| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **UNITED STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **SECURITIES 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 June 30, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **[  ] TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (d)**                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| For the Transition Period  from                        to	                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Commission file number  000-27719                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                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 100                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
|                          Greenville,     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 [  ]                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Indicate  by check mark whether the registrant is a large accelerated filer, an accelerated  filer, or a non-accelerated filer.  See                                                                                                                                                                                                                                                                                                                                                                          |
| definition  of "accelerated filer and large accelerated filer" in Rule 12b-2 of the  Exchange Act).                                                                                                                                                                                                                                                                                                                                                                                                      |
| Large accelerated filer [   ]                                Accelerated  filer [   ]                                        Non-accelerated filer [ X  ] |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).                                                                                                                                                                                                                                                                                                                                                                                                 |
| Yes [   ]  No [ X ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Indicate  the number of shares outstanding of each of the issuer's classes of common  stock, as of the latest practicable date:                                                                                                                                                                                                                                                                                                                                                                               |
| 2,946,456  shares of common stock, $.01 par value per share, were issued and outstanding  as of August 7, 2007.                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

----

** **

** **

**SOUTHERN FIRST BANCSHARES,INC.PARTI.  FINANCIAL INFORMATION**

**            **

**Item 1.  Financial Statements**

             The financial statements of Southern FirstBancshares, Inc. and Subsidiary are set forth in the following pages.

 

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

***CONSOLIDATEDBALANCE SHEETS***

**                                                                                        **

| ** **                    |                                                                                                  |                                                                                          | ** **                                  | **June 30,**             | ** **        | **December  31,** |
|-------------------------------|--------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|---------------------------------------------|--------------------------|-------------------|-------------------|
| ** **                    |                                                                                                  |                                                                                          | ** **                                  | **2007**                 | ** **        | **2006**          |
| ** **                    |                                                                                                  |                                                                                          | ** **                                  | (Unaudited)              |                   | (Audited)         |
| **Assets**                    |                                                                                                  |                                                                                          |                                             |
| ** **                    | Cash and due from banks                                                                          |  $                                                                                  | 13,812,446                             |                          |  $           | 9,112,675    |
|                               | Federal funds sold                                                                               | 3,598,169                                                                           |                                             | 7,466,458           |
|                               | Investment securities available for sale                                                         | 55,305,338                                                                          |                                             | 50,199,513          |
|                               | Investment securities held to maturity-                                                          |                                                                                          |                                             |                          |
|                               |  (fair value $15,337,123 and $16,576,673)                                                   | 16,098,201                                                                          |                                             | 17,044,531          |
|                               | Other investments, at cost                                                                       | 8,292,500                                                                           |                                             | 7,060,100           |
|                               | Loans, net of allowance for loan losses                                                          | 456,285,905                                                                         |                                             | 397,233,829         |
|                               | Property and equipment, net                                                                      | 5,193,306                                                                           |                                             | 6,450,854           |
|                               | Accrued interest receivable                                                                      | 2,739,700                                                                           |                                             | 2,381,336           |
|                               | Other real estate owned                                                                          | 523,733                                                                             |                                             | 1,012,030           |
|                               | Bank owned life insurance                                                                        | 8,325,330                                                                           |                                             | 8,142,947           |
|                               | Deferred income taxes                                                                            | 2,365,960                                                                           |                                             | 1,907,966           |
|                               | Other assets                                                                                     | 567,465                                                                             |                                             | 1,331,712           |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |
|                               |           Total assets                                   |  $                                                                                  | 573,108,053                            |                          |  $           | 509,343,951  |
|                               |                                                                                                  |                                                                                          |                                             |                          | ** **        | ** **        |
| **Liabilities**               | ** **                                                                                       | ** **                                                                               |                                             |
| ** **                    | Deposits                                                                                         |  $                                                                                  | 384,283,278                            |      |  $           | 345,504,076  |
|                               | Official checks outstanding                                                                      | 2,194,722                                                                           |                                             | 4,131,107           |
|                               | Federal Home Loan Bank advances                                                                  | 133,500,000                                                                         |                                   | 108,500,000         |
|                               | Junior subordinated debentures                                                                   | 13,403,000                                                                          |                                             | 13,403,000          |
|                               | Accrued interest payable                                                                         | 3,045,408                                                                           |                                             | 2,278,154           |
|                               | Accounts payable and accrued expenses                                                            | 995,916                                                                             |                                             | 944,168             |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                  |                                                                                          | Total liabilities                           | 537,422,324         |                   | 474,760,505  |
|                               |                                                                                                  |                                                                                          |                                             |                          | ** **        | ** **        |
| Commitments and contingencies |                                                                                                  |                                                                                          |                                             |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |
| **Shareholders' equity**      | ** **                                                                                       |                                                                                          |                                             |
|                               | Preferred stock, par value $.01 per share, 10,000,000 shares                                     |                                                                                          |                                             |                          |
|                               |                                                                                                  | authorized, no shares issued           | -                                      |                          | -            |
|                               | Common stock, par value $.01 per share                                                           |                                                                                          |                                             |                          |
|                               |     10,000,000 shares authorized, 2,946,456 and 2,933,868 shares  issued and      |                                                                                          |                                             |                          |
|                               |       outstanding at June 30, 2007 and December 31, 2006,  respectively | 29,465                                                                              |                                             | 29,339              |
|                               | Non-vested restricted stock                                                                      | (47,316)                                                                                 |                                             | -                   |
|                               | Additional paid-in capital                                                                       | 30,968,835                                                                          |                                             | 30,846,538          |
|                               | Accumulated other comprehensive gain (loss)                                                      | (698,479)                                                                                |                                             | (16,465)                 |
|                               | Retained earnings                                                                           | 5,433,224                                                                           |                                             | 3,724,034           |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                  |                                                                                          | Total shareholders' equity                  | 35,685,729          |                   | 34,583,446   |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                  |                                                                                          | Total liabilities and  shareholders' equity |  $                  | 573,108,053  |                   |  $ | 509,343,951  |
|                               |                                                                                                  |                                                                                          |                                             |                          |                   |                   |  |  |  |

 

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

 

2

----

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

*** ***

|                                                                  |                                                                  |                 |                                  |                 | **For the  three months ended** |
|------------------------------------------------------------------|------------------------------------------------------------------|-----------------|----------------------------------|-----------------|---------------------------------|
| ** **                                                       |                                                                  |                 |                                  |                 | **June 30,**                    |
| ** **                                                       |                                                                  | ** **      |                                  |                 | **2007**                        | ** ** | **2006** |
| ** **                                                       |                                                                  |                 |                                  |                 | (Unaudited)                     |
| **Interest income**                                              | ** **                                                       |                 |                                  |
|                                                                  | Loans                                                            |  $         | 8,454,337                   |                 |  $                         | 6,797,310  |
|                                                                  | Investment securities                                            | 1,086,060  |                                  | 657,156    |
|                                                                  | Federal funds sold                                               | 202,014    |                                  | 43,405     |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
|                                                                  |         Total interest income | 9,742,411  |                                  | 7,497,871  |
| **Interest expense**                                             | ** **                                                       |                 |                                  |
| **  **Deposits                                         | 3,877,096                                                   |                 | 2,515,278                   |
| **  **Borrowings                                       | 1,714,871                                                   |                 | 1,419,707                   |
| Total interest expense                                           | 5,591,967                                                   |                 | 3,934,985                   |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
|    Net interest income                                 | 4,150,444                                                   |                 | 3,562,886                   |
|    Provision for loan losses                           | 380,000                                                     |                 | 400,000                     |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  | ** ** |
|    Net interest income after provision for loan losses | 3,770,444                                                   |                 | 3,162,886                   |
|                                                                  | *** ***                                                     |                 |                                  |                 |                                 |  |  |
| **Noninterest income**                                           | ** **                                                       |                 |                                  |
| ** **                                                       | Loan fee income                                                  | 37,846     |                                  | 28,661     |
|                                                                  | Service fees on deposit accounts                                 | 106,511    |                                  | 66,188     |
|                                                                  | Income from bank owned life insurance                            | 86,383     |                                  | -          |
|                                                                  | Real estate owned activity                                       | (149,338)       |                                  | (14,489)        |
|                                                                  | Other income                                                     | 66,741     |                                  | 53,638     |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
|                               | Total noninterest income                                         | 148,143    |                                  | 133,998    |
|                                                                  |
| **Noninterest expenses**                                         | ** **                                                       |                 |                                  |
|                                                                  | Compensation and benefits                                        | 1,509,784  |                                  | 1,057,121  |
|                                                                  | Professional fees                                                | 160,518    |                                  | 91,427     |
|                                                                  | Marketing                                                        | 142,776    |                                  | 86,057     |
|                                                                  | Insurance                                                        | 160,434    |                                  | 44,674     |
|                                                                  | Occupancy                                                        | 348,029    |                                  | 158,829    |
|                                                                  | Data processing and related costs                                | 296,350    |                                  | 198,719    |
|                                                                  | Telephone                                                        | 33,089     |                                  | 23,396     |
|                                                                  | Other                                                            | 168,264    |                                  | 109,175    |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
|                                                                  |                                                                  |                 | Total noninterest expenses       | 2,819,244  |                                 | 1,769,398  |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
|                                                                  |                                                                  |                 | Income before income tax expense | 1,099,343  |                                 | 1,527,486  |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
| **Income tax expense**                                           | 348,209                                                     |                 | 557,531                     |
|                                                                  | ** **                                                       |                 |                                  |                 |                                 |  |  |
| **Net income**                                                   |  $                                                          | 751,134    |                                  |  $         | 969,955                    |
|                                                                  |                                                                  |                 |                                  |                 | ** **                      | ** ** | ** ** |
| **Earnings per common share**                                    | ** **                                                       | ** **      | ** **                       |
| ** **                                                       | Basic                                                            |  $         | .25                         |                 |  $                         | .33  |
|                                                                  | Diluted                                                          |  $         | .23                         |                 |  $                         | .30  |
|                                                                  |                                                                  |                 |                                  |                 |                                 |  |  |
| **Weighted average common shares outstanding**                   | ** **                                                       | ** **      | ** **                       |
|    Basic                                               | 2,940,197                                                   |                 | 2,931,723                   |
|    Diluted                                             | 3,240,625                                                   |                 | 3,236,262                   |

 

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

 

3

----

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

*** ***

|                                                                  |                                                                  |                  |                                  |                  | **For the  six months ended** |
|------------------------------------------------------------------|------------------------------------------------------------------|------------------|----------------------------------|------------------|-------------------------------|
| ** **                                                       |                                                                  |                  |                                  |                  | **June 30,**                  |
| ** **                                                       |                                                                  | ** **       |                                  |                  | **2007**                      | ** ** | **2006** |
| ** **                                                       |                                                                  |                  |                                  |                  | (Unaudited)                   |
| **Interest income**                                              | ** **                                                       |                  |                                  |
|                                                                  | Loans                                                            |  $          | 16,219,441                  |                  |  $                       | 12,943,359  |
|                                                                  | Investment securities                                            | 2,120,207   |                                  | 1,088,846   |
|                                                                  | Federal funds sold                                               | 363,848     |                                  | 91,796      |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
|                                                                  |         Total interest income | 18,703,496  |                                  | 14,124,001  |
| **Interest expense**                                             | ** **                                                       |                  |                                  |
| **  **Deposits                                         | 7,517,584                                                   |                  | 4,628,236                   |
| **  **Borrowings                                       | 3,251,762                                                   |                  | 2,573,076                   |
| Total interest expense                                           | 10,769,346                                                  |                  | 7,201,312                   |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
|    Net interest income                                 | 7,934,150                                                   |                  | 6,922,689                   |
|    Provision for loan losses                           | 840,000                                                     |                  | 800,000                     |
|                                                                  |                                                                  |                  |                                  |                  |                               |  | ** ** |
|    Net interest income after provision for loan losses | 7,094,150                                                   |                  | 6,122,689                   |
|                                                                  | *** ***                                                     |                  |                                  |                  |                               |  |  |
| **Noninterest income**                                           | ** **                                                       |                  |                                  |
| ** **                                                       | Loan fee income                                                  | 75,225      |                                  | 59,462      |
|                                                                  | Service fees on deposit accounts                                 | 181,989     |                                  | 128,259     |
|                                                                  | Income from bank owned life insurance                            | 182,383     |                                  | -           |
|                                                                  | Real estate owned activity                                       | 179,255     |                                  | (14,489)         |
|                                                                  | Other income                                                     | 122,691     |                                  | 116,341     |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
|                               | Total noninterest income                                         | 741,543     |                                  | 289,573     |
|                                                                  |
| **Noninterest expenses**                                         | ** **                                                       |                  |                                  |
|                                                                  | Compensation and benefits                                        | 2,932,316   |                                  | 2,090,862   |
|                                                                  | Professional fees                                                | 285,038     |                                  | 181,864     |
|                                                                  | Marketing                                                        | 248,374     |                                  | 207,127     |
|                                                                  | Insurance                                                        | 211,770     |                                  | 87,708      |
|                                                                  | Occupancy                                                        | 743,976     |                                  | 333,606     |
|                                                                  | Data processing and related costs                                | 554,696     |                                  | 396,589     |
|                                                                  | Telephone                                                        | 67,856      |                                  | 39,278      |
|                                                                  | Other                                                            | 282,751     |                                  | 221,908     |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
|                                                                  |                                                                  |                  | Total noninterest expenses       | 5,326,777   |                               | 3,558,942  |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
|                                                                  |                                                                  |                  | Income before income tax expense | 2,508,916   |                               | 2,853,320  |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
| **Income tax expense**                                           | 799,726                                                     |                  | 1,041,461                   |
|                                                                  | ** **                                                       |                  |                                  |                  |                               |  |  |
| **Net income**                                                   |  $                                                          | 1,709,190   |                                  |  $          | 1,811,859                |
|                                                                  |                                                                  |                  |                                  |                  | ** **                    | ** ** | ** ** |
| **Earnings per common share**                                    | ** **                                                       | ** **       | ** **                       |
| ** **                                                       | Basic                                                            |  $          | .58                         |                  |  $                       | .62  |
|                                                                  | Diluted                                                          |  $          | .53                         |                  |  $                       | .56  |
|                                                                  |                                                                  |                  |                                  |                  |                               |  |  |
| **Weighted average common shares outstanding**                   | ** **                                                       | ** **       | ** **                       |
|    Basic                                               | 2,938,283                                                   |                  | 2,929,486                   |
|    Diluted                                             | 3,244,176                                                   |                  | 3,241,049                   |

 

