|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **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 September 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 October 17, 2007.                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

----

** **

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

**             Item 1.  FinancialStatements**

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

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

***CONSOLIDATEDBALANCE SHEETS***

**                                                                                        **

| ** **                    |                                                                                                      |                                                                                          | ** **                                  | **September  30,**       | ** **        | **December  31,** |
|-------------------------------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|---------------------------------------------|--------------------------|-------------------|-------------------|
| ** **                    |                                                                                                      |                                                                                          | ** **                                  | **2007**                 | ** **        | **2006**          |
| ** **                    |                                                                                                      |                                                                                          | ** **                                  | (Unaudited)              |                   | (Audited)         |
| **Assets**                    |                                                                                                      |                                                                                          |                                             |
| ** **                    | Cash and due from banks                                                                              |  $                                                                                  | 9,153,673                              |                          |  $           | 9,112,675    |
|                               | Federal funds sold                                                                                   | 18,313,901                                                                          |                                             | 7,466,458           |
|                               | Investment securities available for sale                                                             | 65,223,677                                                                          |                                             | 50,199,513          |
|                               | Investment securities held to maturity-                                                              |                                                                                          |                                             |                          |
|                               |  (fair value $14,685,693 and $16,576,673)                                                       | 15,199,166                                                                          |                                             | 17,044,531          |
|                               | Other investments, at cost                                                                           | 8,292,500                                                                           |                                             | 7,060,100           |
|                               | Loans, net of allowance for loan losses                                                              | 478,250,361                                                                         |                                             | 397,233,829         |
|                               | Property and equipment, net                                                                          | 5,109,183                                                                           |                                             | 6,450,854           |
|                               | Accrued interest receivable                                                                          | 3,036,557                                                                           |                                             | 2,381,336           |
|                               | Other real estate owned                                                                              | 363,733                                                                             |                                             | 1,012,030           |
|                               | Bank owned life insurance                                                                            | 8,811,402                                                                           |                                             | 8,142,947           |
|                               | Deferred income taxes                                                                                | 1,960,719                                                                           |                                             | 1,907,966           |
|                               | Other assets                                                                                         | 555,746                                                                             |                                             | 1,331,712           |
|                               |                                                                                                      |                                                                                          |                                             |                          |                   |                   |
|                               |           Total assets                                       |  $                                                                                  | 614,270,618                            |                          |  $           | 509,343,951  |
|                               |                                                                                                      |                                                                                          |                                             |                          | ** **        | ** **        |
| **Liabilities**               | ** **                                                                                           | ** **                                                                               |                                             |
| ** **                    | Deposits                                                                                             |  $                                                                                  | 415,063,727                            |      |  $           | 345,504,076  |
|                               | Official checks outstanding                                                                          | 1,257,952                                                                           |                                             | 4,131,107           |
|                               | Repurchase agreements                                                                                | 10,000,000                                                                          |                                             | -                   |
|                               | Federal Home Loan Bank advances                                                                      | 133,500,000                                                                         |                                   | 108,500,000         |
|                               | Junior subordinated debentures                                                                       | 13,403,000                                                                          |                                             | 13,403,000          |
|                               | Accrued interest payable                                                                             | 2,597,877                                                                           |                                             | 2,278,154           |
|                               | Accounts payable and accrued expenses                                                                | 1,356,552                                                                           |                                             | 944,168             |
|                               |                                                                                                      |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                      |                                                                                          | Total liabilities                           | 577,179,108         |                   | 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 September 30, 2007 and December 31, 2006, respectively | 29,465                                                                              |                                             | 29,339              |
|                               | Non-vested restricted stock                                                                          | (43,936)                                                                                 |                                             | -                   |
|                               | Additional paid-in capital                                                                           | 30,971,882                                                                          |                                             | 30,846,538          |
|                               | Accumulated other comprehensive income (loss)                                                        | (255,687)                                                                                |                                             | (16,465)                 |
|                               | Retained earnings                                                                               | 6,389,786                                                                           |                                             | 3,724,034           |
|                               |                                                                                                      |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                      |                                                                                          | Total shareholders' equity                  | 37,091,510          |                   | 34,583,446   |
|                               |                                                                                                      |                                                                                          |                                             |                          |                   |                   |
|                               |                                                                                                      |                                                                                          | Total liabilities and  shareholders' equity |  $                  | 614,270,618  |                   |  $ | 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** |
|------------------------------------------------------------------|------------------------------------------------------------------|------------------|----------------------------------|-----------------|---------------------------------|
| ** **                                                       |                                                                  |                  |                                  |                 | **September 30,**               |
| ** **                                                       |                                                                  | ** **       |                                  |                 | **2007**                        | ** ** | **2006** |
| ** **                                                       |                                                                  |                  |                                  |                 | (Unaudited)                     |
| **Interest income**                                              | ** **                                                       |                  |                                  |
|                                                                  | Loans                                                            |  $          | 9,095,562                   |                 |  $                         | 7,266,867  |
|                                                                  | Investment securities                                            | 1,107,560   |                                  | 766,990    |
|                                                                  | Federal funds sold                                               | 77,278      |                                  | 100,211    |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
|                                                                  |         Total interest income | 10,280,400  |                                  | 8,134,068  |
| **Interest expense**                                             | ** **                                                       |                  |                                  |
| **  **Deposits                                         | 4,015,307                                                   |                  | 3,068,681                   |
| **  **Borrowings                                       | 1,842,256                                                   |                  | 1,371,967                   |
| Total interest expense                                           | 5,857,563                                                   |                  | 4,440,648                   |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
|    Net interest income                                 | 4,422,837                                                   |                  | 3,693,420                   |
|    Provision for loan losses                           | 450,000                                                     |                  | 400,000                     |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  | ** ** |
|    Net interest income after provision for loan losses | 3,972,837                                                   |                  | 3,293,420                   |
|                                                                  | *** ***                                                     |                  |                                  |                 |                                 |  |  |
| **Noninterest income**                                           | ** **                                                       |                  |                                  |
| ** **                                                       | Loan fee income                                                  | 45,364      |                                  | 29,683     |
|                                                                  | Service fees on deposit accounts                                 | 111,345     |                                  | 66,772     |
|                                                                  | Income from bank owned life insurance                            | 96,000      |                                  | 55,000     |
|                                                                  | Real estate owned activity                                       | (70,129)         |                                  | (88,903)        |
|                                                                  | Other income                                                     | 64,865      |                                  | 50,375     |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
|                               | Total noninterest income                                         | 247,445     |                                  | 112,927    |
|                                                                  |
| **Noninterest expenses**                                         | ** **                                                       |                  |                                  |
|                                                                  | Compensation and benefits                                        | 1,547,014   |                                  | 1,085,922  |
|                                                                  | Professional fees                                                | 130,621     |                                  | 126,386    |
|                                                                  | Marketing                                                        | 139,018     |                                  | 108,067    |
|                                                                  | Insurance                                                        | 116,349     |                                  | 48,068     |
|                                                                  | Occupancy                                                        | 336,572     |                                  | 161,981    |
|                                                                  | Data processing and related costs                                | 310,319     |                                  | 225,558    |
|                                                                  | Telephone                                                        | 28,977      |                                  | 20,540     |
|                                                                  | Other                                                            | 176,466     |                                  | 77,654     |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
|                                                                  |                                                                  |                  | Total noninterest expenses       | 2,785,336  |                                 | 1,854,176  |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
|                                                                  |                                                                  |                  | Income before income tax expense | 1,434,946  |                                 | 1,552,171  |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
| **Income tax expense**                                           | 478,384                                                     |                  | 532,494                     |
|                                                                  | ** **                                                       |                  |                                  |                 |                                 |  |  |
| **Net income**                                                   |  $                                                          | 956,562     |                                  |  $         | 1,019,677                       |
|                                                                  |                                                                  |                  |                                  |                 | ** **                      | ** ** | ** ** |
| **Earnings per common share**                                    | ** **                                                       | ** **       | ** **                       |
| ** **                                                       | Basic                                                            |  $          | .32                         |                 |  $                         | .35  |
|                                                                  | Diluted                                                          |  $          | .30                         |                 |  $                         | .32  |
|                                                                  |                                                                  |                  |                                  |                 |                                 |  |  |
| **Weighted average common shares outstanding**                   | ** **                                                       | ** **       | ** **                       |
|    Basic                                               | 2,946,456                                                   |                  | 2,933,721                   |
|    Diluted                                             | 3,235,959                                                   |                  | 3,231,605                   |

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

| 3 |
|---|

----

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

|                                                                  |                                                                  |                  |                                  |                  | **For the nine  months ended** |
|------------------------------------------------------------------|------------------------------------------------------------------|------------------|----------------------------------|------------------|--------------------------------|
| ** **                                                       |                                                                  |                  |                                  |                  | **September 30,**              |
| ** **                                                       |                                                                  | ** **       |                                  |                  | **2007**                       | ** ** | **2006** |
| ** **                                                       |                                                                  |                  |                                  |                  | (Unaudited)                    |
| **Interest income**                                              | ** **                                                       |                  |                                  |
|                                                                  | Loans                                                            |  $          | 25,315,003                  |                  |  $                        | 20,210,226  |
|                                                                  | Investment securities                                            | 3,227,767   |                                  | 1,855,836   |
|                                                                  | Federal funds sold                                               | 441,126     |                                  | 192,007     |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
|                                                                  |         Total interest income | 28,983,896  |                                  | 22,258,069  |
| **Interest expense**                                             | ** **                                                       |                  |                                  |
| **  **Deposits                                         | 11,532,891                                                  |                  | 7,696,917                   |
| **  **Borrowings                                       | 5,094,018                                                   |                  | 3,945,043                   |
| Total interest expense                                           | 16,626,909                                                  |                  | 11,641,960                  |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
|    Net interest income                                 | 12,356,987                                                  |                  | 10,616,109                  |
|    Provision for loan losses                           | 1,290,000                                                   |                  | 1,200,000                   |
|                                                                  |                                                                  |                  |                                  |                  |                                |  | ** ** |
|    Net interest income after provision for loan losses | 11,066,987                                                  |                  | 9,416,109                   |
|                                                                  | *** ***                                                     |                  |                                  |                  |                                |  |  |
| **Noninterest income**                                           | ** **                                                       |                  |                                  |
| ** **                                                       | Loan fee income                                                  | 120,589     |                                  | 89,145      |
|                                                                  | Service fees on deposit accounts                                 | 293,334     |                                  | 195,031     |
|                                                                  | Income from bank owned life insurance                            | 278,383     |                                  | 55,000      |
|                                                                  | Real estate owned activity                                       | 109,126     |                                  | (103,392)        |
|                                                                  | Other income                                                     | 187,556     |                                  | 166,716     |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
|                               | Total noninterest income                                         | 988,988     |                                  | 402,500     |
|                                                                  |
| **Noninterest expenses**                                         | ** **                                                       |                  |                                  |
|                                                                  | Compensation and benefits                                        | 4,479,330   |                                  | 3,176,784   |
|                                                                  | Professional fees                                                | 415,659     |                                  | 308,250     |
|                                                                  | Marketing                                                        | 387,392     |                                  | 350,192     |
|                                                                  | Insurance                                                        | 328,119     |                                  | 135,776     |
|                                                                  | Occupancy                                                        | 1,080,548   |                                  | 495,587     |
|                                                                  | Data processing and related costs                                | 865,015     |                                  | 622,147     |
|                                                                  | Telephone                                                        | 96,833      |                                  | 59,818      |
|                                                                  | Other                                                            | 459,217     |                                  | 264,564     |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
|                                                                  |                                                                  |                  | Total noninterest expenses       | 8,112,113   |                                | 5,413,118  |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
|                                                                  |                                                                  |                  | Income before income tax expense | 3,943,862   |                                | 4,405,491  |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
| **Income tax expense**                                           | 1,278,110                                                   |                  | 1,573,955                   |
|                                                                  | ** **                                                       |                  |                                  |                  |                                |  |  |
| **Net income**                                                   |  $                                                          | 2,665,752   |                                  |  $          | 2,831,536                 |
|                                                                  |                                                                  |                  |                                  |                  | ** **                     | ** ** | ** ** |
| **Earnings per common share**                                    | ** **                                                       | ** **       | ** **                       |
| ** **                                                       | Basic                                                            |  $          | .91                         |                  |  $                        | .97  |
|                                                                  | Diluted                                                          |  $          | .82                         |                  |  $                        | .87  |
|                                                                  |                                                                  |                  |                                  |                  |                                |  |  |
| **Weighted average common shares outstanding**                   | ** **                                                       | ** **       | ** **                       |
|    Basic                                               | 2,941,007                                                   |                  | 2,930,898                   |
|    Diluted                                             | 3,241,437                                                   |                  | 3,237,901                   |

