt embedded credit derivative features related to the
                     transfer of credit risk from potential bifurcation and separate
                     accounting. Embedded features related to other types of risk and
                     other embedded credit derivative features are not exempt from
                     potential bifurcation and separate accounting. The amendments were
                     effective for the Company on July 1, 2010. These amendments will have
                     no impact on the financial statements. Income Tax guidance was amended in April 2010 to reflect an SEC Staff
                     Announcement after the President signed the Health Care and Education
                     Reconciliation Act of 2010 on March 30, 2010, which amended the
                     Patient Protection and Affordable Care Act signed on March 23, 2010.
                     According to the announcement, although the bills were signed on
                     separate dates, regulatory bodies would not object if the two Acts
                     were considered together for accounting purposes. This view is based
                     on the SEC staff's understanding that the two Acts together represent
                     the current health care reforms as passed by Congress and signed by
                     the President. The amendment had no impact on the financial
                     statements. Stock compensation guidance was updated in April 2010 to address the
                     classification of employee share-based payment awards with exercise
                     prices dominated in the currency of a market in which a substantial
                     portion of the entity's equity securities trade. The guidance states
                     that these awards should not be considered to contain a condition
                     that is not a market, performance,
 44


or service condition. Share based payments that contain conditions
                     related to market, performance and service must be recorded as
                     liabilities. These awards should not be classified as liabilities if
                     they otherwise qualify to be classified as equity. The amendments in
                     this update are effective for fiscal years, and interim periods
                     within those fiscal years, beginning on or after December 15, 2010.
                     The Company does not expect the update to have an impact on the
                     financial statements. In July 2010, the Receivables topic of the ASC was amended to require
                     expanded disclosures related to a company's allowance for credit
                     losses and the credit quality of its financing receivables. The
                     amendments will require the allowance disclosures to be provided on a
                     disaggregated basis. The Company is required to begin to comply with
                     the disclosures in its financial statements for the year ended
                     December 31, 2010. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall
                     Street Reform and Consumer Protection Act (the "Dodd-Frank Act"),
                     which significantly changes the regulation of financial institutions
                     and the financial services industry.  The Dodd-Frank Act includes
                     several provisions that will affect how community banks, thrifts, and
                     small bank and thrift holding companies will be regulated in the
                     future.  Among other things, these provisions abolish the Office of
                     Thrift Supervision and transfer its functions to the other federal
                     banking agencies, relax rules regarding interstate branching, allow
                     financial institutions to pay interest on business checking accounts,
                     change the scope of federal deposit insurance coverage, and impose
                     new capital requirements on bank and thrift holding companies.  The
                     Dodd-Frank Act also establishes the Bureau of Consumer Financial
                     Protection as an independent entity within the Federal Reserve, which
                     will be given the authority to promulgate consumer protection
                     regulations applicable to all entities offering consumer financial
                     services or products, including banks.  Additionally, the Dodd-Frank
                     Act includes a series of provisions covering mortgage loan
                     origination standards affecting originator compensation, minimum
                     repayment standards, and pre-payments.  Management is actively
                     reviewing the provisions of the Dodd-Frank Act and assessing its
                     probable impact on our business, financial condition, and results of
                     operations. In August 2010, two updates were issued to amend various SEC rules
                     and schedules pursuant to Release No. 33-9026: Technical Amendments
                     to Rules, Forms, Schedules and Codification of Financial Reporting
                     Policies and based on the issuance of SEC Staff Accounting Bulletin
                     112. The amendments related primarily to business combinations and
                     removed references to "minority interest" and added references to
                     "controlling" and "noncontrolling interests(s)". The updates were
                     effective upon issuance but had no impact on the Company's financial
                     statements. Other accounting standards that have been issued or proposed by the
                     FASB or other standards-setting bodies that do not require adoption
                     until a future date are not expected to have a material impact on the
                     consolidated financial statements upon adoption.
 45


Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not applicable Item 4. Controls and Procedures. As of the end of the period covered by this report, we carried out an
                     evaluation, under the supervision and with the participation of our
                     management, including our Chief Executive Officer and Principal
                     Financial Officer, of the effectiveness of our disclosure controls
                     and procedures as defined in Exchange Act Rule 13a-15(e). Based upon
                     that evaluation, our Chief Executive Officer and Principal Financial
                     Officer have concluded that our current disclosure controls and
                     procedures are effective as of September 30, 2010. There have been no
                     significant changes in our internal controls over financial reporting
                     during the fiscal quarter ended September 30, 2010 that have
                     materially affected, or are reasonably likely to materially affect,
                     our internal controls over financial reporting. The design of any system of controls and procedures is based in part
                     upon certain assumptions about the likelihood of future events. There
                     can be no assurance that any design will succeed in achieving its
                     stated goals under all potential future conditions, regardless of
                     how remote. PART II. OTHER INFORMATION Item 1. Legal Proceedings. There are no material pending legal proceedings to which the company
                     is a party or of which any of its property is the subject. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable Item 3. Defaults Upon Senior Securities. Not applicable Item 4. [Removed and Reserved] Item 5. Other Information. Not applicable Item 6. Exhibits. 31.1      Rule 13a-14(a) Certification of the Principal Executive Officer. 31.2      Rule 13a-14(a) Certification of the Principal Financial Officer. 32        Section 1350 Certifications.
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
                     the registrant has duly caused this report to be signed on its behalf
                     by the undersigned thereunto duly authorized.  SOUTHERN FIRST BANCSHARES, INC.RegistrantDate: November 2, 2010
                           
                           
                           
                           
                           
                           /s/R. Arthur Seaver, Jr.R. Arthur Seaver, Jr.Chief Executive OfficerDate: November 2, 2010
                           
                           
                           
                           
                           
                           /s/F. Justin StricklandF. Justin StricklandPresident, Principal Financial Officer
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INDEX TO EXHIBITS Exhibit Number
                           
                           
                           
                           
                           
                           Description31.1
                           
                           
                           
                           
                           
                           Rule 13a-14(a) Certification of the Principal Executive Officer.31.2
                           
                           
                           
                           
                           
                           Rule 13a-14(a) Certification of the Principal Financial Officer.32
                           
                           
                           
                           
                           
                           Section 1350 Certifications.
 48