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

4

----

***SOUTHERN  FIRSTBANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2007  AND 2006(Unaudited)***

                                                                                                                                                         

| ** **                           | ** **                          | ** **    | ** **     | ** **       | ** **    | ** **    | ** **        | ** **      | **Accumulated**  | ** **           | ** **      | ** **        | **Total**       |
|--------------------------------------|-------------------------------------|---------------|----------------|------------------|---------------|---------------|-------------------|-----------------|------------------|----------------------|-----------------|-------------------|-----------------|
| ** **                           | ** **                          | ** **    | ** **     | ** **       | **Nonvested** | ** **    | **Additional**    | ** **      | **other**        | ** **           | ** **      | ** **        | **share-**      |
| ** **                           | **Common  stock**                   | ** **    | **restricted** | ** **       | **paid-in**   | ** **    | **comprehensive** | ** **      | **Retained**     | ** **           | **holders'**    |
| ** **                           | **Shares**                          | ** **    | **Amount**     | ** **       | **stock**     | ** **    | **capital**       | ** **      | **income(loss)** | ** **           | **Earnings**    | ** **        | **equity**      |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| **December 31, 2005**                | 2,659,719                      |               |  $        | 26,597      |               |  $       | -            |                 |  $          | 25,626,740      |                 |  $           | (150,602)       |  |  $ | 4,970,012  |  |  $ | 30,472,747  |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Net income                           | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | 1,811,859  |                   | 1,811,859  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Comprehensive income, net of tax -   |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | Unrealized holding loss on          |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |  |
|                                      |  securities available for sale | -        |                | -           |               | -        |                   | -          |                  | (355,506)            |                 | -            |                 | (355,506) |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Comprehensive income                 | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | -          |                   | 1,456,353  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Proceeds from exercise of stock      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | options and warrants                | 7,000    |                | 70          |               | -        |                   | 46,620     |                  | -          |                 | -       |                 | 46,690  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Stock dividend (10%), net of cash in |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | lieu of fractional shares           | 266,649  |                | 2,667       |               | -   |                   | 5,143,659  |                  | -          |                 | (5,146,772)  |                 | (446) |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| **June 30, 2006**                    | **2,933,368 **                 | ** **    | ** $**    | **29,334 ** | ** **    | ** $**   | **- **       | ** **      | ** $**      | **30,817,019 ** | ** **      | ** $**       | **(506,108)**   | ** ** | ** $** | **1,635,099 ** | ** ** | ** $** | **31,975,344 ** |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| **December 31, 2006**                | 2,933,868                      |               |  $        | 29,339      |               |  $       | -            |                 |  $          | 30,846,538      |                 |  $           | (16,465)        |  |  $ | 3,724,034  |  |  $ | 34,583,446  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Net  income                     | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | 1,709,190  |                   | 1,709,190  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Comprehensive income, net of tax -   |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | Unrealized holding loss on          |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |  |
|                                      |  securities available for sale | -        |                | -           |               | -             |                   | -               |                  | (682,014)            |                 | -            |                 | (682,014) |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Comprehensive income                 | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | -          |                   | 1,027,176  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Proceeds from exercise of stock      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | options and warrants                | 10,088   |                | 101         |               | -        |                   | 62,786     |                  | -               |                 | -            |                 | 62,887  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Issuance of restricted stock         | 2,500                          |               | 25        |                  | (54,075)      |               | 54,050       |                 | -           |                      | -          |                   | -          |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Amortization of deferred             |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
|                                      | compensation on restricted stock    | -        |                | -           |               | 6,759    |                   | -          |                  | -               |                 | -            |                 | 6,759  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| Compensation expense related to      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| ** **                           | stock options                       | -        |                | -           |               | -        |                   | 5,461      |                  | -               |                 | -            |                 | 5,461  |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |
| **June 30, 2007**                    | **2,946,456 **                 | ** **    | ** $**    | **29,465 ** | ** **    | ** $**   | **(47,316)**      | ** **      | ** $**      | **30,968,835 ** | ** **      | ** $**       | **(698,479)**   | ** ** | ** $** | **5,433,224  ** | ** ** | ** $** | **35,685,729 ** |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                 |                   |                 |  |  |  |  |  |  |  |  |  |

 

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

 

5

----

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

 

|                                                                |                                             | *** ***                                                         |                    |                                                      |                               | ** **                                 |                  |
|----------------------------------------------------------------|---------------------------------------------|----------------------------------------------------------------------|--------------------|------------------------------------------------------|-------------------------------|--------------------------------------------|------------------|
|                                                                |                                             | *** ***                                                         |                    |                                                      | **For the six  months ended** |
|                                                                |                                             | ** **                                                           |                    |                                                      | **June 30,**                  |
|                                                                |                                             | ** **                                                           |                    |                                                      | **2007**                      | ** **                                 | **2006**         |
| ** **                                                     |                                             |                                                                      |                    |                                                      | (Unaudited)                   |
| **Operating activities**                                       | ** **                                  |                                                                      |                    |
|                                                                | Net income                                  |  $                                                              | 1,709,190     |                                                      |  $                       | 1,811,859                             |
|                                                                | Adjustments to reconcile net income to cash |                                                                      |                    |                                                      |
|                                                                |                                             | provided by (used for) operating activities:                         |                    |                                                      |                               |
|                                                                |                                             | Provision for loan losses                                            | 840,000       |                                                      | 800,000                  |
|                                                                |                                             | Depreciation and other amortization                                  | 239,782       |                                                      | 173,992                  |
|                                                                |                                             | Accretion and amortization of securities discounts and premium,  net | 40,091        |                                                      | 53,081                   |
|                                                                |                                             | Loss on sale of real estate                                          | 146,975       |                                                      | -                        |
|                                                                |                                             | Gain on sale of property held for sale                               | (319,291)          |                                                      | -                        |
|                                                                |                                             | Compensation expense related to stock options                        | 12,220        |                                                      | -                        |
|                                                                |                                             | Increase in cash surrender value of bank owned life insurance        | (182,383)          |                                                      | -                        |
|                                                                |                                             | (Increase) decrease in deferred tax asset                            | 214,005       |                                                      | (10,908)                      |
|                                                                |                                             | (Increase) decrease  in other assets, net                       | 40,892        |                                                      | (307,896)                     |
|                                                                |                                             | Decrease in other liabilities, net                                   | (1,117,383)        |                                                      | (9,402,600)                   |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
| ** **                                                     |                                             |                                                                      |                    | Net cash provided by (used for) operating activities | 1,624,098                |         | (6,882,472)      |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
| **Investing activities**                                       | ** **                                  |                                                                      |                    |
|                                                                | Increase (decrease) in cash realized from:  |                                                                      |                    |                                                      |
|                                                                | ** **                                  | Origination of loans, net                                            | (59,892,076)       |                                                      | (42,276,959)                  |
|                                                                | ** **                                  | Purchase of property and equipment                                   | (1,017,607)        |                                                      | (313,191)                     |
|                                                                |                                             | Purchase of investment securities:                                   |                    |                                                      |                               |
|                                                                |                                             |                                                                      | Available for sale | (10,090,830)                                         |                               | (21,991,570)                               |
|                                                                |                                             |                                                  | Other investments  | (2,042,400)                                          |                               | (4,014,700)                                |
|                                                                |                                             | Payments and maturity of investment securities:                      |                    |                                                      |                               |
|                                                                |                                             |                                                                      | Available for sale | 3,974,209                                       |                               | 1,407,356                             |
|                                                                |                                             |                                                                      | Held to maturity   | 928,013                                         |                               | 1,118,207                             |
|                                                                |                                             |                                                                      | Other investments  | 810,000                                         |                               | 2,925,000                             |
|                                                                |                                             | Proceeds from sale of property held for sale                         | 2,354,664     |                                                      | -                        |
|                                                                |                                             | Proceeds from sale of real estate acquired in settlement of  loans   | 341,322       |                                                      | 524,168                  |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
|                                                                |                                             |                                                                      |                    | Net cash used for investing activities               | (64,634,705)                  |                                            | (62,621,689)     |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
| **Financing activities**                                       | ** **                                  |                                                                      |                    |
|                                                                | Increase in deposits, net                   | 38,779,202                                                      |                    | 40,793,137                                      |
|                                                                | Decrease in short-term borrowings           | -                                                               |                    | (950,000)                                            |
| ** **                                                     | Proceeds from the exercise of stock options | 62,887                                                          |                    | 46,690                                          |
|                                                                | Increase in Federal Home Loan Bank advances | 25,000,000                                                      |                    | 18,000,000                                      |
|                                                                | ** **                                  |                                                                      |                    |                                                      |                               |                                            |                  |
|                                                                |                                             |                                                                      |                    | Net cash provided by financing activities            | 63,842,089               |                                            | 57,889,827  |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
|                                                                | ** **                                  |                                                                      |                    | Net increase (decrease) in cash and cash equivalents | 831,482                  |                                            | (11,614,334)     |
|                                                                | ** **                                  |                                                                      |                    |                                                      |                               |                                            |                  |
| **Cash and cash equivalents at beginning of  the period** | 16,579,133                             |                                                                      | 25,604,152    |
| ** **                                                     |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
| **Cash and cash equivalents at end of the period**             |  $                                     | 17,410,615                                                      |                    |  $                                              | 13,989,818               |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
| **Supplemental information**                                   | ** **                                  |                                                                      |                    |
|                                                                | **Cash paid for**                           | ** **                                                           |                    |                                                      |
|                                                                |                                             | Interest                                                             |  $            | 10,002,092                                      |                               |  $                                    | 6,925,871   |
|                                                                |                                             |                                                                      |                    |                                                      |                               |
|                                                                |                                             | Income taxes                                                         |  $            | 948,986                                         |                               |  $                                    | 1,052,369   |
|                                                                | ** **                                  |                                                                      |                    |
| **   Schedule of non-cash transactions**             | ** **                                  |                                                                      |                    |
|                                                                |                                             | Transfer of property and equipment to property held for sale         | $                  | 2,035,373                                       |                               | $                                          | -           |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |
|                                                                |                                             | Foreclosure of real estate                                           |  $            | -                                               |                               |  $                                    | 2,118,421   |
|                                                                |                                             |                                                                      |                    |                                                      |
|                                                                |                                             | Unrealized gain (loss) on securities, net of income taxes            |  $            | (682,014)                                       |                               |  $                                    | (355,506)        |
|                                                                |                                             |                                                                      |                    |                                                      |                               |                                            |                  |  |  |  |  |  |

 

See notes to consolidated financial statements that are anintegral part of these consolidated statements.

 

6

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***SOUTHERN FIRSTBANCSHARES, INC.  AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS***

**Note1 - Nature of Business and Basis of Presentation****Business activity**             Southern First Bancshares, Inc. is a South Carolinacorporation that owns all of the capital stock of Southern First Bank, N.A.****andall of the stock of Greenville First Statutory Trust I and Trust II (collectivelythe "Trusts").  On  July 2, 2007, the holding company changed its name fromGreenville First Bancshares, Inc. to Southern First Bancshares, Inc. and thebank changed its name from Greenville First Bank, N.A. to Southern First Bank,N.A.  The bank is a national bank organized under the laws of the United Stateslocated in Greenville and Richland Counties, South Carolina and will continueto operate under the trade name, Greenville First Bank, in Greenville County.  Thebank is primarily engaged in the business of accepting demand deposits andsavings deposits insured by the Federal Deposit Insurance Corporation, andproviding commercial, consumer and mortgage loans to the general public.  Thebank owns all of the capital stock of JB Properties.  This subsidiary is used forthe purpose of owning real estate acquired in loan foreclosures.   The Trustsare special purpose subsidiaries for the sole purpose of issuing trustpreferred securities.

 

**Basisof Presentation**             The accompanying financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q.  Accordingly, they do not include allthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the company's Form 10-Kfor the year ended December 31, 2006 (Registration Number 000-27719) as filedwith the Securities and Exchange Commission.  The consolidated financialstatements include the accounts of Southern First Bancshares, Inc., and itswholly owned subsidiary Southern First Bank, N.A.  In accordance with FinancialAccounting Standards Board ("FASB") Interpretation No. 46, the financialstatements related to the special purpose subsidiaries, Greenville FirstStatutory Trust I and Trust II, have not been consolidated.

** **

**Cashand Cash Equivalents**

 

             Forpurposes of the Consolidated Statements of Cash Flows, cash and federal fundssold are included in "cash and cash equivalents."  These assets havecontractual maturities of less than three months.

 

**Note 2 - PropertyHeld for Sale**

 

            InFebruary 2007, we decided to actively market the sale of our former main officeand corporate headquarters building.  Accordingly, we reclassified the buildingfrom property and equipment to property held for sale, in accordance with Statementof Financial Accounting Standards ("SFAS") No. 144 "Accounting for theImpairment and Disposal of Long-Lived Assets," and ceased depreciation of thebuilding.  On April 13, 2007, we completed the sale of the former main officebuilding.  Based on the sales contract, adjusted for commissions and otherselling costs, we recorded a $319,291 gain on the sale of the building duringthe six months ended June 30, 2007.  The $319,291 gain was partially offset byother unrelated real estate operating expenses of $140,036.  The net gain onreal estate operations recorded in the six months ended June 30, 2007 was $179,255.

** **

**Note3 - Note Payable**

** **

The company has an unused $4.5 million revolvingline of credit with another bank that matures on March 20, 2008.  The line ofcredit bears interest at a rate of three-month libor plus 2.00%, which at June30, 2007 was 7.36%.  The company has pledged the stock of the bank ascollateral for this line of credit.  The line of credit agreement containsvarious covenants related to net income and asset quality.  As of June 30,2007, the company believes it is in compliance with all covenants.

** **

7

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**Note4 - Earnings per Share******             The following schedulereconciles the numerators and denominators of the basic and diluted earningsper share computations for the three and six months ended June 30, 2007 and 2006. Dilutive common shares arise from the potentially dilutive effect of thecompany's stock options and warrants that are outstanding.  The assumedconversion of stock options and warrants can create a difference between basicand dilutive net income per common share.  

 

             At June 30, 2007, 13,000 options were anti-dilutive in the calculation ofearnings per share as their exercise price exceeded the fair market value.

 

| ** **                             | **Three months ended June  30,** |
|----------------------------------------|----------------------------------|
| ** **                             | **2007**                         | ** ** | **2006** |
|                                        |                                  |  |  |  |  |  |
| Basic  Earnings Per Share              |                                  |  |  |  |  |  |
|    Average common shares          | 2,940,197                   |  | 2,931,723  |
|    Net income                     |  $                          | 751,134  |  |  $ | 969,955  |
|    Earnings per share             |  $                          | 0.25  |  |  $ | 0.33  |
|                                        |                                  |  |  |  |  |  |
| Diluted  Earnings Per Share            |                                  |  |  |
|    Average common shares          | 2,940,197                   |  | 2,931,723  |
|    Average dilutive common shares | 300,428                     |  | 304,539  |
|    Adjusted average common shares | 3,240,625                   |  | 3,236,262  |
|    Net income                     |  $                          | 751,134  |  |  $ | 969,955  |
|    Earnings per share             |  $                          | 0.23  |  |  $ | 0.30  |

** **

| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | **2007**                       | ** ** | **2006** |
| Basic  Earnings Per Share

   Average common shares

2,938,283 

2,929,486 

   Net income

 $

1,709,190 

 $

1,811,859 

   Earnings per share

 $

0.58 

 $

0.62 

Diluted  Earnings Per Share

   Average common shares

2,938,283 

2,929,486 

   Average dilutive common shares

305,893 

311,563 

   Adjusted average common shares

3,244,176 

3,241,049 

   Net income

 $

1,709,190 

 $

1,811,859 

   Earnings per share

 $

0.53 

 $

0.56 

** **

**Note5 - 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 SFAS No. 123(R), "Accounting for Stock-BasedCompensation," to account for compensation costs under its stock option plan.  On December 20, 2005, the Board of Directors approved accelerating the vesting of45,813 unvested stock options effective December 28, 2005.  The decision to accelerate vesting of these options resulted in a reduction ofcompensation expense upon the adoption of SFAS No. 123(R) by approximately$68,000 and $52,000 for the years ending December 31, 2006 and 2007,respectively, and $4,000 for each of the years ending December 31, 2008 and2009.
 

In adopting SFAS No. 123(R), the company elected to use themodified prospective method to account for the transition from the intrinsicvalue method to the fair value recognition method.  Under the modifiedprospective method, compensation cost is recognized from the adoption dateforward for all new stock options granted and for any outstanding unvestedawards as if the fair value method had been applied to those awards as of thedate of grant.       