 

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 NINE MONTHS ENDED SEPTEMBER  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                           | -                              |               | -         |                  | -        |               | -            |                 | -           |                      |   2,831,536       |               | 2,831,536  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Comprehensive income, net of tax -   |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
|                                      | Unrealized holding loss on          |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |  |
|                                      |  securities available for sale | -        |                | -           |               | -        |                   | -          |                  | (19,936)             |                             | -        |                 | (19,936) |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Comprehensive income                 | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | -                      |               | 2,811,600  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Proceeds from exercise of stock      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
|                                      | options and warrants                | 7,500    |                | 75          |               | -        |                   | 49,645     |                  | -          |                             | -   |                 | 49,720  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Stock dividend (10%), net of cash in |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
|                                      | lieu of fractional shares           | 266,649  |                | 2,667       |               | -   |                   | 5,143,659  |                  | -          |                             | (5,146,772)   |                 | (446) |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| **September 30, 2006**               | **2,933,868 **                 | ** **    | ** $**    | **29,339 ** | ** **    | ** $**   | **- **       | ** **      | ** $**      | **30,820,044 ** | ** **                  | ** $**   | **(170,538)**   | ** ** | ** $** | **2,654,776 ** | ** ** | ** $** | **33,333,621 ** |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| **December 31, 2006**                | 2,933,868                      |               |  $        | 29,339      |               |  $       | -            |                 |  $          | 30,846,538      |                             |  $       | (16,465)        |  |  $ | 3,724,034  |  |  $ | 34,583,446  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Net  income                     | -                              |               | -         |                  | -        |               | -            |                 | -           |                      |    2,665,752 |               | 2,665,752       |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Comprehensive income, net of tax -   |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
|                                      | Unrealized holding loss on          |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |  |
|                                      |  securities available for sale | -        |                | -           |               | -             |                   | -               |                  | (239,222)            |                             | -        |                 | (239,222) |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Comprehensive income                 | -                              |               | -         |                  | -        |               | -            |                 | -           |                      | -                      |               | 2,426,530       |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| 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    | -        |                | -           |               | 10,139   |                   | -          |                  | -               |                             | -        |                 | 10,139  |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| Compensation expense related to      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| ** **                           | stock options                       | -        |                | -           |               | -        |                   | 8,508      |                  | -               |                             | -        |                 | 8,508  |
| ** **                           |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |
| **September 30, 2007**               | **2,946,456 **                 | ** **    | ** $**    | **29,465 ** | ** **    | ** $**   | **(43,936)**      | ** **      | ** $**      | **30,971,882**       | ** **                  | ** $**   | **(255,687)**   | ** ** | ** $** | **6,389,786  ** | ** ** | ** $** | **37,091,510** |
|                                      |                                     |               |                |                  |               |               |                   |                 |                  |                      |                             |               |                 |  |  |  |  |  |  |  |  |  |

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

 

 5 |
|-------------------------------------------------------------------------------------------------------------------------------|

----

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

|                                                                |                                              | *** ***                                                         |                    | **                                                                                                                      For the nine months ended September 30,** |
|----------------------------------------------------------------|----------------------------------------------|----------------------------------------------------------------------|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                |                                              | ** **                                                           |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **2007** | ** ** | **2006** |
| ** **                                                     |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (Unaudited) |
| **Operating activities**                                       | ** **                                   |                                                                      |                    |
|                                                                | Net income                                   |  $                                                              | 2,665,752     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  $ | 2,831,536  |
|                                                                | Adjustments to reconcile net income to cash  |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                |                                              | provided by (used for) operating activities:                         |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |
|                                                                |                                              | Provision for loan losses                                            | 1,290,000     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 1,200,000  |
|                                                                |                                              | Depreciation and other amortization                                  | 361,334       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 259,626  |
|                                                                |                                              | Accretion and amortization of securities discounts and premium,  net | 62,944        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 80,005  |
|                                                                |                                              | (Gain) loss on sale of real estate                                   | 181,118       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (1,065) |
|                                                                |                                              | Gain on sale of property held for sale                               | (319,291)          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | -  |
|                                                                |                                              | Compensation expense related to stock options                        | 18,647        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | -  |
|                                                                |                                              | Increase in cash surrender value of bank owned life insurance        | (278,383)          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | -  |
|                                                                |                                              | (Increase) decrease in deferred tax asset                            | 26,149        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (402,413) |
|                                                                |                                              | (Increase) decrease  in other assets, net                       | 120,746       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (630,448) |
|                                                                |                                              | Decrease in other liabilities, net                                   | (2,141,048)        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (9,165,535) |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| ** **                                                     |                                              |                                                                      |                    | Net cash provided by (used for) operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 1,987,968  |         | (5,828,294) |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **Investing activities**                                       | ** **                                   |                                                                      |                    |
|                                                                | Increase (decrease) in cash realized from:   |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                | ** **                                   | Origination of loans, net                                            | (82,306,533)       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (55,017,192) |
|                                                                | ** **                                   | Purchase of property and equipment                                   | (1,055,036)        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (1,023,655) |
|                                                                |                                              | Purchase of investment securities:                                   |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |
|                                                                |                                              |                                                                      | Available for sale | (21,082,579)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | (41,828,730) |
|                                                                |                                              |                                                  | Other investments  | (2,042,400)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | (5,567,200) |
|                                                                |                                              | Payments and maturity of investment securities:                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |
|                                                                |                                              |                                                                      | Available for sale | 5,706,491                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 3,624,315  |
|                                                                |                                              |                                                                      | Held to maturity   | 1,816,220                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 1,791,564  |
|                                                                |                                              |                                                                      | Other investments  | 810,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 4,162,500  |
|                                                                |                                              | Purchase of bank owned life insurance                                | (390,072)          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (8,055,000) |
|                                                                |                                              | Proceeds from sale of property held for sale                         | 2,354,664     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | -  |
|                                                                |                                              | Proceeds from sale of real estate acquired in settlement of  loans   | 467,180       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 1,340,269  |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
|                                                                |                                              |                                                                      |                    | Net cash used for investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (95,722,066) |  | (100,573,129) |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **Financing activities**                                       | ** **                                   |                                                                      |                    |
|                                                                | Increase in deposits, net                    | 69,559,651                                                      |                    | 85,811,563                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                | Increase (decrease) in short-term borrowings | 10,000,000                                                      |                    | (14,680,000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **                                                     | Proceeds from the exercise of stock options  | 62,887                                                          |                    | 49,720                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                | Increase in Federal Home Loan Bank advances  | 25,000,000                                                      |                    | 25,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                | Cash in lieu of fractional shares            | -                                                               |                    | (446)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                | ** **                                   |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
|                                                                |                                              |                                                                      |                    | Net cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 104,622,538  |  | 96,180,837  |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
|                                                                | ** **                                   |                                                                      |                    | Net increase (decrease) in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 10,888,441  |  | (10,220,586) |
|                                                                | ** **                                   |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **Cash and cash equivalents at beginning of  the period** | 16,579,133                              |                                                                      | 25,604,152    |
| ** **                                                     |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **Cash and cash equivalents at end of the period**             |  $                                      | 27,467,574                                                      |                    |  $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 15,383,566  |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **Supplemental information**                                   | ** **                                   |                                                                      |                    |
|                                                                | **Cash paid for**                            | ** **                                                           |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                |                                              | Interest                                                             |  $            | 16,307,186                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  $ | 10,978,656  |
|                                                                |                                              | Income taxes                                                         |  $            | 1,252,011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  $ | 1,976,369  |
|                                                                | ** **                                   |                                                                      |                    |
| **   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            | $                  | (239,222)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  $ | (19,936) |
|                                                                |                                              |                                                                      |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |  |  |  |  |  |

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

| 6 |
|---|

----

***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 will however, continue to operate under the trade name,Greenville First Bank, in Greenville County.   The bank is a national bankorganized under the laws of the United States located in Greenville and Richland Counties, South Carolina. The bank is primarily engaged in the business ofaccepting demand deposits and savings deposits insured by the Federal DepositInsurance Corporation, and providing commercial, consumer and mortgage loans tothe general public.  The bank owns all of the capital stock of JB Properties. This subsidiary is used for the purpose of owning real estate acquired in loanforeclosures.   The Trusts are special purpose subsidiaries for the solepurpose of issuing trust preferred securities.