    

The fair value of the option grant is estimated on the dateof grant using the Black-Scholes option-pricing model.  The followingassumptions were used for grants: expected volatility of 6.76% for 2007 and 2006,risk-free interest rate of 4.60% for 2007 and 4.02% for 2006, expected lives ofthe options 10 years, and the assumed dividend rate was zero.  

8
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**Item2.**** Management's Discussion and Analysis of Financial Condition and Results ofOperations**.

 

*Thefollowing discussion reviews our results of operations and assesses ourfinancial condition.  You should read the following discussion and analysis inconjunction with the accompanying consolidated financial statements.  Thecommentary should be read in conjunction with the discussion of forward-lookingstatements, the financial statements and the related notes and the otherstatistical information included in this report.*

**DISCUSSION OF FORWARD-LOOKING STATEMENTS**

 

                Thisreport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements are based on many assumptionsand estimates and are not guarantees of future performance.  Our actual resultsmay differ materially from those anticipated in any forward-looking statements,as they will depend on many factors about which we are unsure, including manyfactors which are beyond our control.  The words "may,"  "would," "could,""will," "expect," "anticipate," "believe," "intend," "plan," and "estimate," aswell as similar expressions, are meant to identify such forward-lookingstatements.  Potential risks and uncertainties that could cause our actualresults to differ from those anticipated in any forward-looking statements include,but are not limited to, those described in our Form 10-K for the year endedDecember 31, 2006 under Item 1A- Risk Factors and the following:

 

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

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

•        changesin political conditions or the legislative or regulatory environment; 

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

•        changesoccurring in business conditions and inflation;

•        changesin technology;

•        changesin deposit flows,

•        changesin monetary and tax policies;

•        thelevel of allowance for loan loss;

•        therate of delinquencies and amounts of charge-offs; 

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

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

•        lossof consumer confidence and economic disruptions resulting from terroristactivities;

•        changesin the securities markets; and

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

 

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

*  *

**Overview**

** **

We were incorporated in March 1999 to organize and serve as the holdingcompany for Greenville First Bank, N.A.  On July 2, 2007, we changed our nameto Southern First Bancshares, Inc. and the bank's name to Southern First Bank,N.A.  Our primary reason for the name change was related to our expansion intothe Columbia, SC market.  Since we opened our bank in January 2000, we haveexperienced consistent growth in total assets, loans, deposits, and shareholders'equity, which has continued during the first six months of 2007.  

 

Likemost community banks, we derive the majority of our income from interestreceived on our loans and investments.  Our primary source of funds for makingthese loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of netinterest income, or the difference between the income on our interest-earningassets, such as loans and investments, and the expense on our interest-bearingliabilities, such as deposits and borrowings.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities, which is called our net interest spread. 

 

9
**** 
Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible.  Wemaintain this allowance by charging a provision for loan losses against ouroperating earnings for each period.  We have included a detailed discussion ofthis process, as well as several tables describing our allowance for loanlosses.

 

Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other charges to our customers.  We have also included adiscussion of the various components of this noninterest income, as well as ofour noninterest expense.

 

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

 
CriticalAccounting Policies
 
                We have adopted various accounting policies that governthe application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation ofour financial statements.  Our significant accounting policies are described inthe footnotes to our audited consolidated financial statements as of December31, 2006, as filed in our annual report on Form 10-K.
 

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

 

We believe the allowance for loan losses is thecritical accounting policy that requires the most significant judgment andestimates used in preparation of our consolidated financial statements.  Someof the more critical judgments supporting the amount of our allowance for loanlosses include judgments about the credit worthiness of borrowers, theestimated value of the underlying collateral, the assumptions about cash flow,determination of loss factors for estimating credit losses, the impact ofcurrent events, and conditions, and other factors impacting the level ofprobable inherent losses.  Under different conditions, the actual amount ofcredit losses incurred by us may be different from management's estimatesprovided in our consolidated financial statements.  Refer to the portion ofthis discussion that addresses our allowance for loan losses for a morecomplete discussion of our processes and methodology for determining ourallowance for loan losses.

** **

**Effectof Economic Trends**

** **

Beginning in July 2004 and through the first sixmonths of 2007, our rates on both short-term or variable rate interest-earningassets and interest-bearing liabilities increased as the Federal Reserve beganto increase short-term rates as the economy showed signs of strengtheningfollowing an economic decline and historically low interest rates.  During thisperiod, the Federal Reserve increased rates 17 times for a total of 425 basispoints.  The last rate increase occurred in July 2006, and the Federal Reserveallowed short-term rates to remain unchanged during the remainder of 2006 andthe first six months of 2007, leading many economists to believe that theFederal Reserve is nearing the end of this cycle of rate increases.  Themomentum of the 17 rate increases resulted in higher interest-earning assetsand higher interest-bearing liabilities; subsequently, as fixed rate loans,deposits, and borrowings have matured they are repriced at higher interest rates. The following discussion includes our analysis of theeffect that we anticipate changes in interest rates will have on our financialcondition.  However, no assurance can be given related to future actions thatthe Federal Reserve may choose to take or that the results we anticipate willactually occur.

 

10
**** 
**Results of OperationsIncome Statement Review***Summary*

* *

*Three months ended June 30, 2007 and 2006*

* *

                Our net income was $751,134and $969,955 for the three months ended June 30, 2007 and 2006, respectively, adecrease of $218,821, or 22.6%.  The $218,821 decrease in net income resultedprimarily from an increase of $1.0 million in noninterest expenses, partiallyoffset by increases of $587,558 in net interest income and $14,145 innoninterest income, and a decrease of $20,000 in the provision for loan losses. Our efficiency ratio increased due to higher operating costs related toadditional infrastructure in Greenville County, our expansion into the Columbia, SC market, and a lower net margin.  Our efficiency ratio was 65.6% and 47.9% forthe three months ended June 30, 2007 and 2006, respectively.  We believe thatour efficiency ratio will improve in future periods as earning assets areanticipated to increase at a higher rate than noninterest expenses due to ourrecent investment in infrastructure.  However, no assurance can be given thatwe will be able to achieve this goal.

* *

*Six months ended June30, 2007 and 2006*

* *

                Our net income was $1,709,190and $1,811,859 for the six months ended June 30, 2007 and 2006, respectively, adecrease of $102,669, or 5.7%.  The decrease in net income resulted primarilyfrom increases of $1.8 million in noninterest expenses and $40,000 in theprovision for loan losses, partially offset by increases of $1.0 million in netinterest income and $451,970 in noninterest income.  Our efficiency ratio was61.4% and 49.4% for the six months ended June 30, 2007 and 2006, respectively. We believe that our efficiency ratio will improve in future periods as earningassets are anticipated to increase at a higher rate than noninterest expensesdue to our recent investment in infrastructure.  However, no assurance can begiven that we will be able to achieve this goal.

* *

*Net Interest Income*

* *

                Ourlevel of net interest income is determined by the level of earning assets andthe management of our net interest margin.  The continuous growth in our loanportfolio is the primary driver of the increase in net interest income.  Duringthe six months ended June 30, 2007, our average loan portfolio increased $69.8million compared to the average for the six months ended June 30, 2006.  Thegrowth in the first six months of 2007 was $59.4 million.  We anticipate thegrowth in loans will continue to drive the growth in assets and the growth innet interest income.  However, no assurance can be given that we will be ableto continue to increase loans at the same levels we have experienced in thepast.

 

Our decision to grow the loan portfolio at thecurrent pace created the need for a higher level of capital and the need toincrease deposits and borrowings.  This loan growth strategy also resulted in asignificant portion of our assets being in higher earning loans than in loweryielding investments.  At June 30, 2007, net loans represented 79.6% of totalassets.  However,as described below, we have also increased our level of depositssignificantly.  While we plan to continue our focus on increasing the loanportfolio, as rates on investment securities rose during the past twelve monthsand we obtained additional deposits, we increased the size of the investmentportfolio.  As a result, net loans as a percentage of total assets hasactually decreased from 82.0% at June 30, 2006 to the 79.6% amount at June 30,2007.  Our investment portfolio increased by $23.6 million from June 30,2006 to June 30, 2007.  At June 30, 2007, investments and federal fundssold represented 14.5% of total assets.  

 

The historically low interest rate environmentin the last four years allowed us to obtain short-term borrowings and wholesalecertificates of deposit at rates that were lower than certificate of depositrates being offered in our local market.  Therefore, we decided not to beginour retail deposit office expansion program until the beginning of 2005.  Thisfunding strategy allowed us to continue to operate in one location until 2005,maintain a smaller staff, and not incur marketing costs to advertise depositrates, which in turn allowed us to focus on the fast growing loan portfolio. 

 

11
**** 
We opened one retail deposit office in March 2005 and a second in November 2005.  Our focus forthese two locations has been to obtain low cost transaction accounts.  Our goalis to increase both the percentage of assets being funded by "in market" retaildeposits and to increase the percentage of low-cost transaction accounts tototal deposits.  The two additional retail deposit offices are assisting us inmeeting these objectives.  We anticipate these two additional retail officesopened in 2005 will have little impact on earnings in 2007.  However, webelieve that these two strategies will provide additional clients in our localmarket and will eventually provide a lower alternative cost of funding.   At June30, 2007, retail deposits represented $259.9 million, or 45.3% of total assets,borrowings represented $146.9 million, or 25.6% of total assets, and wholesaleout-of-market deposits represented $124.4 million, or 21.7% of total assets.

 

As more fully discussed in the - "Market Risk"and - "Liquidity and Interest Rate Sensitivity" sections below, at June 30, 2007,42.7% of our loans had variable rates.  Given our percentage of rate-sensitiveloans, our focus during the past three years has been to obtain short-termliabilities to fund our asset growth.  This strategy improves our ability tomanage the impact on our earnings resulting from anticipated changes in marketinterest rates.

 

At June 30, 2007, 86.3% of our interest-bearingliabilities had a maturity of less than one year.   Therefore, we believe thatwe are positioned to benefit from future decreases in short-term rates.  Conversely,future increases in short-term rates would likely have a negative effect on ourearnings.  At June 30, 2007, we had $161.8 million more liabilities than assetsthat reprice within the next twelve months.  Based on a review of our depositportfolio, we believe that the interest rates that we pay on the majority ofour interest-bearing transaction accounts, would only be impacted by a portion ofany change in market rates.  This key assumption is utilized in our overallevaluation of our level of interest sensitivity.

 

We intend to maintain a capital level for thebank that exceeds the OCC requirements to be classified as a "well capitalized"bank.  To provide the additional capital needed to support our bank's growth inassets, in 2003 we issued $6.2 million in junior subordinated debentures inconnection with our trust preferred securities offering.  During 2004, weissued 920,000 additional shares of common stock (1,012,000 adjusted for the 10percent stock dividend in 2006) that resulted in $14.9 million of additionalcapital.  In 2005, we issued an additional $7.2 million in junior subordinateddebentures in a second trust preferred securities offering.  The company alsohas a $4.5 million unused short-term holding companyline of credit that could be utilized to provide additional capital for thebank if deemed necessary. As of June 30, 2007, the company's regulatory capitallevels were over $8.1 million in excess of the various well capitalizedrequirements.

 

In addition to the growth in both assets andliabilities, and the timing of repricing of our assets and liabilities, netinterest income is also affected by the ratio of interest-earning assets tointerest-bearing liabilities and the changes in interest rates earned on ourassets and interest rates paid on our liabilities. 

 

Our net interest income margin for the sixmonths ended June 30, 2007 exceeded our net interest spread because we had moreinterest-earning assets than interest-bearing liabilities.  Averageinterest-earning assets exceeded average interest-bearing liabilities by $48.8million, and $45.8 million for the six months ended June 30, 2007 and 2006,respectively.  

 

During the six months ended June 30, 2007, our yields on interest earning assets and the rates that we paid for our deposits andborrowings continued to increase primarily as a result of the actions taken bythe Federal Reserve prior to June 30, 2007 to raise short-term rates.   Ourfixed rate loans are being originated or renewed at higher rates, while therates on new or maturing interest-bearing liabilities are also higher than inthe past.  Our net interest spread declined since more of our rate-sensitive liabilitiesrepriced than our rate-sensitive assets during the twelve month period ended June30, 2007.  Given the fact that the Federal Reserve has increased short-termrates by 425 basis points since July 2004, we believe that short-term interestrates are currently at or near their peak.  Therefore, we have chosen to increasethe amount of fixed rate loans in our loan portfolio and targeted to have asignificant portion of our liabilities to reprice within a twelve monthperiod.  

 

We have included a number of tables to assist inour description of various measures of our financial performance.  For example,the "Average Balances" table shows the average balance of each category of ourassets and liabilities as well as the yield we earned or the rate we paid withrespect to each category during the three and six month periods ended June 30, 2007 and 2006.  A review of these tables shows that our loans typically providehigher interest yields than do other types of interest-earning assets, which iswhy we direct a substantial percentage of our earning assets into our loanportfolio.  Similarly, the "Rate/Volume Analysis" table demonstrates the effectof changing interest rates and changing volume of assets and liabilities on ourfinancial condition during the periods shown.  A review of these tables shows thatas short-term rates continue to rise, the increase in net interest income ismore effected by the changes in rates than in prior years.  We also track thesensitivity of our various categories of assets and liabilities to changes ininterest rates, and we have included tables to illustrate our interest ratesensitivity with respect to interest-earning accounts and interest-bearingaccounts.  Finally, we have included various tables that provide detail about ourinvestment securities, our loans, our deposits, and other borrowings.

 

12
****
The following tables set forth informationrelated to our average balance sheets, average yields on assets, and averagecosts of liabilities.  We derived these yields by dividing income or expense bythe average balance of the corresponding assets or liabilities.  We derivedaverage balances from the daily balances throughout the periods indicated. During the three month and six month periods ended June 30, 2007 and 2006, we had no interest-bearing deposits in other banks or any securities purchased withagreements to resell.  All investments owned have an original maturity of overone year.  Nonaccrual loans are included in the following tables.  Loan yieldshave been reduced to reflect the negative impact on our earnings of loans onnonaccrual status.  The net of capitalized loan costs and fees are amortizedinto interest income on loans.

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

**For the Three Months  Ended June 30,**

**2007**

**2006**

**Average**

**Income/**

**Yield/**

**Average**

**Income/**

**Yield/**

**Balance**

**Expense**

**Rate(1)**

**Balance**

**Expense**

**Rate(1)**

**(Dollars in thousands)**

Earnings

Federal  funds sold

$

14,888 

$

202 

5.44%

$

3,554 

$

44 

4.85%

Investment  securities, taxable

78,315 

1,049 

5.37%

51,705 

644 

5.00%

Investment  securities, nontaxable (2)

3,700 

54 

5.87%

1,253 

20 

6.55%

Loans

446,348 

8,454 

7.60%

372,734 

6,797 

7.31%

   Total interest-earning assets

543,251 

9,759 

7.21%

429,246 

7,505 

7.01%

Non-interest-earning  assets

22,861 

15,063 

   Total assets

$

566,112 

$

444,309 

Interest-bearing  liabilities

NOW  accounts

$

35,164 

146 

1.67%

$

45,057 

210 

1.87%

Savings  & money market

86,958 

765 

3.53%

78,484 

708

3.62%

Time  deposits

230,049 

2,967 

5.17%

140,698 

1,597 

4.55%

Total  interest-bearing deposits

352,171 

3,878 

4.42%

264,239 

2,515 

3.82%

FHLB  advances

127,071 

1,446 

4.56%

89,173 

958 

4.31%

Other  borrowings

14,474 

268 

7.43%

30,475 

462 

6.08%

Total interest-bearing liabilities

493,716 

5,592 

4.54%

383,887 

3,935 

4.11%

Non-interest-bearing  liabilities

36,205 

28,367 

Shareholders'  equity

36,191 

32,055 

Total  liabilities and shareholders' equity

$

566,112 

$

444,309 

Net  interest spread

2.67%

2.90%

Net  interest income (tax equivalent) / margin

$

4,167 

3.08%

$

3,570 

3.34%

Less:   tax-equivalent adjustment (2)

17 

7 

Net  interest income

$

4,150 

$

3,563 

     (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 spread, on a tax-equivalentbasis, was 2.67% for the three months ended June 30, 2007 compared to 2.90% forthe three months ended June 30, 2006.  The net interest spread is thedifference between the yield we earn on our interest-earning assets and therate we pay on our interest-bearing liabilities.

 

The 23 basis point reduction in our net interestspread resulted primarily from the $114.0 million growth in average earningassets in the second quarter of 2007 compared to the same period in 2006.  Theadditional earning assets and liabilities yielded a lower than historical netspread of 1.74%, accounting for the entire decline in the net interest spread. 

 

During 2006 and the first and second quarters of2007, management determined that the bank had excess capital and given the flatinterest rate environment, both earnings and return on equity could beincreased with additional assets and liabilities even if the net interest spreadswere at less than historical levels.  Accordingly, $40.4 million or 35.4% ofthe total growth in earning assets occurred in investments and federal funds,yielding a combined weighted rate of 5.40% for the second quarter of 2007.  Theremaining growth in earning assets of $73.6 million, or 64.6% of the totalgrowth, occurred in loans which yielded a weighed rate of 7.60% in the second quarterof 2007.  This combination of investments, federal funds, and loans togetheryielded a weighted rate of 6.82%.

 

13
**** 
The growth of $114.0 million in earning assets wasfunded primarily with $21.9 million in other borrowings with a weighted rate of4.85% and $89.4 million in certificates of deposit with a weighted rate of5.17% for the three months ended June 30, 2007.  Since the total growth inearning assets was funded with higher borrowing and certificate of depositrates, the combined funding cost was 5.08%.

 

Although, substantially all of the variable rateassets and the short-term and variable rate liabilities have repriced to marketrates, our net interest spread may continue to decline in future periods, if asubstantial portion of growth in earning assets is funded with higher rateborrowings and certificates of deposit.

 

Our net interest margin is calculated as netinterest income divided by average interest-earning assets.  Our net interestmargin, on a tax-equivalent basis, for the three months ended June 30, 2007 was3.08% compared to 3.34% for the three months ended June 30, 2006.  During thethree months ended June 30, 2007, interest-earning assets exceededinterest-bearing liabilities by $49.5 million compared to $45.4 million for thethree month period ended June 30, 2006.  During the second quarter of 2007,interest-earning assets averaged $543.3 million compared to $429.2 million inthe second quarter of 2006.  

 

Our loan yield increased 29 basis points for thethree months ended June 30, 2007 compared to the three months ended June 30,2006 as a result of loans maturing or being renewed at market rates higher thantheir original rates and the impact of higher market rates on our variable rateloans which represent approximately 43% of the loan portfolio at June 30, 2007. Offsetting the increase in our loan yield was a 60 basis point increase in thecost of our interest-bearing deposits for the second quarter of 2007 comparedto the same period in 2006.  The increase in the rate on interest-bearingdeposits is due to the renewal rates on time deposits also being much higherthan those in the past combined with our lower costing transaction accounts whichrepresent a smaller percentage of our total interest-bearing deposits.  The 25 basispoint increase in FHLB advances and the 135 basis point increase in otherborrowed funds in the second quarter of 2007 compared to the same period in 2006resulted primarily from the impact of the 200 basis point increase inshort-term market rates over the past two years.  As of June 30, 2007,approximately 49% of our FHLB advances had variable rates, while all of our otherborrowings had variable rates.

 

Net interest income, the largest component ofour income, was $4.2 million and $3.6 million for the three months ended June30, 2007 and 2006, respectively.  The increase in the second quarter of 2007related primarily to the net effect of higher levels of both average interest-earningassets and interest-bearing liabilities.  Average interest-earning assets were$114.0 million higher during the three months ended June 30, 2007 compared tothe same period in 2006.  During the same period, average interest-bearingliabilities increased $109.8 million.  The higher average balances resulted in $853,000additional net interest income for the three months ended June 30, 2007, while lowerspreads on the average balances reduced net interest income by $258,000. 

 

Interest income for the three months ended June30, 2007 was $9.7 million, consisting of $8.5 million on loans, $1.1 million oninvestments, and $202,014 on federal funds sold.  Interest income for the threemonths ended June 30, 2006 was $7.5 million, consisting of $686 million onloans, $657,156 on investments, and $43,405 on federal funds sold.  Interest onloans for the three months ended June 30, 2007 and 2006 represented 86.8% and 90.7%,respectively, of total interest income, while income from investments and federalfunds sold represented only 13.2% and 9.3%, respectively, of total interestincome.  The high percentage of interest income from loans relates to ourstrategy to maintain a significant portion of our assets in higher earningloans compared to lower yielding investments.  Average loans represented 82.2%and 86.8% of average interest-earning assets for the three months ended June 30,2007 and 2006, respectively.  Included in interest income on loans for thethree months ended June 30, 2007 and 2006 was $190,283 and $137,239,respectively, which related to the net amortization of loan fees andcapitalized loan origination costs.

 

Interest expense for the three months ended June30, 2007 was $5.6 million, consisting of $3.9 million related to deposits and $1.7million related to FHLB advances and other borrowings.  Interest expense forthe three months ended June 30, 2006 was $3.9 million, consisting of $2.5million related to deposits and $1.4 million related to FHLB advances and otherborrowings.  Interest expense on deposits for the three months ended June 30,2007 and 2006 represented 69.3% and 63.9%, respectively, of total interestexpense, while interest expense on FHLB advances and other borrowingsrepresented 30.7% and 36.1%, respectively, of total interest expense for thesame three month periods.  For the three months ended June 30, 2007, averageinterest-bearing deposits increased by $87.9 million over the same period in2006, while FHLB advances increased $37.9 million and other borrowings decreased$16.0 million during the three months ended June 30, 2007 over the same periodin 2006.  Both the short-term borrowings from the FHLB advances and the sale ofsecurities under agreements to repurchase provide us with the opportunity toobtain low cost funding with various maturities similar to the maturities onour loans and investments.  

 

14
**** 
**Average Balances,  Income and Expenses, and Rates**

**For the Six Months  Ended June 30,**

**2007**

**2006**

**Average**

**Income/**

**Yield/**

**Average**

**Income/**

**Yield/**

**Balance**

**Expense**

**Rate(1)**

**Balance**

**Expense**

**Rate(1)**

**(Dollars in thousands)**

Earnings

Federal  funds sold

$

13,941 

$

364 

5.27%

$

3,720 

$

92 

4.99%

Investment  securities, taxable

76,534 

2,047 

5.39%

43,150 

1,064 

4.97%

Investment  securities, nontaxable (2)

3,718 

107 

5.81%

1,267 

39 

6.27%

Loans

432,130 

16,219 

7.57%

362,288 

12,943 

7.20%

   Total interest earning assets

526,323 

18,737 

7.18%

410,425 

14,138 

6.95%

Non-interest  earning assets

23,313 

13,008 

   Total assets

$

549,636 

$

423,433 

Interest  bearing liabilities

NOW  accounts

$

34,327 

286 

1.68%

$

39,053 

357 

1.84%

Savings  & money market

85,523 

1,500 

3.54%

69,328 

1,136 

3.30%

Time  deposits

223,484 

5,732 

5.17%

144,211 

3,135 

4.38%

Total  interest-bearing deposits

343,334 

7,518 

4.42%

252,592 

4,628 

3.69%

FHLB  advances

120,273 

2,732 

4.58%

82,421 

1,711 

4.19%

Other  borrowings

13,942 

519 

7.51%

29,567 

862 

5.88%

Total interest bearing liabilities

477,549 

10,769 

4.55%

364,580 

7,201 

3.98%

Non-interest  bearing liabilities

36,375 

27,194 

Shareholders'  equity

35,712 

31,659 

Total  liabilities and shareholders' equity

$

549,636 

$

423,433 

Net  interest spread

2.63%

2.97%

Net  interest income (tax equivalent) / margin

$

7,968 

3.05%

$

6,937 

3.41%

Less:   tax-equivalent adjustment (2)

34 

14 

Net  interest income / margin

$

7,934 

$

6,923 

     (1) Annualized for the six 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 spread was 2.63% for the sixmonths ended June 30, 2007, compared to 2.96% for the six months ended June 30,2006.  The net interest spread is the difference between the yield we earn onour interest-earning assets and the rate we pay on our interest-bearingliabilities.  

 

The 34 basis point reduction in our net interestspread resulted primarily from the $115.9 million growth in average earningassets in the first six months of 2007 compared to the same period in 2006. The additional earning assets and liabilities yielded a lower than historicalnet spread of 1.85%, which caused the overall net interest spread to decline by25 basis points.  The remaining 9 basis point reduction in net interest spreadresulted from the impact of liabilities repricing over a longer period than therelated assets that repriced.  Therefore, once short-term market rates stoppedincreasing, certain short-term liabilities such as one year certificates ofdeposit continued to slowly reprice to the current market rates as theymatured.  Management believes that substantially all of our variable rateassets and short-term liabilities have been repriced to current market rates asof June 30, 2007.   

 

During 2006 and the first and second quarters of2007, management determined that the bank had excess capital and given the flatinterest rate environment, both earnings and return on equity could beincreased with additional assets and liabilities even if the net interest spreadswere at less than historical levels.  Accordingly, $46.1 million or 39.7% ofthe total growth in earning assets occurred in investments and federal funds,yielding a combined weighted rate of 5.39% for the first six months of 2007. The remaining growth in earning assets of $69.8 million, or 60.3% of the totalgrowth, occurred in loans which yielded a weighed rate of 7.57% in the firstsix months of 2007.  This combination of investments, federal funds, and loanstogether yielded a weighted rate of 6.70%.

 

The growth of $115.9 million in earning assetswas funded primarily with $22.2 million in other borrowings with a weightedrate of 4.88% and $79.3 million in certificates of deposit with a weighted rateof 5.17% for the six months ended June 30, 2007.  Since the total growth inearning assets was funded with higher borrowing and certificate of depositrates, the combined funding cost was 4.85%.

 

15
****
Although, substantially all of the variable rateassets and the short-term and variable rate liabilities have repriced to marketrates, our net interest spread may continue to decline in future periods, if asubstantial portion of growth in earning assets is funded with higher rateborrowings and certificates of deposit.

 

Our net interest marginis calculated as net interest income divided by average interest-earningassets.  Our net interest margin, on a tax-equivalent basis, for the six monthsended June 30, 2007 was 3.05%, compared to 3.41% for the six months ended June30, 2006.  During the six months ended June 30, 2007, interest-earning assetsaveraged $526.3 million, compared to $410.4 million in the six months endedJune 30, 2006.  Interest earning assets exceeded interest bearing liabilitiesby $48.8 million and $45.8 million for the six month periods ended June 30, 2007and 2006, respectively.  

                             

Our loan yield increased 37 basis points for thesix months ended June 30, 2007 compared to the six months ended June 30, 2006 asa result of loans maturing or being renewed at rates higher than their originalrates as well as the impact of higher market rates on our variable rate loanswhich represent approximately 43% of the loan portfolio at June 30, 2007.  Offsettingthe increase in our loan yield is a 73 basis point increase in the cost of ourinterest-bearing deposits for the first six months of 2007 compared to the sameperiod in 2006.  The increase in the rate on our time deposits is also due tothe renewal rates on time deposits being much higher than those in the past.   Inaddition, the cost of our savings and money market accounts has increased by 24basis points as we have increased the rates we offer on these products to staycompetitive in response to the increase in short-term market rates.  The 39basis point increase in FHLB advances and the 163 basis point increase in otherborrowed funds in the first six months of 2007 compared to the same period in 2006resulted primarily from the repricing of matured FHLB advances to higher marketrates and carrying a lower balance of other borrowings at higher rates.  As ofJune 30, 2007, approximately 49% of our FHLB advances had variable rates, whileall of our other borrowings had variable rates.

 

Net interest income, the largest component ofour income, was $7.9 million and $6.9 million for the six months ended June 30,2007 and 2006, respectively.  Of the $1.0 million increase in net interestincome, approximately $1.7 million related to the impact of higher averageearning assets and interest-bearing liabilities in the six months ended June30, 2007 compared to the same period in 2006.  Average earning assets were $115.9million higher during the six months ended June 30, 2007 compared to the sameperiod in 2006, and average interest-bearing liabilities increased by $113.0million during the same period, while lower spreads on the average balancesreduced net interest income by $577,000. 

 

Interest income for the six months ended June30, 2007 was $18.7 million, consisting of $16.2 million on loans, $2.1 millionon investments, and $363,848 on federal funds sold.  Interest income for thesix months ended June 30, 2006 was $14.1 million, consisting of $12.9 millionon loans, $1.1 million on investments, and $91,796 on federal funds sold. Interest on loans for the six months ended June 30, 2007 and 2006 represented 86.7%and 91.6%, respectively, of total interest income, while income frominvestments and federal funds sold represented only 13.3% and 8.4% of totalinterest income.  The high percentage of interest income from loans relates toour strategy to maintain a significant portion of our assets in higher earningloans compared to lower yielding investments.  Average loans represented 82.1%and 88.3% of average interest-earning assets for the six months ended June 30,2007 and 2006, respectively.  Included in interest income on loans for the sixmonths ended June 30, 2007 and 2006, was $345,910 and $277,436, respectively,related to the net amortization of loan fees and capitalized loan originationcosts.

 

Interest expense for the six months ended June30, 2007 was $10.8 million, consisting of $7.5 million related to deposits and$3.3 million related to borrowings.  Interest expense for the six months endedJune 30, 2006 was $7.2 million, consisting of $4.6 million related to depositsand $2.6 million related to borrowings.  Interest expense on deposits for thesix months ended June 30, 2007 and 2006 represented 69.8% and 64.3%,respectively, of total interest expense, while interest expense on borrowingsrepresented 30.2% and 35.7%, respectively, of total interest expense for thesame periods.  During the six months ended June 30, 2007, averageinterest-bearing deposits increased by $90.7 million over the same period in2006, while FHLB and other borrowings during the six months ended June 30, 2007increased $22.2 million over the same period in 2006.  During the six monthsended June 30, 2007, we pledged additional collateral to the FHLB, allowing usto increase our FHLB borrowings.  Both the short-term borrowings from the FHLBand the sale of securities under agreements to repurchase provide us with theopportunity to obtain low cost funding with various maturities similar to thematurities on our loans and investments. 

* *

16
****
 

*Rate/VolumeAnalysis*

*** ***

Net interest income can be analyzed in terms ofthe impact of changing interest rates and changing volume.  The following tablesset forth the effect which the varying levels of interest-earning assets andinterest-bearing liabilities and the applicable rates have had on changes innet interest income for the periods presented.