**Basisof Presentation**             The accompanying financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q.  Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included.  Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2007.  For further information, refer to theconsolidated financial statements and footnotes thereto included in thecompany's Form 10-K for the year ended December 31, 2006 (Registration Number 000-27719) as filed with the Securities and Exchange Commission.  The consolidatedfinancial statements include the accounts of Southern First Bancshares, Inc.,and its wholly owned subsidiary Southern First Bank, N.A.  In accordance with FinancialAccounting Standards Board ("FASB") Interpretation No. 46, the financial statementsrelated to the special purpose subsidiaries, Greenville First Statutory Trust Iand 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**

           

            In February 2007, we decided toactively market the sale of our former main office and corporate headquartersbuilding.  Accordingly, we reclassified the building from property andequipment to property held for sale, in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 144 "Accounting for the Impairment andDisposal of Long-Lived Assets," and ceased depreciation of the building.  On April 13, 2007, we completed the sale of the former main office building.  Based on thesales contract, adjusted for commissions and other selling costs, we recorded a$319,291 gain on the sale of the building during the nine months ended September 30, 2007.  The $319,291 gain was partially offset by other unrelated real estateoperating expenses of $140,036.  The net gain on real estate operationsrecorded in the nine months ended September 30, 2007 was $210,165. 

 
| 7 |
|---|

----

**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 of credit bears interest at a rate of three-month libor plus 2.00%, which at September30, 2007 was 7.23%.  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 September 30, 2007, the company believes it is in compliance with all covenants.

**Note4 - Earnings per Share******             The following schedulereconciles the numerators and denominators of the basic and diluted earningsper share computations for the three and nine months ended September 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 September 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 September 30,** |
|----------------------------------------|---------------------------------------|
| ** **                             | **2007**                              | ** ** | **2006** |
|                                        |                                       |  |  |  |  |  |
| Basic  Earnings Per Share              |                                       |  |  |  |  |  |
|    Average common shares          | 2,946,456                        |  | 2,933,721  |
|    Net income                     |  $                               |    956,562  |  |  $ | 1,019,677  |
|    Earnings per share             |  $                               | 0.32  |  |  $ | 0.35  |
|                                        |                                       |  |  |  |  |  |
| Diluted  Earnings Per Share            |                                       |  |  |
|    Average common shares          | 2,946,456                        |  | 2,933,721  |
|    Average dilutive common shares | 289,503                          |  | 297,884  |
|    Adjusted average common shares | 3,235,959                        |  | 3,231,605  |
|    Net income                     |  $                               | 956,562  |  |  $ | 1,019,677  |
|    Earnings per share             |  $                               | 0.30  |  |  $ | 0.32  |

** **

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

   Average common shares

2,941,007 

2,930,898 

   Net income

 $

2,665,752 

 $

2,831,536 

   Earnings per share

 $

0.91 

 $

0.97 

Diluted  Earnings Per Share

   Average common shares

2,941,007 

2,930,898 

   Average dilutive common shares

300,430 

307,003 

   Adjusted average common shares

3,241,437 

3,237,901 

   Net income

 $

2,665,752 

 $

2,831,536 

   Earnings per share

 $

0.82 

 $

0.87 

** 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 of compensationexpense by approximately $68,000 for the year ended December 31, 2006 and willresult in a reduction of compensation expense by approximately $52,000, $4,000,and $4,000 for the years ended December 31, 2007, 2008, and  2009, respectively.

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 onthe date of 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 is 10 years, and the assumed dividend rate was zero.  

8
 ****
**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 actual resultsto differ from those anticipated in any forward-looking statements include, butare 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 name to Southern First Bancshares, Inc. and the bank's name to Southern First Bank,N.A., although we will continue to operate as Greenville First Bank in Greenville County.  Our primary reason for the name change was related to our expansioninto the Columbia, SC market.  Since we opened our bank in January 2000, wehave experienced consistent growth in total assets, loans, deposits, andshareholders' equity, which has continued during the first nine 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 interestspread.  

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 income throughfees and other charges to our customers.  We have also included a discussion ofthe various components of this noninterest income, as well as of ournoninterest 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 more completediscussion of our processes and methodology for determining our allowance forloan losses.

** Effectof Economic Trends**

** **                Following an economic decline and historicallylow interest rates that ended in the first six months of 2004, the FederalReserve began increasing short-term rates as the economy showed signs ofstrengthening.  Between July 2004 and July 2006, the Federal Reserve increasedrates at 17 of their meetings for a total of 425 basis points. Between July2006 and September 18, 2007, the Federal Reserve allowed short-term rates toremain unchanged, leading many economists to believe that the Federal Reservewas nearing the end of this cycle of rate increases.   Consequently, beginningin July 2004 and continuing until September 18, 2007, our rates on both short-termor variable rate interest-earning assets and interest-bearing liabilities have increased. The momentum of the 17 rate increases resulted in higher rates on interest-earningassets and higher interest-bearing liabilities during the first nine months of2007; subsequently, as fixed rate loans, deposits, and borrowings have matured theyhave repriced at higher interest rates.  On September18, 2007, the Federal Reserve reversed their position and lowered theshort-term rates by 50 basis points, leading many economists to believe thatthe Federal Reserve may begin a cycle of  rate decreases. The results of theFederal Reserve's actions on September 18, 2007 resulted in a decline of rateson our variable rate loans, investments, deposits and borrowings.  Thefollowing discussion includes our analysis of the effect that we anticipatechanges in interest rates will have on our financial condition.  However, wecan give no assurances as to the future actions of the Federal Reserve or to theanticipated results that will actually occur.

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

*Three months ended September30,2007 and 2006*

                Our net income was $956,562and $1.0 million for the three months ended September 30, 2007 and 2006, respectively,a decrease of $63,115, or 6.2%.  The $63,115 decrease in net income resultedprimarily from an increase of $931,160 in noninterest expenses and anadditional $50,000 in the provision for loan losses, partially offset byincreases of $729,417 in net interest income and $134,518 in noninterest income.  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 59.6% and 48.7% forthe three months ended September 30, 2007 and 2006, respectively.  We believethat our 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, we can give no assurances thatwe will be able to achieve this goal.

*Nine months ended September30, 2007 and 2006*

                Our net income was $2.7million and $2.8 million for the nine months ended September 30, 2007 and 2006,respectively, a decrease of $165,784, or 5.9%.  The decrease in net incomeresulted primarily from increases of $2.7 million in noninterest expenses and $90,000in the provision for loan losses, partially offset by increases of $1.7 millionin net interest income and $586,488 in noninterest income.  Our efficiency ratio was60.8% and 49.1%for the ninemonths ended September 30, 2007 and 2006, respectively.  We believe that ourefficiency 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, we can give no assurances thatwe will be able to achieve this goal.

*             NetInterest 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 nine months ended September 30, 2007, our average loan portfolio increased$76.4 million compared to the average for the nine months ended September 30,2006.  The actual growth in the first nine months of 2007 was $81.0 million. We anticipate the growth in loans will continue to drive the growth in assetsand the growth in net interest income.  However, we can give no assurances thatwe will be able to continue to increase loans at the same levels we haveexperienced in the past.

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 September 30, 2007, net loans represented 77.9% oftotal assets.  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.  Consequently,  net loans as a percentage of total assets remainedat 77.9%.  Our investment portfolio increased by $14.9 million from September30, 2006 to September 30, 2007.  At September 30, 2007, investments andfederal funds sold represented 17.4% of total assets.  

The historically low interest rate environmentthat was experienced between January of 2000 and July of 2004, allowed us toobtain short-term borrowings and wholesale certificates of deposit at ratesthat were lower than certificate of deposit rates being offered in our localmarket.  Therefore, we decided not to begin our retail deposit office expansionprogram until the beginning of 2005.  This funding strategy allowed us tocontinue to operate in one location until 2005, maintain a smaller staff, andnot incur marketing costs to advertise deposit rates, which in turn allowed usto focus on the fast growing loan portfolio.  

11
****
We opened two retail deposit offices in 2005.  During the third quarter of 2007, we convertedour Columbia loan production office into a full service branch facility.  Ourfocus for these three locations is to obtain low cost transaction accounts. Our goal is to increase both the percentage of assets being funded by "inmarket" retail deposits and to increase the percentage of low-cost transactionaccounts to total deposits.  We anticipate opening two additional retaildeposit offices during the first six months of 2008, one in the Columbia marketand one in the Greenville market.  These offices will assist us in meeting thepreviously stated objectives.  We believe that this growth strategy will provideus with additional clients in our two market areas and will eventually providea lower alternative cost of funding.   At September 30, 2007, retail depositsrepresented $269.6 million, or 43.9% of total assets, borrowings represented $156.9million, or 25.5% of total assets, and wholesale out-of-market depositsrepresented $145.4 million, or 23.7% of total assets. 

Our net interest income margin for the ninemonths ended September 30, 2007 exceeded our net interest spread because we hadmore interest-earning assets than interest-bearing liabilities.  Averageinterest-earning assets exceeded average interest-bearing liabilities by $48.7million and $45.4 million for the nine months ended September 30, 2007 and2006, respectively.  

In addition to the growth in both assets andliabilities, and the ratio of interest-earning assets to interest-bearingliabilities, net interest income is also affected by the timing of the repricingof our assets and liabilities, and the changes in interest rates earned on ourassets and interest rates paid on our liabilities. Until September 18, 2007, ouryields on interest earning assets and the rates that we paid for our depositsand borrowings continued to increase primarily as a result of the actions takenby the Federal Reserve prior to July 30, 2006 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 September 30, 2007.  Given the fact that the Federal Reserve increased short-term rates by425 basis points between July 2004 and July 2006 and allowed rates to remainunchanged until September 18, 2007, we believed during most of 2006 and thefirst nine months of 2007 that short-term interest rates were at or near theirpeak.  Therefore, we chose to increase the amount of fixed rate loans in ourloan portfolio and targeted to have a significant portion of our liabilities toreprice within a twelve month period.  On September 18, 2007, the FederalReserve decided to decrease the short-term rates by 50 basis points.  While thebank had more assets that repriced down on September 18, 2007, the amount ofliabilities that will reprice over the next three months will "neutralize" theimmediate downward negative impact and then we believe we will begin to have apositive impact on our net interest income for the nine months thereafter.

As more fully discussed in the - "Market Risk"and - "Liquidity and Interest Rate Sensitivity" sections below, at September30, 2007, 60% of our loans had fixed rates.  During 2006 and the first ninemonths of 2007, we have placed more emphasis on fixed rate loans.  During thisperiod, our fixed rates loans as a percentage of total loans increased from 39%to 60%.  While our percentage of fixed rate loans has increased, our focusduring the past three years has been to obtain short-term liabilities to fundour asset growth.  This strategy has resulted in our ability to move from beingasset sensitive to being liability sensitive.  We are currently positioned tobenefit from lower market rates and to be negatively impacted by higher market rates.