**Three Months Ended**

**June 30, 2007 vs. 2006**

** **

**June 30, 2006 vs. 2005**

**Increase (Decrease) Due  to**

**Increase (Decrease) Due  to**

**Volume**

** **

**Rate**

**Rate/  Volume**

**Total**

**Volume**

** **

**Rate**

**Rate/****Volume**

**Total**

**(Dollars in thousands)**

**Interest income**

** **

   Loans

$

1,336 

$

261 

$

60 

$

1,657 

$

1,024 

$

818 

$

184 

$

2,026 

   Investment securities

360 

45 

24 

429 

164 

45 

18 

227 

   Federal funds sold

137 

5 

17 

159 

- 

16 

- 

16 

       Total interest income

1,833 

311

101 

2,245 

1,188 

879 

202 

2,269 

**Interest  expense**

** **

   Deposits

816 

410 

137 

1,363 

421 

493 

148 

1,062 

   FHLB advances

407 

57 

24 

488 

135 

175 

39 

349 

   Other borrowings

(243)

102 

(53)

(194)

53 

135 

29 

217 

       Total interest expense

980 

569 

108 

1,657 

609 

803 

216 

1,628 

**Net  interest income**

**$**

853 

$

(258)

$

(7)

$

588 

$

579 

$

76 

$

(14) 

$

641 

* *

** Six Months Ended**

**June 30, 2007 vs. 2006**

** **

**June 30, 2006 vs. 2005**

**Increase (Decrease) Due  to**

**Increase (Decrease) Due  to**

**Volume**

** **

**Rate**

**Rate/  Volume**

**Total**

**Volume**

** **

**Rate**

**Rate/****Volume**

**Total**

**(Dollars in thousands)**

**Interest income**

** **

   Loans

$

2,489 

$

653 

$

134 

$

3,276 

$

1,949 

$

1,678 

$

374 

$

4,001 

   Investment securities

879 

84 

68 

1,031

153 

85 

16 

254 

   Federal funds sold

253 

5 

14 

272 

21 

23 

15 

59 

       Total interest income

3,621 

742 

216 

4,579 

2,123 

1,786 

405 

4,314 

**Interest  expense**

** **

   Deposits

1,641 

919 

330 

2,890 

758 

974 

288 

2,020 

   FHLB advances

786 

161 

74 

1,021 

155 

361 

49 

565 

   Other borrowings

(456)

239 

(126)

(343)

86 

271 

51 

408 

       Total interest expense

1,971 

1,319 

278 

3,568 

999 

1,606 

388 

2,993 

**Net  interest income**

**$**

1,650 

$

(577)

$

(62)

$

1,011 

$

1,124 

$

180 

$

17 

$

1,321 

* *

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

* *

*Three and six monthsended June 30, 2007 and 2006*

* *

For the three monthsended June 30, 2007 and 2006, we incurred a noncash expense related to theprovision for loan losses of $380,000 and $400,000, respectively, bringing the allowancefor loan losses to $5.3 million and $4.2 million, respectively.  The allowancerepresented 1.15% of gross loans at June 30, 2007 and 1.12% of gross loans atJune 30, 2006.  During the three months ended June 30, 2007, we charged-off $469,100of loans and recorded $30,563 of recoveries on loans previously charged-off. During the three months ended June 30, 2006, we charged off $730,936 of loansand recorded $49,339 of recoveries on loans previously charged-off.  The $438,537and $681,597 net charge-offs during the second quarters of 2007 and 2006,respectively, represented 0.39% and 0.73% of the average outstanding loanportfolio for the three months ended June 30, 2007 and 2006, respectively.

 

17
**** 
For the six months endedJune 30, 2007, we incurred a noncash expense related to the provision for loanlosses of $840,000, bringing the allowance for loan losses to $5.3 million, or1.15% of gross loans, as of June 30, 2007.  The $840,000 provision for the sixmonths ended June 30, 2007 related primarily to the level of charge-offs thatoccurred during this period.   During the six month period ended June 30, 2007,we charged-off $526,205 in loans and recorded $30,563 of recoveries on loanspreviously charged-off.  In contrast, for the six months ended June 30, 2006, weadded $800,000 to the provision for loan losses, resulting in an allowance of $4.2million at June 30, 2006.  We charged-off $1.1 million of loans and recorded$82,955 of recoveries on loans previously charged-off during the six monthsended June 30, 2006.

 

At June 30, 2007, theallowance for loan losses represented 1.2 times the amount of non-performingloans.  As a result of this level of coverage on non-performing loans and ourinternal loan calculation, we determined that the provisions of $380,000 and$840,000 for the three and six months ended June 30, 2007 were adequate.

 

*Noninterest Income*

 

*           *The following table setsforth information related to our noninterest income. 

**Three months  ended**

** **

**Six months  ended**

**June 30,**

** **

**June 30,**

**2007**

** **

**2006**

** **

**2007**

** **

**2006**

** **

** **

** **

** **

** **

** **

Loan fee income

$

37,846 

$

28,661 

**$**

75,225 

$

59,462 

Service fees on deposit accounts

106,511 

66,188 

** **

181,989 

128,259 

Income from bank owned life insurance

86,383 

- 

** **

182,383 

- 

Real estate owned activity

(149,338)

(14,489)

** **

179,255 

(14,489)

Other income

66,741 

53,638 

** **

122,691 

116,341 

 Total noninterest income

$

148,143 

$

133,998 

**$**

741,543 

$

289,573 

** **

** **

** **

** **

** **

*Three months ended June 30, 2007 and 2006*

** **

Noninterestincome in the three month period ended June 30, 2007 was $148,143, an increaseof 10.6% over noninterest income of $133,998 in the same period of 2006. 

 

Loanfee income consists primarily of late charge fees, fees from issuance ofletters of credit and mortgage origination fees we receive on residential loansfunded and closed by a third party.  Loan fees were $37,846 and $28,661 for thethree months ended June 30, 2007 and 2006, respectively.  The $9,185 increasefor the three months ended June 30, 2007 compared to the same period in 2006related primarily to a $7,260 increase in mortgage origination fees and a $2,835increase in late charge fees which were offset by a $910 decrease in feesreceived from the issuance of letters of credit.  Mortgage origination feeswere $7,261 and $0 for the three months ended June 30, 2007 and 2006,respectively, while late charge fees were $23,433 and $20,598 for the secondquarter of 2007 and 2006, respectively.  Income related to amortization of feeson letters of credit was $7,152 and $8,062 for the three months ended June 30,2007 and 2006, respectively.  

 

Servicefees on deposit accounts consist primarily of service charges on our checking,money market, and savings accounts and the fee income received from client non-sufficientfunds ("NSF") transactions.   Deposit fees were $106,511 and $66,188 for thethree months ended June 30, 2007 and 2006, respectively.  The $40,323 increaseis primarily related to a $42,734 increase in NSF fees and a $3,604 increase inoverdraft fees, partially offset by a $5,968 decrease in other deposit relatedfees.  NSF fee income was $76,900 and $34,166 for the three months ended June30, 2007 and 2006, respectively, representing 72.2% of total service fees ondeposits in the 2007 period compared to 51.6% of total service fees on depositsin the 2006 period.  The significant increase in NSF feeincome is due primarily to an increased effort to collect rather than waive NSFfees from our clients.  Overdraft fees were $5,504 and $1,900 for the threemonths ended June 30, 2007 and 2006, respectively, while other deposit relatedfees were $20,412 and $26,380 for the three month periods ended June 30, 2007and 2006, respectively.  

 

We purchased $8.0 million of bankowned life insurance in the third quarter of 2006.  Income derived from this lifeinsurance was $86,383 for the three months ended June 30, 2007.  

 

18
****
 

                Other real estate owned activity includesincome and expenses from property held for sale and other real estate we own. In February 2007, we decided to actively market the sale of our former mainoffice and corporate headquarters building, and accordingly, reclassified thebuilding from property and equipment to property held for sale.  As a result, werecorded a pre-tax gain of $375,000 during the first quarter of 2007. Inaddition, we leased a portion of the building and began to collect monthly rentof $18,517 in March 2007.  The building was sold during April 2007 and werecorded a subsequent write-down of $55,709 during the three months ended June30, 2007 to account for additional selling costs. The gain on the sale of thebuilding is included in other real estate owned activity.  Also included inreal estate owned activity are income and expenses related to loans that weretransferred into other real estate owned.  Our cost of owning the real estateexceeded income derived from the property by $93,629 for the three months endedJune 30, 2007.  Expenses on real estate owned exceeded income derived from realestate owned by $14,489 for the same period in 2006.

 

Otherincome consisted primarily of fees received on debit card transactions, sale ofcustomer checks, and wire transfers.  Other income was $66,741 and $53,683 forthe three months ended June 30, 2007 and 2006, respectively.  The $13,058 increaserelates primarily to a $5,172 increase in debit card transaction fees and a $3,164increase in wire transfer fees.  Debit card transaction fees were $43,679 and $38,507for the three months ended June 30, 2007 and 2006, respectively, and represented65.4% and 71.8% of total other income for the second quarters of 2007 and 2006,respectively.  The corresponding transaction costs associated with debit cardtransactions are included in noninterest data processing and related costs. The debit card transaction costs were $19,125 and $15,614 for the three monthsended June 30, 2007 and 2006, respectively.  The net impact of the feesreceived and the related cost of the debit card transactions on earnings forthe three months ended June 30, 2007 and 2006 was $24,554 and $22,893,respectively.  Wire transfer fees were $9,588 and $6,424 for the secondquarters ended June 30, 2007 and 2006, respectively.

 

*Six months ended June 30, 2007 and 2006*

 

Noninterestincome in the six month period ended June 30, 2007 was $741,543, an increase of156.1% over noninterest income of $289,573 in the same period of 2006.  The $451,970increase in noninterest income is related to increases of $15,763 in loan feeincome, $53,730 in service fees on deposit accounts, $182,383 in income from bankowned life insurance, $193,744 in real estate owned activity, and $6,350 inother income.

* *

Loanfee income consists primarily of late charge fees, fees from issuance ofletters of credit and mortgage origination fees we receive on residential loansfunded and closed by a third party.  Loan fees were $75,225 and $59,462 for thesix months ended June 30, 2007 and 2006, respectively.  The $15,763 increasefor the six months ended June 30, 2007 compared to the same period in 2006related primarily to increases of $12,975 in mortgage origination fees and $5,964in late charge fees, which were partially offset by a $3,176 decrease in feesreceived from the issuance of letters of credit.  Mortgage origination feeswere $15,860 and $2,885 for the six months ended June 30, 2007 and 2006,respectively, while income related to amortization of fees on letters of creditwas $13,477 and $16,653 for the first six months of 2007 and 2006,respectively.  Late charge fees were $45,887 and $39,923 for the six monthsended June 30, 2007 and 2006, respectively.  

 

Servicefees on deposits were $181,989 and $128,259 for the six months ended June 30,2007 and 2006, respectively.  While the number of client accounts continues togrow, the $53,730 increase is primarily related to the amount of NSF feescollected in the first six months of 2007 compared to the same period in 2006. NSF income increased $52,383 to $123,474 for the six months ended June 30, 2007from $71,091 for the same period in 2006, representing 67.8% of total servicefees on deposits in the 2007 period compared to 55.4% of total service fees ondeposits in the 2006 period.  The increase in NSF fee income is due primarilyto an increased effort to collect rather than waive NSF fees from our clients.  Inaddition, overdraft fees increased $10,102 during the six months ended June 30,2007 to $12,002 from $1,900 for the same period in 2006.  Partially offsettingthe increase in NSF fees collected and overdraft fees was a $9,252 decrease inservice charges on deposit accounts which were $38,864 for the six months endedJune 30, 2007 compared to $48,116 for the same period in 2006  

 

We purchased $8.0 million of bankowned life insurance in the third quarter of 2006.  Income derived from this lifeinsurance was $182,383 for the six months ended June 30, 2007.  

 

19
****
               Other real estate owned activity includesincome and expenses from property held for sale and other real estate we own. In February 2007, we decided to actively market the sale of our former mainoffice and corporate headquarters building, and accordingly, reclassified thebuilding from property and equipment to property held for sale.  As a result, werecorded a pre-tax gain of $375,000 which is included in other real estateowned activity.  In addition, we leased a portion of the building and began tocollect monthly rent of $18,517 in March 2007.  The building was sold duringApril 2007, and we recorded a subsequent write-down of $55,709 during the threemonths ended June 30, 2007 to account for additional selling costs.  Alsoincluded in real estate owned activity are income and expenses related to loansthat were transferred into other real estate owned.  Our cost of owning thereal estate exceeded income derived from the property by $177,070 for the sixmonths ended June 30, 2007.  Expenses on real estate owned exceeded incomederived from real estate owned by $14,489 for the same period in 2006.

 

Otherincome consisted primarily of fees received on debit card transactions, sale ofcustomer checks, and wire transfers.  Other income was $122,691 and $116,341for the six months ended June 30, 2007 and 2006, respectively.  The $6,350increase relates primarily to a $12,343 increase in debit card transaction feesand a $5,452 increase in wire transfer fees, partially offset by a $17,889 decreasein gain on the sale of fixed assets.  Debit card transaction fees were $82,457and $70,114 for the six months ended June 30, 2007 and 2006, respectively andrepresented 67.2% and 60.3% of total other income for the first six months of2007 and 2006, respectively.  The corresponding transaction costs associatedwith debit card transactions are included in noninterest data processing andrelated costs.  The debit card transaction costs were $34,981 and $38,812 forthe six months ended June 30, 2007 and 2006, respectively.  The net impact ofthe fees received and the related cost of the debit card transactions onearnings for the six months ended June 30, 2007 and 2006 was $47,476 and $31,302,respectively.  Wire transfer fees were $17,001 and $11,549 for the six monthsended June 30, 2007 and 2006, respectively.

 

*Noninterest expenses*

 

*                 *Thefollowing table sets forth information related to our noninterest expenses.  

*            *

**Three months  ended**

**Six months  ended**

**June 30,**

**June 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Compensation and benefits

$

1,509,784

1,057,121

$

2,932,316 

$

2,090,862

Professional fees

160,518

91,427

285,038 

181,864

Marketing

142,776

86,057

248,374 

207,127

Insurance       	

160,434

44,674

211,770 

87,708

Occupancy

348,029

158,829

743,976 

333,606

Data processing and related costs

296,350

198,719

554,696 

396,589

Telephone     	

33,089

23,396

67,856 

39,278

Other   

168,264

109,175

282,751 

221,908

 Total noninterest expense

$

2,819,244

1,769,398

$

5,326,777 

$

3,558,942

*Threemonths ended June 30, 2007 and 2006*

Weincurred noninterest expenses of $2.8 million for the three months ended June30, 2007 compared to $1.8 million for the three months ended June 30, 2006. Average interest-earning assets increased 26.6% during this period, whilegeneral and administrative expense increased 59.3% due to the additional costsassociated with our new main office and headquarters building, market expansioninto Columbia, SC, and additional deposit insurance costs.

Forthe three months ended June 30, 2007, compensation and benefits, occupancy, anddata processing and related costs represented 76.4% of the total noninterestexpense compared to 80.0% for the same period in 2006.  

*Sixmonths ended June 30, 2007 and 2006*

Weincurred noninterest expenses of $5.3 million for the six months ended June 30,2007 compared to $3.6 million for the six months ended June 30, 2006.  Averageinterest-earning assets increased 28.2% during this period, while general andadministrative expense increased 49.7%.

Forthe six months ended June 30, 2007 compensation and benefits, occupancy, anddata processing and related costs represented 79.4% of the total noninterestexpense compared to 79.3% for the same period in 2006.  

20
****
The following table sets forthinformation related to our compensation and benefits.  

**Three months  ended**

**Six months  ended**

**June 30,**

**June 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Base compensation

$

1,029,980 

$

752,415 

$

1,968,682 

1,478,247 

Incentive compensation

269,000 

181,000 

483,000 

323,000 

 Total compensation

1,298,980 

933,415 

2,451,682 

1,801,247 

Benefits          	

251,920 

157,856 

558,604 

364,085 

Capitalized loan origination costs

(41,116)

(34,150)

(77,970)

(74,470)

 Total compensation and benefits

$

1,509,784 

$

1,057,121 

$

2,932,316 

2,090,862 

 

*Threemonths ended June 30, 2007 and 2006*

 

Compensationand benefits expense was $1.5 million and $1.1 million for the three monthsended June 30, 2007 and 2006, respectively.   Compensation and benefitsrepresented 53.6% and 59.7% of our total noninterest expense for the threemonths ended June 30, 2007 and 2006, respectively.  The $452,663 increase incompensation and benefits in the second quarter of 2007 compared to the sameperiod in 2006 resulted from increases of $277,565 in base compensation,  $88,000in additional incentive compensation, and $94,064 higher benefits expense.  Theseamounts were partly offset by an increase of $6,966 in loan originationcompensation expense, which is required to be capitalized and amortized overthe life of the loan as a reduction of loan interest income.  

 

The $277,565increase in base compensation expense related to the cost of fifteen additionalemployees as well as annual salary increases.  Six of the new employees relateto the management and staff that we hired to support our expansion into theColumbia, SC market.  The remaining nine employees were hired primarily to supportthe growth in both loans and deposit operations.   Incentive compensationrepresented 17.8% and 17.1 % of total compensation and benefits for the threemonths ended June 30, 2007 and 2006, respectively.  The incentive compensationexpense recorded for the second quarters of 2007 and 2006 represented anaccrual of the estimated incentive compensation earned during the secondquarter of the respective year.  Benefits expense increased $94,064 in the secondquarter of 2007 compared to the same period in 2006.  Benefits expenserepresented 19.4% and 16.9% of the total compensation for the three monthsended June 30, 2007 and 2006, respectively.

* *

*Sixmonths ended June 30, 2007 and 2006*

 

Compensationand benefits expense was $2,932,316 and $2,090,862 for the six months endedJune 30, 2007 and 2006, respectively.   Compensation and benefits represented 55.0%and 58.7% of our total noninterest expense for the six months ended June 30,2007 and 2006, respectively.  The $841,454 increase in compensation andbenefits in the first six months of 2007 compared to the same period in 2006resulted from increases of $490,435 in base compensation,  $160,000 inadditional incentive compensation, and $194,519 higher benefits expense.  Theseamounts were partly offset by an increase of $3,500 in loan originationcompensation expense, which is required to be capitalized and amortized overthe life of the loan as a reduction of loan interest income.  

 

The $490,435increase in base compensation expense related to the cost of fifteen additionalemployees as well as annual salary increases. Six of the new employees relateto the management and staff that we hired to support our expansion into theColumbia, SC market.  The remaining nine employees were hired to support thegrowth in both loans and deposits.  Incentive compensation represented 16.5%and 15.4 % of total compensation and benefits for the six months ended June 30,2007 and 2006, respectively.  The incentive compensation expense recorded forthe first six months of 2007 and 2006 represented an accrual of the estimatedincentive compensation earned during the first six months of the respectiveyear.  Benefits expense increased $194,519 in the first six months of 2007compared to the same period in 2006.  Benefits expense represented 22.8% and 20.2%of the total compensation for the six months ended June 30, 2007 and 2006,respectively.

 

21
**** 
Thefollowing tables set forth information related to our data processing andrelated costs.

 

**Three months  ended**

**Six months  ended**

**June 30,**

**June 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Data processing costs

$

212,670 

$

132,198 

$

395,944 

$

259,284 

Debit card transaction expense

19,125 

15,614 

34,981 

38,812 

Courier expense

29,357 

21,956 

53,752 

45,166 

Other expenses

35,198 

28,951 

70,019 

53,327 

Total data  processing and related costs 

$

296,350 

$

198,719 

$

554,696 

$

396,589 

* *

Dataprocessing and related costs were $296,350 and $198,719, an increase of $97,631for the three months ended June 30, 2007 and 2006, respectively.   During the firstsix months of 2007 and the same period of 2006, our data processing and relatedcosts were $554,696 and $396,589, respectively, an increase of $158,107.

 

Duringthe three months ended June 30, 2007, our data processing costs for our coreprocessing system were $212,670 compared to $132,198 for the three months endedJune 30, 2006.   We have contracted with an outside computer****servicecompany to provide our core data processing services.  During the six monthsended June 30, 2007 and 2006, data processing costs were $395,944 and $259,284,respectively.

 

Dataprocessing costs increased $80,472, or 60.9%, for the three months ended June30, 2007 compared to the same period in 2006.  For the six months ended June30, 2007, data processing costs increased $136,660, or 52.7%, compared to thesame period in 2006.  The increases in costs were caused by the higher numberof loan and deposit accounts as well as the new Columbia office.  A significantportion of the fee charged by the third party processor is directly related tothe number of loan and deposit accounts and the related number oftransactions.  

 

Wereceive income from debit card transactions performed by our clients.  Since weoutsource this service, we are charged related transaction expenses from our merchantservice provider.  Debit card transaction expense was $19,125 and $15,614 forthe three months ended June 30, 2007 and 2006, respectively.  During the firstsix months of 2007 and 2006, debit card transaction expense was $34,981 and$38,812, respectively.

 

Occupancyexpense represented 12.3% and 9.0% of total noninterest expense for the threemonths ended June 30, 2007 and 2006, respectively.  Occupancy expense for thethree months ended June 30, 2007 and 2006 was $348,029 and $158,829,respectively, an increase of $189,200.  The increase is primarily due to theincreased costs associated with our new main office and headquarters buildingsuch as depreciation and rent expense.  For the six months ended June 30, 2007,occupancy expense increased $410,370 to $743,976 from $333,606 for the sameperiod ended June 30, 2006.  Occupancy expense represented 14.0% and 9.4% oftotal noninterest expense for the first six months of 2007 and 2006,respectively.

 

Theremaining $310,352 increase in noninterest expense for the three month periodended June 30, 2007 compared to the same period in 2006 resulted primarily fromincreases of $69,091 in professional fees, $56,719 in marketing expenses, $115,760in insurance, and $59,089 in other noninterest expenses.  The increase in professionalfees relates primarily to SEC reporting requirements, the name change of ourcompany, as well as the overall growth of our company, while the increased marketingexpenses relates to expanding our market awareness in the Greenville market, aswell as the new Columbia market.  The $115,760 increase in insurance costs isdue primarily to additional FDIC deposit insurance imposed by the FederalDeposit Insurance Corporation in June 2007 which covered the first six monthsof 2007.  In addition, the increase in other noninterest expenses for the threemonth period ended June 30, 2007 relates primarily to increased costs of postageand office supplies, collection expenses, and deposit account losses. 

 

22
**** 
Forthe six month period ended June 30, 2007, remaining noninterest expensesincreased $357,904 from the same period in 2006.  Of this amount, professionalfees represented $103,174 of the increase, marketing expenses represented $41,247of the increase, $124,062 was related to insurance, $28,578 related totelephone expenses and other expenses represented $60,843 of the increase.  Theincrease in professional fees relates primarily to additional legal andaccounting fees related to SEC reporting requirements, the name change of ourcompany, as well as the overall growth of our company, while the additional marketingexpenses relates to expanding our market awareness in the Greenville market, aswell as the new Columbia market.  The $124,062 increase in insurance costs isprimarily due to the additional FDIC deposit insurance imposed by the FederalDeposit Insurance Corporation in June 2007 which covered the first six monthsof 2007.  In addition, a significant portion of the increase in other expenses isdue to increased costs of postage and office supplies, collection expenses anddeposit account losses.    

 

Incometax expense was $348,209 for the three monthsended June 30, 2007 compared to $557,531 during the same period in 2006.   Forthe six months ended June 30, 2007, income tax expense was $799,726 compared to$1.0 million for the same period in 2006.  Our effective tax rate was 31.7% and36.5%, respectively, for the three month periods ended June 30, 2007 and 2006,respectively, and 31.9% and 36.5% for the six month periods ended June 30, 2007and 2006, respectively.  The decrease in the effective tax rate for the 2007periods compared to 2006 results primarily from the tax exempt income on bankowned life insurance which we purchased in the third quarter of 2006.

 

**BalanceSheet Review***General*

 

*           *At June 30, 2007, we had total assets of$573.1 million, consisting principally of $456.3 million in loans, $79.7million in investments, $3.6 million in federal funds sold, and $13.8 millionin cash and due from banks.  Our liabilities at June 30, 2007 totaled $537.4million, which consisted principally of $384.3 million in deposits, $133.5million in FHLB advances, and $13.4 million in junior subordinated debentures. At June 30, 2007, our shareholders' equity was $35.7 million.

 

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

 

*FederalFunds Sold*

 

At June 30, 2007, our federal funds sold were $3.6million, or 0.6% of total assets.  At December 31, 2006, our $7.5 million infederal funds sold on an overnight basis comprised 1.5% of total assets. 

* *

*Investments*

 

Contractual maturities and yields on ourinvestments that are available for sale and are held to maturity at June 30,2007 are shown in the following table.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  We had no securitieswith maturities less than one year at June 30, 2007.

 

** **

** **

**One to Five Years**

** **

**Five to Ten Years**

** **

**Over Ten Years**

** **

**Total**

** **

** **

**Amount**

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

** **

 

** **

** **

**(Dollars in thousands)**

** **

** **

** **

** **

**Available for Sale**

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Government  sponsored enterprises

$

1,980 

5.06 %

$

- 

- 

$

- 

- 

$

1,980 

5.06 %

State and  political subdivisions

-

-

-

-

3,631 

3.79 %

3,631 

3.79 %

Mortgage-backed  securities

- 

- 

3,964 

5.33 %

45,730 

5.71 %

49,694 

5.68 %

Total

$

1,980 

5.06 %

$

3,964 

5.33 %

$

49,361 

5.56 %

$

55,305 

5.53 %

** **

** **

**Held to Maturity**

** **

Mortgage-backed  securities

$

- 

- 

$

384 

3.90 %

$

15,714 

4.62 %

$

16,098 

4.60 %

             AtJune 30, 2007, our investments included securities issued by Federal Home LoanMortgage Corporation and Federal National Mortgage Association with carryingvalues of $19.0 million, and $40.0 million, respectively.

23
**** 
The amortized costs and the fair value of ourinvestments at June 30, 2007 and December 31, 2006 are shown in the followingtable.

* *

** **

**June 30, 2007**

** **

**December 31, 2006**

** **

**Amortized**

** **

**Fair**

** **

**Amortized**

** **

**Fair**

** **

**Cost**

** **

**Value**

** **

**Cost**

** **

**Value**

** **

**(Dollars in thousands)**

**Available  for Sale**

 
Government sponsored enterprises

$

1,997 

$

1,980 

$

1,996 

$

1,989 

State and political subdivisions

3,794 

3,631 

3,795 

3,782 

Mortgage-backed  securities

50,573 

49,694 

44,478 

44,429 

 Total

$

56,364 

$

55,305 

$

50,269 

$

50,200 

** **

**Held  to Maturity**

Mortgage-backed  securities

$

16,098 

$

15,337 

$

17,045 

$

16,577 

               Otherinvestments totaled $8.3 million at June 30, 2007 and consisted of FederalReserve Bank stock with a cost of $968,700, investments in Greenville FirstStatutory Trust I and Trust II of $186,000 and $217,000, respectively, andFederal Home Loan Bank stock with a cost of $6.9 million.  

At June 30, 2007, we had$79.7 million in our investment securities portfolio which representedapproximately 13.9% of our total assets.  We held U.S. Government sponsoredenterprise securities, municipal securities, and mortgage-backed securitieswith a fair value of $70.6 million and an amortized cost of $72.4 million foran unrealized loss of $1.8 million.  We believe, based on industry analyst reportsand credit ratings that the deterioration in value is attributed to changes inmarket interest rates and not in the credit quality of the issuer andtherefore, these losses are not considered other-than-temporary.  We havethe ability and intent to hold these securities until such time as the valuerecovers or the securities mature.

At December31, 2006, we had $74.3 million in our investment securities portfolio, which representedapproximately 14.6% of our total assets.  We held U.S. Government sponsoredenterprise securities, municipal securities, and mortgage-backed securitieswith a fair value of $66.8 million and an amortized cost of $67.3 million foran unrealized loss of $537,138.  As a result of the strong growth in our loanportfolio and the historically low fixed rates that were available during thelast two and one-half years, through December 31, 2005, we had maintained alower than normal level of investments.  During 2006, as rates on investmentsecurities have risen and we have attracted a material amount of additionaldeposits, we increased the size of our investment portfolio.

Contractual maturities and yields on ouravailable for sale and held to maturity investments at December 31, 2006 are shown in the following table.  Expected maturities may differ from contractualmaturities because issuers may have the right to call or prepay obligationswith or without call or prepayment penalties.  At December 31, 2006, we had no securities with a maturity of less than one year.

** **

** **

**One to Five Years**

** **

**Five to Ten Years**

** **

**Over Ten Years**

** **

**Total**

** **

** **

**Amount**

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

**Amount**

** **

**Yield**

** **

** **

** **

** **

**(Dollars in thousands)**

** **

** **

** **

** **

**Available for Sale**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Government  sponsored enterprises

$

1,989 

5.06 %

$

- 

- 

$

- 

- 

$

1,989 

5.06 %

State and  political subdivisions

-

-

-

-

3,782 

3.81 %

3,782 

3.81 %

Mortgage-backed  securities

- 

- 

4,608 

5.33 %

39,821 

5.64 %

44,429 

5.61 %

Total

$

1,989 

5.06 %

$

4,608 

5.33 %

$

43,603 

5.48 %

$

50,200 

5.45 %

** **

** **

**Held to Maturity**

** **

Mortgage-backed  securities

$

- 

- 

$

441 

3.92 %

$

16,604 

4.63 %

$

17,045 

4.61 %

 

At December 31, 2006, our investments includedsecurities issued by Federal National Mortgage Association and Federal HomeLoan Mortgage Corporation with carrying values of $39.5 million and $12.4 million,respectively.

 

Other investments totaled $7.1 million at December 31, 2006.  Otherinvestments at December 31, 2006 consisted of Federal Reserve Bank stock with acost of $968,700, investments in Greenville First Statutory Trust I and II of$186,000 and $217,000, respectively, and Federal Home Loan Bank stock with acost of $5.7 million.  

* *

24
**** 
*Loans*

 

*              *Since loans typically provide higher interestyields than other types of interest earning assets, a substantial percentage ofour earning assets are invested in our loan portfolio.  For the six monthsended June 30, 2007 and 2006, average loans were $432.1 million and $362.3million, respectively.  Before the allowance for loan losses, total loansoutstanding at June 30, 2007 were $461.6 million.  Average loans for the yearended December 31, 2006 were $375.4 million.  Before the allowance for loanlosses, total loans outstanding at December 31, 2006 were $402.2 million.

 

The principal component of our loan portfolio isloans secured by real estate mortgages.    Most of our real estate loans aresecured by residential or commercial property.  We do not generally originatetraditional long term residential mortgages, but we do issue traditional secondmortgage residential real estate loans and home equity lines of credit.  Weobtain a security interest in real estate whenever possible, in addition to anyother available collateral.  This collateral is taken to increase thelikelihood of the ultimate repayment of the loan.  Generally, we limit theloan-to-value ratio on loans we make to 80%.  Due to the short time ourportfolio has existed, the current mix may not be indicative of the ongoingportfolio mix.  We attempt to maintain a relatively diversified loan portfolioto help reduce the risk inherent in concentration in certain types ofcollateral.