At September 30, 2007, 89.0% of ourinterest-bearing liabilities were either variable rate or had a maturity ofless than one year.   Therefore, we believe that we are positioned to benefitfrom future decreases in short-term rates.  Conversely, future increases inshort-term rates would likely have a negative effect on our earnings.  AtSeptember 30, 2007, we had $200.1 million more liabilities than assets thatreprice 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 portionof any change in market rates.  This key assumption is utilized in our overallevaluation of our level of interest sensitivity.

We have included a number of tables to assist inour description of various measures of our financial performance.  For example,the "Average Balances" tables 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 month periods ended September 30, 2007and 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 continued 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 aboutour investment 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 nine month periods ended September 30, 2007 and 2006, we had no interest-bearing deposits in other banks or any securitiespurchased with agreements to resell.  All investments owned have an originalmaturity of over one year.  Nonaccrual loans are included in the followingtables.  Loan yields have been reduced to reflect the negative impact on ourearnings of loans on nonaccrual status.  The net of capitalized loan costs andfees are amortized into interest income on loans.

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

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

**2007**

**2006**

**Average**

**Income/**

**Yield/**

**Average**

**Income/**

**Yield/**

**Balance**

**Expense**

**Rate(1)**

**Balance**

**Expense**

**Rate(1)**

**(Dollars in thousands)**

Earnings

Federal  funds sold

$

5,876 

$

77 

5.20%

$

7,482 

$

100 

5.30%

Investment  securities, taxable

76,749 

1,072 

5.54%

59,694

767 

5.10%

Investment  securities, nontaxable (2)

3,629 

54 

5.90%

            -

            -

   -

Loans

473,027 

9,096 

7.63%

383,853 

7,267 

7.51%

   Total interest-earning assets

559,281 

10,299 

7.31%

451,029 

8,134 

7.15%

Non-interest-earning  assets

22,530 

19,176 

   Total assets

$

581,811 

$

470,205 

Interest-bearing  liabilities

NOW  accounts

$

34,108 

145 

1.69%

$

30,821 

145 

1.87%

Savings  & money market

89,159 

807 

3.59%

93,989 

828 

3.50%

Time  deposits

235,017 

3,063 

5.17%

169,864 

2,096 

4.90%

Total  interest-bearing deposits

358,284 

4,015 

4.45%

294,674 

3,069 

4.13%

FHLB  advances

134,043 

1,556 

4.61%

92,853 

1,036 

4.43%

Other  borrowings

15,869 

287 

7.18%

19,107 

336 

6.98%

Total interest-bearing liabilities

508,196 

5,858 

4.57%

406,634 

4,441 

4.33%

Non-interest-bearing  deposits

31,632 

26,958 

Non-interest-bearing  liabilities

5,436 

3,584 

Shareholders'  equity

36,547 

33,029 

Total  liabilities and shareholders' equity

$

581,811 

$

470,205 

Net  interest spread

2.74%

2.82%

Net  interest income (tax equivalent) / margin

$

4,441 

3.15%

$

3,693 

3.25%

Less:   tax-equivalent adjustment (2)

18 

            -

Net  interest income

$

4,423 

$

3,693 

     (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 2.74% for the three months ended September 30, 2007 compared to 2.82%for the three months ended September 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 8 basis point reduction in our net interest spreadresulted primarily from the lower spread on the $108.3 million growth inaverage earning assets in the third quarter of 2007 compared to the same periodin 2006.  The additional earning assets and liabilities yielded a lower thanhistorical net spread of 2.15%, accounting for a 14 basis point reduction inthe net interest spread.  The 14 basis point decline was partially offset by a 6basis point increase related to the remaining assets repricing at a higher ratethen the related liabilities. 

13
 ****
During 2006 and the first nine months of 2007,management determined that the bank had excess capital.  Consequently, giventhe flat interest 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, $19.1 million or 17.6% ofthe total growth in earning assets occurred in investments and federal funds,yielding a combined weighted rate of 5.40% for the third quarter of 2007.  Theremaining growth in earning assets of $89.2 million, or 82.4% of the totalgrowth, occurred in loans which yielded a weighted rate of 7.63% in the third quarterof 2007.  This combination of investments, federal funds, and loans yielded a weightedrate of 7.24%.

The growth of $108.3 million in earning assets wasfunded primarily with $38.0 million in borrowings with a weighted rate of 4.88%and $65.1 million in certificates of deposit with a weighted rate of 5.17%.  Sincethe total growth in earning assets was funded with higher borrowing andcertificate of deposit rates, the combined funding cost was 5.09%.

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, shoulda substantial portion of growth in earning assets continue to be funded withhigher rate borrowings 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 September 30, 2007was 3.15% compared to 3.25% for the three months ended September 30, 2006. During the three months ended September 30, 2007, interest-earning assetsexceeded interest-bearing liabilities by $51.1 million compared to $44.4million for the three month period ended September 30, 2006.  The primaryreasons for the $6.7 million increase in interest-earnings assets exceedinginterest- bearing liabilities relates to the $2.4 million proceeds from thesale of real estate and the earnings accumulated between the second and thirdquarters of 2007.

Our loan yield increased 12 basis points for thethree months ended September 30, 2007 compared to the three months ended September30, 2006 as a result of loans maturing or being renewed at market rates higherthan their original rates and the impact of higher market rates on our variablerate loans which represent approximately 40% of the loan portfolio at September30, 2007.  Offsetting the increase in our loan yield was a 32 basis pointincrease in the cost of our interest-bearing deposits for the third quarter of 2007compared to the same period in 2006.  The increase in the rate oninterest-bearing deposits is due to the renewal rates on time deposits also beingmuch higher than those in the past combined with our lower costing transactionaccounts which now represent a smaller percentage of our total interest-bearingdeposits.  The cost of our FHLB advances increased 18 basis points while otherborrowings increased 20 basis points.  As of September 30, 2007, approximately 49%of our FHLB advances had variable rates, while all of our other borrowings hadvariable rates.

Net interest income, the largest component ofour income, was $4.4 million and $3.7 million for the three months ended September30, 2007 and 2006, respectively.  The increase in the third 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$108.3 million higher during the three months ended September 30, 2007 comparedto the same period in 2006.  During the same period, average interest-bearingliabilities increased $101.6 million.  The higher average balances resulted in$1.2 million additional net interest income for the three months ended September30, 2007, while lower spreads on the average balances reduced net interestincome by $406,000. 

Interest income for the three months ended September30, 2007 was $10.3 million, consisting of $9.1 million on loans, $1.1 million oninvestments, and $77,278 on federal funds sold.  Interest income for the threemonths ended September 30, 2006 was $8.1 million, consisting of $7.3 million onloans, $766,990 on investments, and $100,211 on federal funds sold.  Intereston loans for the three months ended September 30, 2007 and 2006 represented 88.5%and 89.3%, respectively, of total interest income, while income frominvestments and federal funds sold represented only 11.5% and 10.7%,respectively, of total interest income.  The high percentage of interest incomefrom loans relates to our strategy to maintain a significant portion of ourassets in higher earning loans compared to lower yielding investments.  Averageloans represented 84.6% and 85.1% of average interest-earning assets for thethree months ended September 30, 2007 and 2006, respectively.  Included ininterest income on loans for the three months ended September 30, 2007 and 2006was $178,810 and $124,731, respectively, which related to the net amortizationof loan fees and capitalized loan origination costs.

14
 ****
Interest expense for the three months ended September30, 2007 was $5.9 million, consisting of $4.0 million related to deposits and $1.8million related to FHLB advances and other borrowings.  Interest expense forthe three months ended September 30, 2006 was $4.4 million, consisting of $3.1million related to deposits and $1.4 million related to FHLB advances and otherborrowings.  Interest expense on deposits for the three months ended September30, 2007 and 2006 represented 68.5% and 69.1%, respectively, of total interestexpense, while interest expense on FHLB advances and other borrowingsrepresented 31.5% and 30.9%, respectively, of total interest expense for thesame three month periods.  For the three months ended September 30, 2007,average interest-bearing deposits increased by $63.6 million over the sameperiod in 2006, while FHLB advances increased $41.2 million and other borrowingsdecreased $3.2 million during the three months ended September 30, 2007 overthe same period in 2006.  Both the short-term borrowings from the FHLB advancesand 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.  
	 
**Average Balances,  Income and Expenses, and Rates**

**For the Nine Months  Ended September 30,**

**2007**

**2006**

**Average**

**Income/**

**Yield/**

**Average**

**Income/**

**Yield/**

**Balance**

**Expense**

**Rate(1)**

**Balance**

**Expense**

**Rate(1)**

**(Dollars in thousands)**

Earnings

Federal  funds sold

$

11,224 

$

441 

5.25%

$

4,988 

$

192 

5.15%

Investment  securities, taxable

76,395 

3,119 

5.46%

49,565 

1,856 

5.01%

Investment  securities, nontaxable (2)  

3,899 

161 

5.53%

- 

- 

-

Loans

445,912 

25,315 

7.59%

369,556 

20,210 

7.31%

   Total interest earning assets

537,430 

29,036 

7.22%

424,109 

22,258 

7.02%

Non-interest  earning assets

23,049 

15,086 

   Total assets

$

560,479 

$

439,195 

Interest  bearing liabilities

NOW  accounts

$

34,253 

431 

1.68%

$

36,279 

502 

1.85%

Savings  & money market

86,749 

2,307 

3.56%

77,639 

1,964 

3.38%

Time  deposits

227,274 

8,795 

5.17%

152,855 

5,231 

4.58%

Total  interest-bearing deposits

348,276 

11,533 

4.43%

266,773 

7,697 

3.86%

FHLB  advances

124,914 

4,288 

4.59%

85,937 

2,747 

4.27%

Other  borrowings

15,551 

806 

6.93%

26,041 

1,198 

6.15%

Total interest bearing liabilities

488,741 

16,627 

4.55%

378,751 

11,642 

4.11%

Non-interest  bearing deposits

31,023 

24,550 

Non-interest  bearing liabilities

4,721 

3,773 

Shareholders'  equity

35,994 

32,121 

Total  liabilities and shareholders' equity

$

560,479 

$

439,195 

Net  interest spread

2.67%

2.91%

Net  interest income (tax equivalent) / margin

$

12,409 

3.09%

$

10,616 

3.35%

Less:   tax-equivalent adjustment (2)

52 

Net  interest income / margin

$

12,357 

$

10,616 

     (1) Annualized for the nine month period.

 
     (2) The tax-equivalent adjustment to net interest income adjusts the yield  for assets earning tax-exempt income to a 

 
comparable yield on a taxable basis.

 
Our net interest spread was 2.67% for the nine monthsended September 30, 2007, compared to 2.91% for the nine months ended September30, 2006.  The net interest spread is the difference between the yield we earnon our interest-earning assets and the rate we pay on our interest-bearingliabilities.  