 

The following table summarizes the compositionof our loan portfolio at June 30, 2007 and December 31, 2006.

** **

** **

**June 30, 2007**

** **

**December 31, 2006**

** **

**Amount**

** **

**%  of Total**

** **

**Amount**

** **

**%  of Total**

Real  estate:

**(Dollars in thousands)**

 Commercial:

Owner occupied

$

100,485 

21.8 %

$

77,668 

19.3 %

Non-owner occupied

135,283 

29.3 %

126,008 

31.3 %

Construction

32,025 

6.9 %

20,466 

5.1 %

Total commercial real estate

267,793 

58.0 %

224,142 

55.7 %

Consumer:

Residential

55,414 

12.0 %

59,187 

14.7 %

Home equity

38,938 

8.5 %

35,986 

9.0 %

Construction

9,344 

2.0 %

8,259 

2.0 %

Total consumer real estate

103,696 

** **

22.5 %

103,432 

25.7 %

Total real estate

371,489 

** **

80.5 %

327,574 

81.4 %

Commercial  business

79,842 

17.3 %

65,891 

16.4 %

Consumer-other

11,149 

2.4 %

9,524 

2.4 %

Deferred  origination fees, net

(900)

(0.2)%

(806)

(0.2)%

       Total gross loans, net of

           deferred fees

461,580 

100.0 %

402,183 

100.0 %

Less-allowance  for loan losses

(5,294)

(4,949)

   Total loans, net

$

456,286 

$

397,234 

* *

*Maturities and Sensitivity of Loans toChanges in Interest Rates*

 

*                 *The information in the following tables is basedon the contractual maturities of individual loans, including loans which may besubject to renewal at their contractual maturity.  Renewal of such loans issubject to review and credit approval, as well as modification of terms uponmaturity.  Actual repayments of loans may differ from the maturities reflectedbelow because borrowers have the right to prepay obligations with or withoutprepayment penalties.

 

25
****
The following tablesummarizes the loan maturity distribution by type and related interest ratecharacteristics at June 30, 2007.

 

** **

** **

**After one but within  five years**

** **

** **

** **

** **

 
* *

**One year or less**

** **

**After five years**

** **

** **

 
** **

**Total**

 
**(Dollars in thousands)**

** **

 
 
Real  estate - mortgage

$

74,800 

$

215,795 

$

39,525 

$

330,120 

 
Real  estate - construction

21,002 

15,250 

5,117 

41,369 

 
   Total real estate

95,802 

231,045 

44,642 

371,489 

 
 
Commercial  business

47,087 

31,838 

917 

79,842 

 
Consumer-other

7,434 

3,225 

490 

11,149 

 
Deferred  origination fees, net

(295)

(506)

(99)

(900)

 Total gross loans,  net of   deferred fees 

$

150,028 

$

265,602 

$

45,950 

$

461,580 

 
Loans maturing after one year with:

 
Fixed interest rates

$

178,582 

 
Floating interest rates

$

132,970 

 
The following table summarizes the loan maturitydistribution by type and related interest rate characteristics at December 31,2006. 

**After one but within  five years**

** **

** **

** **

** **

* *

**One year or less**

**After five years**

** **

** **

** **

**Total**

**(Dollars in thousands)**

Real  estate - mortgage

$

59,676 

$

195,649 

$

43,524 

$

298,849 

Real  estate - construction

18,630 

9,685 

410 

28,725 

   Total real estate

78,306 

205,334 

43,934 

327,574 

Commercial  business

40,143 

24,891 

857 

65,891 

Consumer  - other

4,299 

4,818 

407 

9,524 

Deferred  origination fees, net

(267)

(454)

(85)

(806)

 Total gross loans,  net of   deferred fees

$

122,481 

$

234,589 

$

45,113 

$

402,183 

Loans maturing after  one year with:

Fixed interest rates

$

143,291 

Floating interest rates

$

136,411 

* *

* *

26
****
 

*Provision and Allowance for Loan Losses*
 
We have established an allowance for loan lossesthrough a provision for loan losses charged to expense on our statement ofincome.  The allowance for loan losses represents an amount which we believewill be adequate to absorb probable losses on existing loans that may becomeuncollectible.  Our judgment as to the adequacy of the allowance for loanlosses is based on a number of assumptions about future events, which webelieve to be reasonable, but which may or may not prove to be accurate.  Ourdetermination of the allowance for loan losses is based on evaluations of thecollectibility of loans, including consideration of factors such as the balanceof impaired loans, the quality, mix, and size of our overall loan portfolio,economic conditions that may affect the borrower's ability to repay, the amountand quality of collateral securing the loans, our historical loan lossexperience, and a review of specific problem loans.  We also considersubjective issues such as changes in the lending policies and procedures,changes in the local/national economy, changes in volume or type of credits,changes in volume/severity of problem loans, quality of loan review and boardof director oversight, concentrations of credit, and peer group comparisons. Due to our limited operating history, the provision for loan losses has beenmade primarily as a result of our assessment of general loan loss risk comparedto banks of similar size and maturity.  Due to the rapid growth of our bankover the past several years and our short operating history, a large portion ofthe loans in our loan portfolio and of our lending relationships are ofrelatively recent origin.  In general, loans do not begin to show signs ofcredit deterioration or default until they have been outstanding for someperiod of time, a process known as seasoning.  As a result, a portfolio ofolder loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level ofdelinquencies and defaults may not be representative of the level that willprevail when the portfolio becomes more seasoned, which may be higher thancurrent levels.  If delinquencies and defaults increase, we may be required toincrease our provision for loan losses, which would adversely affect our resultsof operations and financial condition.  Periodically, we adjust the amount ofthe allowance based on changing circumstances.  We charge recognized losses tothe allowance and add subsequent recoveries back to the allowance for loanlosses.  There can be no assurance that charge-offs of loans in future periodswill not exceed the allowance for loan losses as estimated at any point in timeor that provisions for loan losses will not be significant to a particularaccounting period.  

 

The following table summarizes the activityrelated to our allowance for loan losses for the six months ended June 30, 2007and 2006:

 

**June 30,**

**2007**

** **

**2006**

**(Dollars in thousands)**

Balance,  beginning of period

$

4,949 

$

4,490 

Loans  charged-off

(526)

(1,139)

Recoveries  of loans previously charged-off

31 

83 

Net  loans (charged-off) recovery

$

(495)

$

(1,056)

Provision  for loan losses

840 

800 

Balance,  end of period

$

5,294 

$

4,234 

** **

Allowance  for loan losses to gross loans

1.15%  

1.12%  

Net  charge-offs to average loans

0.23%

0.58%

 

  We do not allocate the allowance for loan lossesto specific categories of loans.  Instead, we evaluate the adequacy of theallowance for loan losses on an overall portfolio basis utilizing our creditgrading system which we apply to each loan.  We have retained an independentconsultant to review the loan files on a test basis to confirm the grading of ourloans.

* *

27
****
*NonperformingAssets*

 

*                   *The following tableshows the nonperforming assets, percentages of total assets, and the relatedpercentage of allowance for loan losses for the six months ended June 30, 2007and the year ended December 31, 2006.  All loans over 90 days past due are on andincluded in loans on nonaccrual.

 

**June 30, 2007**

** **

**December   31,  2006**

**(Dollars  in thousands)**

Loans  over 90 days past due

$

1,331 

$

945 

Loans  on nonaccrual:

Mortgage

4,388 

1,424 

Commercial

- 

32 

Consumer

44 

33 

Total nonaccrual loans

4,432 

1,489 

Troubled  debt restructuring

- 

- 

** **

Total of nonperforming loans

4,432 

1,489 

Other  nonperforming assets

524 

1,012 

Total nonperforming assets

$

4,956 

$

2,501 

 Percentage  of total assets

0.86%

0.49%

 Percentage  of nonperforming loans 

     and assets to  gross loans

1.07%

0.62%

** **

            

               Theallowance for loan losses was $5.3 million and $4.9 million at June 30, 2007and December 31, 2006, respectively or 1.15% and 1.23% of outstanding loans,respectively.  During the year ended December 31, 2006, we had net charged-offloans of $1.2 million.  During the six months ended June 30, 2007 and 2006, wehad net charge-offs of $495,642 and $1.1 million, respectively.  

 

At June30, 2007 and December 31, 2006, nonperforming assets represented 0.86% and 0.49%of total assets, respectively.  At June 30, 2007 and December 31, 2006, we had$4.4 million and $1.5 million of loans, respectively, on nonaccrual status.  Generally, a loan is placed on nonaccrual status when it becomes 90 days pastdue as to principal or interest, or when we believe, after considering economicand business conditions and collection efforts, that the borrower's financialcondition is such that collection of the loan is doubtful.  A payment of intereston a loan that is classified as nonaccrual is recognized as income whenreceived**.**

 

The increase in nonperforming loans at June 30,2007 compared to December 31, 2006 is represented primarily by one commercialreal estate loan with a carrying value of $2.9 million.  We incurred a secondquarter loss of $450 thousand on this loan which represented 85.6% of totalcharge-offs year-to-date. 

 

The amount of foregone interest income on thenonaccrual loans in the first six months of 2007 was approximately $79,000.  The amount of interest income recorded in the first six months of 2007 forloans that were on nonaccrual at June 30, 2007 was $145,274.

 

At June 30, 2007, impaired loans amounted toapproximately $ 508,000 for which a $223,000 reserve was allocated in theallowance.

 

28
**** 
*Depositsand Other Interest-Bearing Liabilities*

 

*               *Our primary source of funds for loans andinvestments is our deposits, advances from the FHLB, and short-term repurchaseagreements.  National and local market trends over the past several yearssuggest that consumers have moved an increasing percentage of discretionarysavings funds into investments such as annuities, stocks, and fixed incomemutual funds.  Accordingly, it has become more difficult to attract deposits. We have chosen to obtain a portion of our certificates of deposits from areasoutside of our market.  The deposits obtained outside of our market areagenerally have comparable rates compared to rates being offered forcertificates of deposits in our local market.  We also utilize out-of-marketdeposits in certain instances to obtain longer-term deposits than are readilyavailable in our local market.  The amount of out-of-market deposits was $91.3million, or 17.9% of total assets, at December 31, 2006 and $124.4 million, or21.7% of total assets, at June 30, 2007.  

 

We anticipate being able to either renew orreplace these out-of-market deposits when they mature, although we may not beable to replace them with deposits with the same terms or rates.  Ourloan-to-deposit ratio was 120% and 116% at June 30, 2007 and December 31, 2006,respectively.  

 

The following table shows the average balanceamounts and the average rates paid on deposits held by us for the six monthsended June 30, 2007 and 2006.  

** **

* *

** **

** **

**2007**

** **

**2006**

* *

** **

** **

**Amount**

** **

**Rate**

** **

**Amount**

** **

**Rate**

**(Dollars in thousands)**

 
Noninterest  bearing demand deposits

$

30,569 

- %

$

23,325 

- %

Interest  bearing demand deposits

34,327 

1.68 %

39,053 

1.84 %

Money  market accounts

84,014 

3.59 %

67,989 

3.36 %

Savings  accounts

1,509 

0.68 %

1,339 

0.42 %

Time  deposits less than $100,000

44,526 

5.03 %

31,389 

4.10 %

Time  deposits greater than $100,000

178,958 

5.21 %

112,822 

4.46 %

    Total deposits

$

373,903 

4.05 %

$

275,917 

3.38 %

 

The increase in time deposits of $100,000 ormore for the six months ended June 30, 2007 compared to the 2006 period resultedfrom a $21.6 million increase in retail time deposits and a $44.5 million increasein wholesale deposits.  A significant portion of the increase in retail timedeposits is attributed to the addition of our two new retail branch offices.

 

Core deposits, which exclude out-of-marketdeposits and time deposits of $100,000 or more, provide a relatively stablefunding source for our loan portfolio and other earning assets.  Our coredeposits were $204.3 million and $197.7 million at June 30, 2007 and December31, 2006, respectively.  

 

All of our time deposits are certificates ofdeposits.  The maturity distribution of our time deposits of $100,000 or moreat June 30, 2007 was as follows: 

 

** **

**June 30, 2007**

**(Dollars in thousands)**

Three months or less

$

49,113 

Over three through six months

41,096 

Over six  through twelve months

64,883 

Over twelve months

 

24,890 

   Total

$

179,982 

** **

**Capital Resources**

 

**               **Totalshareholders' equity at June 30, 2007 was $35.7 million.  At December 31, 2006, total shareholders' equity was $34.6 million.  The increase during thefirst six months of 2007 resulted primarily from the $1.7 million of net incomeearned, partially offset by the $698,479 net unrealized holding loss onsecurities.

29
**** 
Thefollowing table shows the return on average assets (net income divided byaverage total assets), return on average equity (annualized net income dividedby average equity), and equity to assets ratio (average equity divided byaverage total assets) for the six months ended June 30, 2007 and the year endedDecember 31, 2006.  Since our inception, we have not paid any cash dividends.

                                     

**June 30, 2007**

**December 31, 2006**

Return  on average assets

0.63 %

0.85 %

Return  on average equity

9.65 %

11.95 %

Equity  to assets ratio

6.50 %

7.15 %

            

Our return on average assetswas .63% for the six months ended June 30, 2007, a decrease from .85% for theyear ended December 31, 2006.  In addition, our return on average equity decreasedto 9.65% from 11.95% for the six months ended June 30, 2007 and the year endedDecember 31, 2006, respectively.  The decrease in the equity to assets ratio isa function of the $92.7 million increase in average assets compared to the $3.1million increase in average equity.

 

             Thefollowing table sets forth the holding company's and the bank's various capitalratios at June 30, 2007 and at December 31, 2006.  For all periods, the bankwas considered "well capitalized" and the holding company met or exceeded itsapplicable regulatory capital requirements.

 

**June  30, 2007**

**December   31, 2006**

**Holding**

** **

** **

**Holding**

** **

**Company**

**Bank**

** **

**Company**

**Bank**

Total risk-based capital

11.7 %

11.5 %

13.1 %

12.3 %

Tier 1 risk-based capital

10.6 %

10.4  %

11.9  %

11.1 %

Leverage  capital

8.7 %

8.5 %

9.4 %

8.7 %

** **

**Borrowings**

 

**             **The following tableoutlines our various sources of borrowed funds during the six months ended June30, 2007 and the year ended December 31, 2006, the amounts outstanding at theend of each period, at the maximum point for each component during the periodsand on average for each period, and the average interest rate that we paid foreach borrowing source.  The maximum month-end balance represents the highindebtedness for each component of borrowed funds at any time during each ofthe periods shown. 

 

30
****
*** ***

* *

** **

** **

**Maximum**

** **

** **

** **

**Ending**

**Period-**

**Month-end**

**Average for the Period**

** **

**Balance**

**End Rate**

**Balance**

**Balance**

**Rate**

** **

**(Dollars in thousands)**

**At  or for the six months ended June, 2007**

Federal  Home Loan Bank advances

 $

133,500 

4.48 %

 $

133,500 

 $

120,273 

4.58 %

Federal  funds purchased

- 

- %

4,492 

539 

5.72 %

Junior subordinated debentures

13,403 

7.57 %

13,403 

13,403 

7.59 %

** **

**At  or for the year ended December 31, 2006**

Federal  Home Loan Bank advances

 $

108,500 

4.52 %

 $

108,500 

 $

91,525 

4.35 %

Securities  sold under agreement to

   repurchase

- 

-  %

14,434 

8,362 

4.92 %

Federal  funds purchased

- 

-  %

3,345 

572 

5.47 %

Junior  subordinated debentures

13,403 

7.57 %

13,403 

13,403 

7.30 %

** **

* *

**Effect of Inflation andChanging Prices**

 

             The effect of relativepurchasing power over time due to inflation has not been taken into account inour consolidated financial statements.  Rather, our financial statements havebeen prepared on an historical cost basis in accordance with generally acceptedaccounting principles.