The 24 basis point reduction in our net interestspread resulted primarily from the lower spreads on our $113.3 million growthin average earning assets in the first nine months of 2007 compared to the sameperiod in 2006.  The additional earning assets and liabilities yielded a lowerthan historical net spread of 1.97%, which caused the overall net interestspread to decline by 23 basis points.  The remaining one basis point reductionin net interest spread resulted from the impact of liabilities repricing over alonger period than the related assets that repriced.  Therefore, onceshort-term market rates stopped increasing, certain short-term liabilities suchas one year certificates of deposit continued to slowly reprice to the currentmarket rates as they matured.  Management believes that substantially all ofour variable rate assets and short-term liabilities have been repriced tocurrent market rates as of September 30, 2007.   

During 2006 and the first nine months of 2007,management determined that the bank had excess capital.  Consequently, giventhe flat interest rate environment, both earnings and return on equity could beincreased with additional assets and liabilities even if the net interestspreads were at less than historical levels.  Accordingly, $37.0 million or 32.6%of the total growth in earning assets occurred in investments and federalfunds, yielding a combined weighted rate of 5.44% for the first nine months of2007.  The remaining growth in earning assets of $76.4 million, or 67.4% of thetotal growth, occurred in loans which yielded a weighted rate of 7.59% in the firstnine months of 2007.  This combination of investments, federal funds, and loansyielded a weighted rate of 6.89%.

15
 ****
The growth of $113.3 million in earning assetswas funded primarily with $28.5 million in borrowings with a weighted rate of4.85% and $74.4 million in certificates of deposit with a weighted rate of5.17% for the nine months ended September 30, 2007.  Since the total growth inearning assets was funded with higher borrowing and certificate of depositrates, the combined funding cost was 4.92%.

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, shoulda substantial portion of growth in earning assets continue to be funded withhigher rate borrowings 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 ninemonths ended September 30, 2007 was 3.09%, compared to 3.35% for the ninemonths ended September 30, 2006.  During the nine months ended September 30,2007, interest-earning assets averaged $537.4 million, compared to $424.1million in the nine months ended September 30, 2006.  Interest earning assetsexceeded interest bearing liabilities by $48.7 million and $45.4 million forthe nine month periods ended September 30, 2007 and 2006, respectively. 

Our loan yield increased 28 basis points for thenine months ended September 30, 2007 compared to the nine months ended September30, 2006.  This increase is as a result of loans maturing or being renewed atrates higher than their original rates as well as the impact of higher marketrates on our variable rate loans which represent approximately 40% of the loanportfolio at September 30, 2007.  Offsetting the increase in our loan yield isa 57 basis point increase in the cost of our interest-bearing deposits for thefirst nine months of 2007 compared to the same period in 2006.  The increase inthe rate on our time deposits is also due to the renewal rates on time depositsbeing much higher than those in the past.   In addition, the cost of our savingsand money market accounts has increased by 18 basis points as we have increasedthe rates we offer on these products to stay competitive in response to theincrease in short-term market rates.  The 32 basis point increase in FHLBadvances and the 78 basis point increase in other borrowed funds in the first ninemonths of 2007 compared to the same period in 2006 resulted primarily from the repricingof matured FHLB advances to higher market rates and carrying a lower balance ofother borrowings at higher rates.  As of September 30, 2007, approximately 49%of our FHLB advances had variable rates, while all of our other borrowings hadvariable rates.

Net interest income, the largest component ofour income, was $12.4 million and $10.6 million for the nine months ended September30, 2007 and 2006, respectively.  Of the $1.8 million increase in net interestincome, approximately $2.5 million related to the impact of higher averageearning assets and interest-bearing liabilities in the nine months ended September30, 2007 compared to the same period in 2006, while lower spreads on theaverage balances reduced net interest income by $573,000.

Average earning assets were $113.3 millionhigher during the nine months ended September 30, 2007 compared to the same periodin 2006, and average interest-bearing liabilities increased by $110.0 millionduring the same period, while lower spreads on the average balances reduced netinterest income by $573,000. 

Interest income for the nine months ended September30, 2007 was $29.0 million, consisting of $25.3 million on loans, $3.2 millionon investments, and $441,126 on federal funds sold.  Interest income for the ninemonths ended September 30, 2006 was $22.3 million, consisting of $20.2 millionon loans, $1.9 million on investments, and $192,007 on federal funds sold. Interest on loans for the nine months ended September 30, 2007 and 2006represented 87.3% and 90.8%, respectively, of total interest income, whileincome from investments and federal funds sold represented only 12.7% and 9.2%of total interest income.  The high percentage of interest income from loansrelates to our strategy to maintain a significant portion of our assets inhigher earning loans compared to lower yielding investments.  Average loansrepresented 83.0% and 87.1% of average interest-earning assets for the ninemonths ended September 30, 2007 and 2006, respectively.  Included in interestincome on loans for the nine months ended September 30, 2007 and 2006, was $524,720and $402,167, respectively, related to the net amortization of loan fees andcapitalized loan origination costs.

16
****
Interest expense for the nine months ended September30, 2007 was $16.6 million, consisting of $11.5 million related to deposits and$5.1 million related to borrowings.  Interest expense for the nine months endedSeptember 30, 2006 was $11.6 million, consisting of $7.7 million related todeposits and $3.9 million related to borrowings.  Interest expense on depositsfor the nine months ended September 30, 2007 and 2006 represented 69.4% and 66.1%,respectively, of total interest expense, while interest expense on borrowingsrepresented 30.6% and 33.9%, respectively, of total interest expense for thesame periods.  During the nine months ended September 30, 2007, average interest-bearingdeposits increased by $81.5 million, while FHLB and other borrowings increased$28.5 million compared to the same period in 2006.  During the nine monthsended September 30, 2007, we pledged additional collateral to the FHLB,allowing us to increase our FHLB borrowings.  Both the short-term borrowingsfrom the FHLB and the sale of securities under agreements to repurchase provideus with the opportunity to obtain low cost funding with various maturitiessimilar to the maturities on our loans and investments. 

*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**

**September 30, 2007 vs. 2006**

** **

**September 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

$

1,688 

$

114 

$

27 

$

1,829 

$

1,086 

$

776 

$

170 

$

2,032 

   Investment securities

266 

69 

24 

359 

252 

62 

37 

351 

   Federal funds sold

(21)

(2)

- 

(23)

41 

13 

28 

82 

       Total interest income

1,933 

181

51 

2,165 

1,379 

851 

235 

2,465 

**Interest  expense**

** **

   Deposits

350 

535 

61 

946 

629 

581 

229 

1,439 

   FHLB advances

460 

42 

19 

521 

159 

163 

38 

360 

   Other borrowings

(57)

10 

(2)

(49)

(46)

149 

(26)

77 

       Total interest expense

753 

587 

78 

1,418 

742 

893 

241 

1,876 

**Net  interest income**

**$**

1,180 

$

(406)

$

(27)

$

747 

$

637 

$

(42)

$

(6)

$

589 

* *

** Nine Months Ended**

**September 30, 2007 vs. 2006**

** **

**September 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

$

4,176 

$

770 

$

159 

$

5,105 

$

3,042 

$

2,455 

$

536 

$

6,033 

   Investment securities

1,151 

169 

105 

1,425 

406 

150 

49 

605 

   Federal funds sold

240 

4 

5 

249 

62 

36 

42 

140 

       Total interest income

5,567 

943 

269 

6,779 

3,510 

2,641 

627 

6,778 

**Interest  expense**

** **

   Deposits

2,324 

1,161 

351 

3,836 

1,378 

1,568 

514 

3,460 

   FHLB advances

1,246 

203 

92 

1,541 

310 

526 

89 

925 

   Other borrowings

(483)

152 

(61)

(392)

50 

405 

29 

484 

       Total interest expense

3,087 

1516 

382 

4,985 

1,738 

2,499 

632 

4,869 

**Net  interest income**

**$**

2,480 

$

(573)

$

(113)

$

1,794 

$

1,772 

$

142 

$

(5)

$

1,909 

*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.

17
 ****
*Three and nine monthsended September 30, 2007 and 2006*

For the three monthsended September 30, 2007 and 2006, we incurred a noncash expense related to theprovision for loan losses of $450,000 and $400,000, respectively, bringing theallowance for loan losses to $5.4 million and $4.6 million, respectively.  Theallowance represented 1.13% of gross loans at September 30, 2007 and 1.18% ofgross loans at September 30, 2006.  During the three months ended September 30,2007, we charged-off $296,994 of loans and recorded $817 of recoveries on loanspreviously charged-off.  During the three months ended September 30, 2006, wecharged off $49,472 of loans and recorded $36,197 of recoveries on loanspreviously charged-off.  The $296,177 and $13,275 net charge-offs during the thirdquarters of 2007 and 2006, respectively, represented an annualized rate of .25%and less than one basis point of the average outstanding loan portfolio for thethree months ended September 30, 2007 and 2006, respectively. 

For the nine monthsended September 30, 2007, we incurred a noncash expense related to theprovision for loan losses of $1.3 million, bringing the allowance for loanlosses to $5.4 million, or 1.13% of gross loans, as of September 30, 2007.  The$1.3 million provision for the nine months ended September 30, 2007 relatedprimarily to the level of charge-offs that occurred during this period.  During the nine month period ended September 30, 2007, we charged-off $823,199in loans and recorded $31,380 of recoveries on loans previously charged-off. In contrast, for the nine months ended September 30, 2006, we added $1.2million to the provision for loan losses, resulting in an allowance of $4.6million at September 30, 2006. During the nine months ended September 30, 2006,we charged-off $1.2 million of loans and recorded $119,152 of recoveries onloans previously charged-off.

At September 30, 2007,the allowance for loan losses represented 1.8 times the amount ofnon-performing loans.  As a result of this level of coverage on non-performingloans and our internal loan calculation, we determined that the provisions of $450,000and $1.3 million for the three and nine months ended September 30, 2007 wereadequate.

 

*Noninterest Income*

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

**Three months  ended**

** **

**Nine months  ended**

**September 30,**

** **

**September 30,**

**2007**

** **

**2006**

** **

**2007**

** **

**2006**

** **

** **

** **

** **

** **

** **

Loan fee income

$

45,364 

$

29,683 

**$**

120,589 

$

89,145 

Service fees on deposit accounts

111,345 

66,772 

** **

293,334 

195,031 

Income from bank owned life insurance

96,000 

55,000 

** **

278,383 

55,000 

Real estate owned activity

(70,129)

(88,903)

** **

109,126 

(103,392)

Other income

64,865 

50,375 

** **

187,556 

166,716 

 Total noninterest income

$

247,445 

$

112,927 

**$**

988,988 

$

402,500 

** **

** **

** **

** **

*Three months ended September 30, 2007 and 2006*

** **                Noninterestincome in the three month period ended September 30, 2007 was $247,445, an increaseof 119.1% over noninterest income of $112,927 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 $45,364 and $29,683 for thethree months ended September 30, 2007 and 2006, respectively.  The $15,681 increasefor the three months ended September 30, 2007 compared to the same period in2006 related primarily to a $1,700 increase in mortgage origination fees, an $8,305increase in late charge fees, and a $5,676 increase in fees received from theissuance of letters of credit.  Mortgage origination fees were $1,700 and $0for the three months ended September 30, 2007 and 2006, respectively, while latecharge fees were $30,524 and $22,218 for the third quarter of 2007 and 2006,respectively.  Income related to amortization of fees on letters of credit was$13,141 and $7,465 for the three months ended September 30, 2007 and 2006,respectively.  

18
 ****
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 $111,345 and $66,772 for thethree months ended September 30, 2007 and 2006, respectively.  The $44,573increase is primarily related to a $40,219 increase in NSF fees and a $5,527increase in overdraft fees, partially offset by a $1,173 decrease in other depositrelated fees.  NSF fee income was $79,621 and $39,402 for the three monthsended September 30, 2007 and 2006, respectively, representing 71.5% of total servicefees on deposits in the 2007 period compared to 59.0% of total service fees ondeposits in the 2006 period.  The significant increase inNSF fee income is due primarily to an increased effort to collect rather thanwaive NSF fees from our clients.  Overdraft fees were $9,709 and $4,182 forthe three months ended September 30, 2007 and 2006, respectively, while otherdeposit related fees were $22,015 and $23,188 for the three month periods endedSeptember 30, 2007 and 2006, respectively.  

We held $8.8 million of bankowned life insurance at the end of the third quarter of 2007.  Income derivedfrom this life insurance was $96,000 for the three months ended September 30,2007 compared to $55,000 in the three months ended September 30, 2006.  Thesubstantial portion of our bank owned life insurance was purchased during thethird quarter of 2006.  

               Included in real estate owned activity are income andexpenses related to loans that were transferred into other real estate owned.   Expenseson real estate owned exceeded income derived from real estate owned by $70,129and $88,903 for the three months ended September 30, 2007 and 2006,respectively. 

Otherincome consisted primarily of fees received on debit card transactions, sale ofcustomer checks, wire transfers and courier fee income.  Other income was $64,865and $50,375 for the three months ended September 30, 2007 and 2006,respectively.  The $14,490 increase relates primarily to a $10,974 increase indebit card transaction fees and a $3,425 increase in courier fee income.  Debitcard transaction fees were $47,635 and $36,661 for the three months ended September30, 2007 and 2006, respectively, and represented 73.4% and 72.8% of total otherincome for the third quarters of 2007 and 2006, respectively.  Thecorresponding transaction costs associated with debit card transactions are includedin noninterest data processing and related costs.  The debit card transactioncosts were $19,669 and $21,387 for the three months ended September 30, 2007and 2006, respectively.  The net impact of the fees received and the relatedcost of the debit card transactions on earnings for the three months ended September30, 2007 and 2006 was $27,966 and $15,274, respectively.  Wire transfer feeswere $7,264 and $7,621 for the three months ended September 30, 2007 and 2006,respectively.  Courier fee income was $5,652 and $2,227 for the quarters endedSeptember 30, 2007 and 2006, respectively.

*Nine months ended September 30, 2007 and 2006*

Noninterestincome in the nine month period ended September 30, 2007 was $988,988, an increaseof 145.7% over noninterest income of $402,500 in the same period of 2006.  The$586,488 increase in noninterest income is related to increases of $31,444 inloan fee income, $98,303 in service fees on deposit accounts, $223,383 inincome from bank owned life insurance, $212,518 in real estate owned activity, and$20,840 in other 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 $120,589 and $89,145 forthe nine months ended September 30, 2007 and 2006, respectively.  The $31,444 increasefor the nine months ended September 30, 2007 compared to the same period in 2006related primarily to increases of $14,676 in mortgage origination fees, $14,269in late charge fees, and $2,500 in fees received from the issuance of lettersof credit.  Mortgage origination fees were $17,561 and $2,885 for the ninemonths ended September 30, 2007 and 2006, respectively, while income related toamortization of fees on letters of credit was $26,618 and $24,118 for the firstnine months of 2007 and 2006, respectively.  Late charge fees were $76,411 and $62,142for the nine months ended September 30, 2007 and 2006, respectively. 

Servicefees on deposits were $293,334 and $195,031 for the nine months ended September30, 2007 and 2006, respectively.  While the number of client accounts continuesto grow, the $98,303 increase is primarily related to the amount of NSF feescollected in the first nine months of 2007 compared to the same period in 2006. NSF income increased $92,602 to $203,095 for the nine months ended September30, 2007 from $110,493 for the same period in 2006, representing 69.2% of totalservice fees on deposits in the 2007 period compared to 56.7% of total servicefees on deposits in the 2006 period.  The increase in NSF fee income is dueprimarily to an increased effort to collect rather than waive NSF fees from ourclients.  In addition, overdraft fees increased $15,630 during the nine monthsended September 30, 2007 to $21,712 from $6,082 for the same period in 2006.  Partiallyoffsetting the increase in NSF fees collected and overdraft fees was an $8,646 decreasein service charges on deposit accounts which were $57,768 for the nine monthsended September 30, 2007 compared to $66,414 for the same period in 2006 

19
****
We held $8.8 million of bankowned life insurance at the end of the third quarter of 2007.  Income derivedfrom this life insurance was $278,383 for the nine months ended September 30,2007 compared to $55,000 in the nine months ended September 30, 2006.  Thesubstantial portion of our bank owned life insurance was purchased during thethird quarter of 2006.  

                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,we recorded 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 $247,199 and $103,392for the nine months ended September 30, 2007and 2006, respectively.  

Otherincome consisted primarily of fees received on debit card transactions, sale ofcustomer checks, and wire transfers.  Other income was $187,556 and $166,716for the nine months ended September 30, 2007 and 2006, respectively.  The $20,840increase relates primarily to a $23,317 increase in debit card transaction fees,a $5,095 increase in wire transfer fees, and a $10,316 increase in other feeincome, partially offset by a $17,889 decrease in gain on the sale of fixedassets.  Debit card transaction fees were $130,092 and $106,775 for the ninemonths ended September 30, 2007 and 2006, respectively and represented 69.4%and 64.0% of total other income for the first nine months 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 $54,650 and $60,199 for the nine monthsended September 30, 2007 and 2006, respectively.  The net impact of the feesreceived and the related cost of the debit card transactions on earnings forthe nine months ended September 30, 2007 and 2006 was $75,442 and $46,576,respectively.  Wire transfer fees were $24,265 and $19,170 for the nine monthsended September 30, 2007 and 2006, respectively.

*Noninterest expenses*

    Thefollowing table sets forth information related to our noninterest expenses. 	

*            *

**Three months  ended**

**Nine months  ended**

**September 30,**

**September 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Compensation and benefits

$

1,547,014

$

1,085,922

$

4,479,330 

$

3,176,784 

Professional fees

130,621

126,386

415,659 

308,250 

Marketing

139,018

108,067

387,392 

350,192 

Insurance       	

116,349

48,068

328,119 

135,776 

Occupancy

336,572

161,981

1,080,548 

495,587 

Data processing and related costs

310,319

225,558

865,015 

622,147 

Telephone     	

28,977

20,540

96,833 

59,818 

Other   

176,466

77,654

459,217 

264,564 

 Total noninterest expense

$

2,785,336

$

1,854,176

$

8,112,113 

$

5,413,118 

*Threemonths ended September30, 2007 and 2006*

Weincurred noninterest expenses of $2.8 million for the three months ended September30, 2007 compared to $1.9 million for the three months ended September 30, 2006. Average interest-earning assets increased 24.0% during this period, whilegeneral and administrative expense increased 50.2% 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 September 30, 2007, compensation and benefits,occupancy, and data processing and related costs represented 78.8% of the totalnoninterest expense compared to 79.5% for the same period in 2006.  

20
****
*Ninemonths ended September 30, 2007 and 2006*

Weincurred noninterest expenses of $8.1 million for the nine months ended September30, 2007 compared to $5.4 million for the nine months ended September 30, 2006. Average interest-earning assets increased 26.7% during this period, whilegeneral and administrative expense increased 50.0%.

Forthe nine months ended September 30, 2007 compensation and benefits, occupancy,and data processing and related costs represented 79.2% of the total noninterestexpense compared to 79.3% for the same period in 2006.  

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

**Three months  ended**

**Nine months  ended**

**September 30,**

**September 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Base compensation

$

1,054,630 

$

758,877 

$

3,023,312 
$
2,237,124 

Incentive compensation

276,000 

189,000 

759,000 

512,000 

 Total compensation

1,330,630 

947,877 

3,782,312 

2,749,124 

Benefits          	

254,354 

170,055 

812,960 

534,140 

Capitalized loan origination costs

(37,970)

(32,010)

(115,940)

(106,480)

 Total compensation and benefits

$

1,547,014 

$

1,085,922

$

4,479,330 

$

3,176,784 

*Threemonths ended September 30, 2007 and 2006*

Compensationand benefits expense was $1.5 million and $1.1 million for the three monthsended September 30, 2007 and 2006, respectively.   Compensation and benefitsrepresented 55.5% and 58.6% of our total noninterest expense for the threemonths ended September 30, 2007 and 2006, respectively.  The $461,092 increasein compensation and benefits in the third quarter of 2007 compared to the sameperiod in 2006 resulted from increases of $295,753 in base compensation,  $87,000in additional incentive compensation, and $84,299 higher benefits expense.  Theseamounts were partly offset by an increase of $5,960 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 $295,753increase in base compensation expense related to the cost of twenty-oneadditional employees as well as annual salary increases.  Seven of the newemployees relate to the management and staff that we hired to support ourexpansion into the Columbia, SC market.  The remaining fourteen employees werehired primarily to support the growth in both loans and deposit operations.  Incentive compensation represented 17.8% and 17.4 % of total compensation andbenefits for the three months ended September 30, 2007 and 2006, respectively. The incentive compensation expense recorded for the third quarters of 2007 and2006 represented an accrual of the estimated incentive compensation earnedduring the third quarter of the respective year.  Benefits expense increased $84,299in the third quarter of 2007 compared to the same period in 2006.  Benefitsexpense represented 19.1% and 17.9% of the total compensation for the threemonths ended September 30, 2007 and 2006, respectively.