 

Unlike most industrial companies, our assets andliabilities are primarily monetary in nature.  Therefore, the effect of changesin interest rates will have a more significant impact on our performance thanwill 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, weseek to manage the relationships between interest sensitive assets andliabilities in order to protect against wide rate fluctuations, including thoseresulting from inflation.

 

**Off-BalanceSheet Risk**

 

              Commitments to extend credit areagreements to lend to a client as long as the client has not violated anymaterial condition established in the contract.  Commitments generally havefixed expiration dates or other termination clauses and may require the paymentof a fee.  At June 30, 2007, unfunded commitments to extend credit were $60.1million, of which $19.9 million was at fixed rates and $40.2 million was atvariable rates.  At December 31, 2006, unfunded commitments to extend creditwere $79.2 million, of which approximately $40.6 million was at fixed rates and$38.6 million was at variable rates.  A significant portion of the unfundedcommitments related to consumer equity lines of credit.  Based on historicalexperience, we anticipate that a significant portion of these lines of creditwill not be funded.  We evaluate each client's credit worthiness on acase-by-case basis.  The amount of collateral obtained, if deemed necessary byus upon extension of credit, is based on our credit evaluation of theborrower.  The type of collateral varies but may include accounts receivable,inventory, property, plant and equipment, and commercial and residential realestate.

 

At June 30, 2007, there was a $2.1 millioncommitment under letters of credit.  At December 31, 2006, there was a $2.4 million commitment under a letter of credit.  The credit risk andcollateral involved in issuing letters of credit is essentially the same asthat involved in extending loan facilities to customers.  Since most of theletters of credit are expected to expire without being drawn upon, they do notnecessarily represent future cash requirements.

 

Except as disclosed in this document, we are notinvolved in off-balance sheet contractual relationships, unconsolidated relatedentities that have off-balance sheet arrangements or transactions that couldresult in liquidity needs or other commitments that significantly impactearnings.

 

**MarketRisk**

 

**            **Market risk is the riskof loss from adverse changes in market prices and rates, which principallyarises from interest rate risk inherent in our lending, investing, depositgathering, and borrowing activities.  Other types of market risks, such asforeign currency exchange rate risk and commodity price risk, do not generallyarise in the normal course of our business.  Our asset/liability managementcommittee ("ALCO") monitors and considers methods of managing exposure tointerest 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 ratesensitivity of our interest sensitive assets and liabilities withinboard-approved limits.

 

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

 

31
**** 
We were liability sensitive during the latterhalf of the year ended December 31, 2006 and during the six months ended June30, 2007.  Our variable rate loans and a majority of our deposits repriceover a 12-month period.  Approximately 43% and 49% of our loans were variablerate loans at June 30, 2007 and December 31, 2006, respectively.  The ratio ofcumulative gap to total earning assets after 12 months was (30.3%) because $161.8million more liabilities will reprice in a 12 month period than assets. However, our gap analysis is not a precise indicator of our interestsensitivity position.  The analysis presents only a static view of the timing ofmaturities and repricing opportunities, without taking into consideration thatchanges in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may changecontractually within a relatively short time frame, but those rates are viewedby us as significantly less interest-sensitive than market-based rates such asthose paid on noncore deposits.  Net interest income may be affected by othersignificant factors in a given interest rate environment, including changes inthe volume and mix of interest-earning assets and interest-bearing liabilities.

 

**Liquidity and InterestRate Sensitivity**

 

             Liquidity represents theability of a company to convert assets into cash or cash equivalents withoutsignificant loss, and the ability to raise additional funds by increasingliabilities.  Liquidity management involves monitoring our sources and uses offunds in order to meet our day-to-day cash flow requirements while maximizingprofits.  Liquidity management is made more complicated because differentbalance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairlypredictable and subject to a high degree of control at the time investmentdecisions are made.  However, net deposit inflows and outflows are far lesspredictable and are not subject to the same degree of control.

 

             AtJune 30, 2007, our liquid assets, consisting of cash and due from banks and federalfunds sold, amounted to $17.4 million, or 3.0% of total assets.  Our investmentsecurities at June 30, 2007 amounted to $79.7 million, or 13.9% of totalassets.  Investment securities traditionally provide a secondary source ofliquidity since they can be converted into cash in a timely manner.  However, $47.6million of these securities are pledged against outstanding debt.  Therefore,the related debt would need to be repaid prior to the securities being sold inorder for these securities to be converted to cash.  At December 31, 2006, our liquid assets amounted to $16.6 million, or 3.3% of total assets.  Ourinvestment securities at December 31, 2006 amounted to $74.3 million, or 14.6%of total assets.  However, substantially all of these securities were pledgedagainst outstanding debt.  

 

Our ability to maintain and expand our depositbase and borrowing capabilities serves as our primary source of liquidity.  Weplan to meet our future cash needs through the liquidation of temporaryinvestments, the generation of deposits, and from additional borrowings.  Inaddition, we will receive cash upon the maturity and sale of loans and thematurity of investment securities.  We maintain three federal funds purchased linesof credit with correspondent banks totaling $30.6 million for which there wereno borrowings against the lines at June 30, 2007.  We are also a member of theFederal Home Loan Bank of Atlanta (FHLB), from which applications forborrowings can be made for leverage purposes.  The FHLB requires thatsecurities, qualifying mortgage loans, and stock of the FHLB owned by the bankbe pledged to secure any advances from the FHLB.  The unused borrowing capacitycurrently available from the FHLB at June 30, 2007 was $17.5 million, based onthe bank's $6.9 million investment in FHLB stock, as well as qualifyingmortgages available to secure any future borrowings.

 

                We have aten-year, five-month lease on our new headquarters and main office.  The leaseprovides for a substantial reduction in the rent rate for the first five monthsof the lease.  Beginning in 2007, the monthly rent expense is approximately $42,000. The lease provides for annual lease rate escalations based on cost of livingadjustments.  

 

We believe that our existing stable base of coredeposits, borrowings from the FHLB, and short-term repurchase agreements willenable us to successfully meet our long-term liquidity needs.

** **

Asset/liability management is the process bywhich we monitor and control the mix and maturities of our assets andliabilities. The essential purposes of asset/liability management are to ensureadequate liquidity and to maintain an appropriate balance between interestsensitive assets and liabilities in order to minimize potentially adverseimpacts on earnings from changes in market interest rates.  We have both aninternal ALCO consisting of senior management that meets at various timesduring each month and a board ALCO that meets monthly.  The ALCOs areresponsible for maintaining the level of interest rate sensitivity of ourinterest sensitive assets and liabilities within board-approved limits.

 

32
**** 
The following table sets forth informationregarding our rate sensitivity as of June 30, 2007 for each of the timeintervals indicated. The information in the table may not be indicative of ourrate sensitivity position at other points in time.  In addition, the maturitydistribution indicated in the table may differ from the contractual maturitiesof the earning assets and interest-bearing liabilities presented due toconsideration of prepayment speeds under various interest rate change scenariosin the application of the interest rate sensitivity methods described above.

** **

**Within**

** **

**After three  but**

** **

**After one  but**

** **

**After**

** **

** **

**three**

** **

**within  twelve**

** **

**within five**

** **

**five**

** **

** **

**months**

** **

**months**

** **

**years**

** **

**years**

** **

**Total**

** **

**(Dollars in  thousands**)

Interest-earning assets:

Federal funds sold

$

3,598 

$

- 

$

- 

$

- 

$

3,598 

Investment securities

3,174 

8,318 

29,978 

29,933 

71,403 

Loans

208,261 

45,467 

165,828 

38,479 

458,035 

 

Total earning assets

$

215,033 

$

53,785 

$

195,806 

$

68,412 

$

533,036 

Interest-bearing liabilities:

Money market and NOW

$

121,586 

$

- 

$

- 

$

- 

$

121,586 

Regular savings

1,525 

- 

- 

- 

1,525 

Time deposits

70,135 

134,936 

23,713 

171 

228,955 

FHLB advances

52,500 

36,500 

44,500 

- 

133,500 

Junior  subordinated debentures

13,403 

- 

- 

- 

13,403 

Total interest-bearing liabilities

$

259,149 

$

171,436 

$

68,213 

$

171 

$

498,969 

Period gap

$

(44,116)

$

(117,651)

$

127,593 

$

68,241 

Cumulative gap

(44,116)

(161,767)

(34,174)

34,067 

Ratio of  cumulative gap to total earning assets

(8.3%)

(30.3%)

(6.4 %)

6.4 %

** **

The following table setsforth information regarding our rate sensitivity, as of December 31, 2006, ateach of the time intervals. 

** **

**Within**

** **

**After three  but**

** **

**After one  but**

** **

**After**

** **

** **

**three**

** **

**within  twelve**

** **

**within five**

** **

**five**

** **

** **

**months**

** **

**months**

** **

**years**

** **

**years**

** **

**Total**

** **

**(Dollars in  thousands)**

 Interest-earning assets:

Federal funds sold

$

7,467 

$

- 

$

- 

$

- 

$

7,467 

Investment securities

3,159 

8,588 

29,940 

25,557 

67,244 

Loans

205,316 

25,828 

134,035 

36,321 

401,500 

Total earning assets

$

215,942  

$

34,416 

$

163,975 

$

61,878 

$

476,211 

Interest-bearing liabilities:

Money market and NOW

$

117,538 

$

- 

$

- 

$

- 

$

117,538 

Regular savings

1,544 

- 

- 

- 

1,544 

Time deposits

45,443 

114,940 

34,995 

165 

195,543 

FHLB advances

57,500 

19,000 

32,000 

- 

108,500 

Junior  subordinated debentures

13,403 

- 

- 

- 

13,403 

Total interest-bearing liabilities

$

235,428 

$

133,940 

$

66,995 

$

165 

$

436,528 

Period gap

$

(19,486)

$

(99,524)

$

96,980 

$

61,713 

Cumulative gap

(19,486)

(119,010)

(22,030)

39,683 

Ratio of  cumulative gap to total earning assets

(4.1 %)

(25.0 %)

(4.6 %)

8.3 %

** **

33
**** 
**Accounting,Reporting, and Regulatory Matters**

 

*RecentlyIssued Accounting Standards*

 

*             *The following is a summary of recentauthoritative pronouncements that affect accounting, reporting, and disclosureof financial information by us:

 

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

 

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

 

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

 

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

 

                Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies that do not require adoption until a future date arenot expected to have a material impact on the consolidated financial statementsupon adoption.

         

34
****
**Item3. Quantitative and Qualitative Disclosures about Market Risk.**

There have been no material changes in ourquantitative and qualitative disclosures about market risk as of June 30, 2007from that presented in our annual report on Form 10-K for the year endedDecember 31, 2006.  See "Market Risk" and "Liquidity and Interest RateSensitivity" in Item 2, Management Discussion and Analysis of FinancialCondition and Results of Operations for quantitative and qualitativedisclosures about market risk, which information is incorporated herein byreference.

 

**Item4.  Controls and Procedures.**

As of the end of the period covered by thisreport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e).  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our current disclosure controls and procedures are effective asof June 30, 2007.  There have been no significant changes in our internalcontrols over financial reporting during the fiscal quarter ended June 30, 2007that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood offuture events.  There can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless ofhow remote.

** **

**PARTII.  OTHER INFORMATION**

** **

**Item 1.             Legal Proceedings.**

There are no material pending legal proceedings towhich we are a party or of which any of its property is the subject.

 

**Item 1A.          Risk Factors.**

There were no materialchanges from the risk factors presented in our annual report on Form 10-K forthe year ended December 31, 2006.

** **

**Item 2.             Unregistered Sales of Equity Securities and Use ofProceeds.**

Not applicable

 

**Item 3.             Defaults Upon Senior Securities.**

                         Notapplicable

 

**Item 4.             Submission of Matters to a Vote of SecurityHolders.**

At our company's annualmeeting of shareholders held on May 15, 2007, our shareholders elected fourmembers of the board of directors as Class II directors for a three-year termand approved our name change to Southern First Bancshares, Inc.  The followingparagraphs describe the matters voted upon at the annual meeting and sets forththe number of votes cast for, against or withheld, and the number ofabstentions as to each matter (except as provided below, there were no brokernon-votes).

 

          Ourboard of directors is divided into three classes with each class being nearlyequal in number as possible.  The three classes of directors have staggeredterms, so that the terms of only approximately one-third of the board memberswill expire at each annual meeting of shareholders.  The current Class Idirectors are Mark A. Cothran, Rudolph G. Johnstone, III, M.D., and R. ArthurSeaver, Jr.  The current Class II directors are Leighton M. Cubbage, David G.Ellison, James B. Orders, and Willam B. Sturgis.  The current Class IIIdirectors are Andrew B. Cajka, Anne S. Ellefson, Fred Gilmer, Jr. and TecumsehHooper, Jr.

 

          Theprevious terms of the Class II directors expired at the 2007 annual shareholdermeeting.  Each of the four then current Class II directors was nominated forelection and stood for election at the 2007 annual shareholder meeting for a three-yearterm. The number of votes in favor of the Class II directors were as follows: For Mr. Cubbage - 2,559,026; for Mr. Ellison - 2,501,305; for Mr. Orders -2,560,016; and for Mr. Sturgis - 2,558,916.  The number of votes against the ClassII directors were as follows:  Mr. Cubbage - 0; Mr. Ellison - 0; Mr. Orders -0; and Mr. Sturgis - 0.   No shareholders voted to abstain. 

 

35
**** 
          Sincea plurality of the votes were attained for the directors that stood forre-election, the approval of the Class II directors to serve a three-year term,expiring at the 2010 annual meeting of shareholders, was recorded in our minutebook.

 

          OnMarch 20, 2007, our board of directors approved, subject to shareholderapproval, changing the company's name from Greenville First Bancshares, Inc. toSouthen First Bancshares, Inc.  The proposed new name would reflect ourexpansion into a more geographically diverse market, including Columbia, SouthCarolina, and potentially other Southern cities.  The number of votes for the approvalof the company's name change was 2,440,466.  The number of votes against theapproval of the company's name change was 26,885, while 95,014 votes wereabstained.  Because we received the affirmative vote of over two-thirds of theoutstanding shares of our common stock, the approval of the company's namechange to Southern First Bancshares, Inc. was recorded in our minute book.

 

          Therewere no other matters voted on by the company's shareholders at our 2007 annualshareholder meeting .

 

**Item 5.             Other Information.**

                         Notapplicable

 

**Item 6.             Exhibits.**

31.1                   Rule 13a-14(a)Certification of the Principal Executive Officer.

 

31.2                  Rule 13a-14(a) Certification of the PrincipalFinancial Officer.  

 

32                     Section1350 Certifications.  

 

36
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**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

SOUTHERN  FIRST BANCSHARES, INC.

Registrant
         
Date: August 9, 2007

/s/R.  Arthur Seaver, Jr.         	

R. Arthur Seaver, Jr.

Chief Executive Officer
         
Date: August 9, 2007

/s/James M. Austin,  III                      	

James M. Austin, III

Chief Financial Officer

37
****
**INDEXTO EXHIBITS**

ExhibitNumber                        Description31.1         Rule13a-14(a) Certification of the Principal Executive Officer.

 

31.2         Rule 13a-14(a) Certification of the Principal FinancialOfficer.  

 

32            Section1350 Certifications. 

 

38 |