21
****
*Ninemonths ended September 30, 2007 and 2006*

Compensationand benefits expense was $4.5 million and $3.2 million for the nine monthsended September 30, 2007 and 2006, respectively.   Compensation and benefitsrepresented 55.2% and 58.7% of our total noninterest expense for the ninemonths ended September 30, 2007 and 2006, respectively.  The $1.3 millionincrease in compensation and benefits in the first nine months of 2007 comparedto the same period in 2006 resulted from increases of $786,188 in basecompensation,  $247,000 in additional incentive compensation, and $278,820higher benefits expense.  These amounts were partly offset by an increase of $9,460in loan origination compensation expense, which is required to be capitalizedand amortized over the life of the loan as a reduction of loan interest income. 

The $786,188increase in base compensation expense related to the cost of twenty-oneadditional employees as well as annual salary increases. Seven of the newemployees relate to the management and staff that we hired to support ourexpansion into the Columbia, SC market.  The remaining fourteen employees werehired to support the growth in both loans and deposits.  Incentive compensationrepresented 16.9% and 16.1 % of total compensation and benefits for the ninemonths ended September 30, 2007 and 2006, respectively.  The incentivecompensation expense recorded for the first nine months of 2007 and 2006represented an accrual of the estimated incentive compensation earned duringthe first nine months of the respective year.  Benefits expense increased $278,820in the first nine months of 2007 compared to the same period in 2006.  Benefitsexpense represented 21.5% and 19.4% of the total compensation for the ninemonths ended September 30, 2007 and 2006, respectively.

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

**Three months  ended**

**Nine months  ended**

**September 30,**

**September 30,**

**2007**

** **

**2006**

**2007**

** **

**2006**

Data processing costs

$

226,854 

$

150,661 

$

622,798 

$

409,945 

Debit card transaction expense

19,669 

21,387 

54,650 

60,199 

Courier expense

29,499 

23,080 

83,251 

68,246 

Other expenses

34,297 

30,430 

104,316 

83,757 

Total data  processing and related costs 

$

310,319 

$

225,558 

$

865,015 

$

622,147 

Dataprocessing and related costs were $310,319 and $225,558, an increase of $84,761for the three months ended September 30, 2007 and 2006, respectively.   Duringthe first nine months of 2007 and the same period of 2006, our data processingand related costs were $865,015 and $622,147, respectively, an increase of $242,868.

Duringthe three months ended September 30, 2007, our data processing costs for ourcore processing system were $226,854 compared to $150,661 for the three monthsended September 30, 2006.   We have contracted with an outside computer****servicecompany to provide our core data processing services.  During the nine monthsended September 30, 2007 and 2006, data processing costs were $622,798 and $409,945,respectively.

Dataprocessing costs increased $84,761, or 37.6%, for the three months ended September30, 2007 compared to the same period in 2006.  For the nine months ended September30, 2007, data processing costs increased $242,868, or 39.0%, compared to thesame period in 2006.  The increases in costs were caused by the higher numberof loan and deposit accounts as well as the addition of the new Columbia office.  A significant portion of the fee charged by the third party processor isdirectly related to the number of loan and deposit accounts and the relatednumber of transactions.  

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 $19,669 and $21,387 forthe three months ended September 30, 2007 and 2006, respectively.  During thefirst nine months of 2007 and 2006, debit card transaction expense was $54,650and $60,199, respectively.

22
****
Occupancyexpense represented 12.1% and 8.7% of total noninterest expense for the threemonths ended September 30, 2007 and 2006, respectively.  Occupancy expense forthe three months ended September 30, 2007 and 2006 was $336,572 and $161,981,respectively, an increase of $174,591.  The increase is primarily due to theincreased costs of depreciation and rent expense associated with our new mainoffice and headquarters building.  For the nine months ended September 30, 2007,occupancy expense increased $584,961 to $1.1 million from $495,587 for the sameperiod ended September 30, 2006.  Occupancy expense represented 13.3% and 9.2%of total noninterest expense for the first nine months of 2007 and 2006,respectively.

Theremaining $202,279 increase in noninterest expense for the three month periodended September 30, 2007 compared to the same period in 2006 resulted primarilyfrom increases of $4,235 in professional fees, $30,951 in marketing expenses, $68,281in insurance, and $98,812 in other noninterest expenses.  The increase in professionalfees relates primarily to additional legal and accounting fees related to SECreporting requirements, the name change of our company, as well as the overallgrowth of our company, while the increased marketing expenses relates toexpanding our market awareness in the Greenville market, as well as the newColumbia market.  The $68,281 increase in insurance costs is due primarily toadditional FDIC deposit insurance imposed by the Federal Deposit Insurance Corporationin 2007.  In addition, the increase in other noninterest expenses for the threemonth period ended September 30, 2007 relates primarily to increased costs of postageand office supplies, collection expenses, deposit account losses, and printing costsrelated to the name change.  

Forthe nine month period ended September 30, 2007, remaining noninterest expensesincreased $568,620 from the same period in 2006.  Of this amount, professionalfees represented $107,409 of the increase, marketing expenses represented $37,200of the increase, $192,343 was related to insurance, $37,015 related totelephone expenses and other expenses represented $194,653 of the increase. The increase 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 $192,343 increase in insurance costs isprimarily due to the additional FDIC deposit insurance imposed by the FederalDeposit Insurance Corporation in 2007.  In addition, a significant portion ofthe increase in other expenses is due to increased costs of postage and officesupplies, collection expenses, deposit account losses, and printing costsrelated to the name change.    

Incometax expense was $478,384 for the three months ended September 30, 2007 comparedto $532,494 during the same period in 2006.   For the nine months ended September30, 2007, income tax expense was $1.3 million compared to $1.6 million for thesame period in 2006.  Our effective tax rate was 33.3% and 34.3%, respectively,for the three month periods ended September 30, 2007 and 2006, respectively,and 32.4% and 35.7% for the nine month periods ended September 30, 2007 and2006, respectively.  The decrease in the effective tax rate for the 2007 periodscompared to 2006 results primarily from the tax exempt income on bank ownedlife insurance which we purchased in the third quarter of 2006.

 

**BalanceSheet Review**

 

*General*

At September 30, 2007, we had totalassets of $614.3 million, consisting principally of $478.3 million in loans, $88.7million in investments, $18.3 million in federal funds sold, and $9.2 millionin cash and due from banks.  Our liabilities at September 30, 2007 totaled $577.2million, which consisted principally of $415.1 million in deposits, $133.5million in FHLB advances, $10.0 million in repurchase agreements, and $13.4million in junior subordinated debentures.  At September 30, 2007, ourshareholders' equity was $37.1 million.

At December 31, 2006, we had total assets of $509.3 million, consisting principally of $397.2 million in loans, $74.3million in investments, $7.5 million in federal funds sold, and $9.1 million incash and 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 September 30, 2007, our federal funds sold were$18.3 million, or 3.0% of total assets.  At December 31, 2006, our $7.5 millionin federal funds sold on an overnight basis comprised 1.5% of total assets. 

23
****
*Investments*

 

*           *Contractual maturities and yields on ourinvestments that are available for sale and are held to maturity at September 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 September 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

$

1,999 

5.06 %

$

10,992 

5.71 %

$

- 

- 

$

12,991 

5.61 %

State and  political subdivisions

-

-

-

-

3,611 

3.79 %

3,611 

3.79 %

Mortgage-backed  securities

- 

- 

3,740 

5.32 %

44,882 

5.69 %

48,622 

5.55 %

Total

$

1,999 

5.06 %

$

14,732 

5.61 %

$

48,493 

5.56 %

$

65,224 

5.55 %

** **

** **

**Held to Maturity**

** **

Mortgage-backed  securities

$

- 

- 

$

358 

3.93 %

$

14,841 

4.55 %

$

15,199 

4.53 %

             

             AtSeptember 30, 2007, our investments included securities issued by Federal HomeLoan Mortgage Corporation and Federal National Mortgage Association withcarrying values of $14.7 million, and $38.4 million, respectively.

 

             The amortized costs and the fair value of ourinvestments at September 30, 2007 and December 31, 2006 are shown in thefollowing table.

 

* *

** **

**September 30, 2007**

** **

**December 31, 2006**

** **

**Amortized**

** **

**Fair**

** **

**Amortized**

** **

**Fair**

** **

**Cost**

** **

**Value**

** **

**Cost**

** **

**Value**

** **

**(Dollars in thousands)**

**Available  for Sale**

 
Government sponsored enterprises

$

12,989 

$

12,991 

$

1,996 

$

1,989 

State and political subdivisions

3,793 

3,611 

3,795 

3,782 

Mortgage-backed  securities

48,829 

48,622 

44,478 

44,429 

 Total

$

65,611 

$

65,224 

$

50,269 

$

50,200 

** **

**Held  to Maturity**

Mortgage-backed  securities

$

15,199 

$

14,686 

$

17,045 

$

16,577 

              Otherinvestments totaled $8.3 million at September 30, 2007 and consisted of Federal Reserve 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 September 30, 2007,we had $88.7 million in our investment securities portfolio which representedapproximately 14.4% of our total assets.  We held U.S. Government sponsored enterprisesecurities, municipal securities, and mortgage-backed securities with a fairvalue of $79.9 million and an amortized cost of $80.8 million for an unrealizedloss of $900,876.  Webelieve, based on industry analyst reports and credit ratings, that thedeterioration in value is attributed to changes in market interest rates andnot in the credit quality of the issuer and therefore, these losses are notconsidered other-than-temporary.  We have the ability and intent to holdthese securities until such time as the value recovers or the securitiesmature.

At December 31, 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.  Prior to 2006, as a result of the stronggrowth in our loan portfolio and the historically low fixed rates that wereavailable, we had maintained a lower than normal level of investments. However, during 2006, as rates on investment securities have risen and we haveattracted a material amount of additional deposits, we increased the size ofour investment portfolio.

24
****
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.  

*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 nine monthsended September 30, 2007 and 2006, average loans were $445.9 million and $369.6million, respectively.  Before the allowance for loan losses, total loansoutstanding at September 30, 2007 were $483.7 million.  Average loans for theyear ended December 31, 2006 were $375.4 million.  Before the allowance forloan losses, 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 real estate loanportfolio to help reduce the risk inherent in concentration in certain types ofcollateral.

 

25
****
The following table summarizes the compositionof our loan portfolio at September 30, 2007 and December 31, 2006.** **

** **

**September 30, 2007**

** **

**December 31, 2006**

** **

**Amount**

** **

**%  of Total**

** **

**Amount**

** **

**%  of Total**

Real  estate:

**(Dollars in thousands)**

 Commercial:

Owner occupied

$

105,040 

21.7 %

$

77,668 

19.3 %

Non-owner occupied

140,657 

29.1 %

126,008 

31.3 %

Construction

37,006 

7.7 %

20,466 

5.1 %

Total commercial real estate

282,703 

58.5 %

224,142 

55.7 %

Consumer:

Residential

57,582 

11.9 %

59,187 

14.7 %

Home equity

41,743 

8.6 %

35,986 

9.0 %

Construction

10,651 

2.2 %

8,259 

2.0 %

Total consumer real estate

109,976 

** **

22.7 %

103,432 

25.7 %

Total real estate

392,679 

** **

81.2 %

327,574 

81.4 %

Commercial  business

82,780 

17.1 %

65,891 

16.4 %

Consumer-other

9,139 

1.9 %

9,524 

2.4 %

Deferred  origination fees, net

(899)

(0.2)%

(806)

(0.2)%

       Total gross loans, net of

           deferred fees

483,699 

100.0 %

402,183 

100.0 %

Less-allowance  for loan losses

(5,447)

(4,949)

   Total loans, net

$

478,250 

$

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.

 

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

 

** **

** **

**After one but within  five years**

** **

** **

** **

** **

 
* *

**One year or less**

** **

**After five years**

** **

** **

 
** **

**Total**

 
**(Dollars in thousands)**

** **

 
 
Real  estate - mortgage

$

74,682 

$

232,343 

$

37,997 

$

345,022 

 
Real  estate - construction

19,414 

20,422 

7,821 

47,657 

 
   Total real estate

94,096 

252,765 

45,818 

392,679 

 
 
Commercial  business

49,141 

33,449 

190 

82,780 

 
Consumer-other

5,150 

3,616 

373 

9,139 

 
Deferred  origination fees, net

(272)

(526)

(101)

(899)

 Total gross loans,  net of   deferred fees 

$

148,115 

$

289,304 

$

46,280 

$

483,699 

 
 
Loans maturing after one year with:

 
Fixed interest rates

$

201,887 

 
Floating interest rates

$

133,697 

 
 

26
****
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 

 

*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 loan lossesis based on a number of assumptions about future events, which we believe to bereasonable, but which may or may not prove to be accurate.  Our determinationof the allowance for loan losses is based on evaluations of the collectabilityof loans, including consideration of factors such as the balance of impairedloans, the quality, mix, and size ofour overall loan portfolio, economic conditions that may affect the borrower'sability to repay the loan, the amount and quality of collateral securing theloans, our historical loan loss experience, and a review of specific problemloans.  We also consider subjective issues such as changes in the lendingpolicies and procedures, changes in the local/national economy, changes involume or type of credits, changes in volume/severity of problem loans, qualityof loan review and board of director oversight, concentrations of credit, andpeer group comparisons.  Due to our limited operating history, the provisionfor loan losses has been made primarily as a result of our assessment ofgeneral loan loss risk compared to banks of similar size and maturity.  Due tothe rapid growth of our bank over the past several years and our shortoperating history, a large portion of the loans in our loan portfolio and ofour lending relationships are of relatively recent origin.  In general, loansdo not begin to show signs of credit deterioration or default until they havebeen outstanding for some period of time, a process known as seasoning.  As aresult, a portfolio of older loans will usually behave more predictably than anewer portfolio.  Because our loan portfolio is relatively new, the currentlevel of delinquencies and defaults may not be representative of the level thatwill prevail 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 ourresults of operations and financial condition.  Periodically, we adjust the amountof the allowance based on changing circumstances.  We charge recognized lossesto the 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.  

 

27
****
The following table summarizes the activityrelated to our allowance for loan losses for the nine months ended September 30, 2007 and 2006:

**September 30,**

**2007**

** **

**2006**

**(Dollars in thousands)**

Balance,  beginning of period

$

4,949 

$

4,490 

Loans  charged-off

(823)

(1,189)

Recoveries  of loans previously charged-off

31 

119 

Net  loans (charged-off) recovery

$

(792)

$

(1,070)

Provision  for loan losses

1,290 

1,200 

Balance,  end of period

$

5,447 

$

4,620 

** **

Allowance  for loan losses to gross loans

1.13%    

1.18%    

Net  charge-offs to average loans

0.24%

0.39%

 

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.

*NonperformingAssets*

The following tableshows the nonperforming assets, percentages of total assets, and the relatedpercentage of allowance for loan losses for the nine months ended September 3 0, 2007 and the year ended December 31, 2006.  All loans over 90 days past dueare on and included in loans on nonaccrual.

**September 30, 2007**

** **

**December  31,      2006**

**(Dollars  in thousands)**

Loans  over 90 days past due

$

2,954 

$

945 

Loans  on nonaccrual:

Mortgage

2,905 

1,424 

Commercial

- 

32 

Consumer

49 

33 

Total nonaccrual loans

2,954 

1,489 

Troubled  debt restructuring

- 

- 

** **

Total of nonperforming loans

2,954 

1,489 

Other  nonperforming assets

364 

1,012 

Total nonperforming assets

$

3,318 

$

2,501 

 Percentage  of total assets

0.54%

0.49%

 Percentage  of nonperforming loans 

     and assets to  gross loans

0.69%

0.62%

** **
 
28
****
             Theallowance for loan losses was $5.4 million and $4.9 million at September 30,2007 and December 31, 2006, respectively or 1.13% and 1.23% of outstandingloans, respectively.  During the year ended December 31, 2006, we had netcharged-off loans of $1.2 million.  During the nine months ended September 30,2007 and 2006, we had net charge-offs of $791,819 and $1.1 million, respectively. 

At September30, 2007 and December 31, 2006, nonperforming assets represented 0.54% and 0.49%of total assets, respectively.  At September 30, 2007 and December 31, 2006, wehad $3.0 million and $1.5 million of loans, respectively, on nonaccrualstatus.   Generally, a loan is placed on nonaccrual status when it becomes 90days past due as to principal or interest, or when we believe, afterconsidering economic and business conditions and collection efforts, that theborrower's financial condition is such that collection of the loan isdoubtful.  A payment of interest on a loan that is classified as nonaccrual isrecognized as income when received**.**

The increase in nonperforming loans at September30, 2007 compared to December 31, 2006 is represented primarily by onecommercial real estate loan with a carrying value of $2.7 million.  We incurredlosses of $675,000 on this loan during the first nine months of 2007, whichrepresented 82.0% of total charge-offs year-to-date. 

The amount of foregone interest income on thenonaccrual loans in the first nine months of 2007 was approximately $122,000.  The amount of interest income recorded in the first nine months of 2007 forloans that were on nonaccrual at September 30, 2007 was approximately $148,000.

At September 30, 2007, impaired loans amountedto approximately $549,000 for which a $277,000 reserve was allocated in theallowance.

*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 $145.4million, or 23.7% of total assets, at September 30, 2007 and $91.3 million, or17.9% of total assets, at December 31, 2006. 

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 115% at both September 30, 2007 and December 31, 2006. 

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

* *

** **

** **

**2007**

** **

**2006**

* *

** **

** **

**Amount**

** **

**Rate**

** **

**Amount**

** **

**Rate**

**(Dollars in thousands)**

 
 
Noninterest  bearing demand deposits

$

31,023 

- %

$

24,550 

- %

 
Interest  bearing demand deposits

34,327 

1.68 %

36,279 

1.85 %

 
Money  market accounts

84,014 

3.59 %

76,292 

3.43 %

 
Savings  accounts

1,509 

0.68 %

1,347 

0.43 %

 
Time  deposits less than $100,000

44,526 

5.03 %

33,243 

4.24 %

 
Time  deposits $100,000 or greater

178,958 

5.21 %

119,612 

4.67 %

 
    Total deposits

$

379,299 

4.05 %

$

291,323 

3.53 %

 
The increase in time deposits of $100,000 ormore for the nine months ended September 30, 2007 compared to the 2006 period resultedfrom a $9.8 million increase in retail time deposits and a $54.1 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.

30
****
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 $203.4 million and $197.7 million at September 30, 2007 andDecember 31, 2006, respectively.  

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

** **

**September 30, 2007**

**(Dollars in thousands)**

Three months or less

$

43,934 

Over three through six months

56,400 

Over six  through twelve months

90,445 

Over twelve months

 

21,010 

   Total

$

211,789 

**Capital Resources**

 

**               **Totalshareholders' equity was $37.1 million and $34.6 million at September 30, 2007and December 31, 2006, respectively.    The increase during the first ninemonths of 2007 resulted primarily from the $2.7 million of net income earned,partially offset by the $239,222 net unrealized holding loss on securities.

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 nine months ended September 30, 2007 and the yearended December 31, 2006.  Since our inception, we have not paid any cash dividends.

**September 30, 2007**

**December 31, 2006**

Return  on average assets

0.64 %

0.85 %

Return  on average equity

10.07 %

11.95 %

Average  equity to average assets ratio

6.42 %

7.15 %

Our return on average assetswas .64% for the nine months ended September 30, 2007, a decrease from .85% forthe year ended December 31, 2006.  In addition, our return on average equity decreasedto 10.07% from 11.95% for the nine months ended September 30, 2007 and the yearended December 31, 2006, respectively.  Our average equity to average assetsratio was 6.42% for the nine months ended September 30, 2007 and 7.15% for theyear ended December 31, 2006.  The 73 basis point decrease in the average equityto average assets ratio is a function of the $103.5 million increase in averageassets compared to the $3.3 million increase in average equity.

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

**September   30, 2007**

**December   31, 2006**

**Holding**

** **

** **

**Holding**

** **

**Company**

**Bank**

** **

**Company**

**Bank**

Total risk-based capital

11.5 %

11.3 %

13.1 %

12.3 %

Tier 1 risk-based capital

10.4 %

10.2  %

11.9  %

11.1 %

Leverage  capital

8.6 %

8.5 %

9.4 %

8.7 %

 

31
****
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, we issued an aggregate of $13.4 million in junior subordinateddebentures in 2003 and 2005.  During 2004, we issued 920,000 additional sharesof common stock (1,012,000 adjusted for the 10 percent stock dividend in 2006)that resulted in $14.9 million of additional capital.  The company also has a$4.5 million unused short-term holding company line of credit that could beutilized to provide additional capital for the bank if deemed necessary. As ofSeptember 30, 2007, the company's regulatory capital levels were over $4.9million in excess of the various well capitalized requirements.** **

**Borrowings**

 

**               **The following tableoutlines our various sources of borrowed funds during the nine months ended September30, 2007 and the year ended December 31, 2006. Included in the table are theamounts outstanding at the end of each period, at the maximum point for eachcomponent during the periods and on average for each period, and the averageinterest rate that we paid for each borrowing source.  The maximum month-endbalance represents the highest indebtedness for each component of borrowedfunds at any time during each of the periods shown. 

** **

* *

** **

** **

**Maximum**

** **

** **

** **

**Ending**

**Period-**

**Month-end**

**Average for the Period**

** **

**Balance**

**End Rate**

**Balance**

**Balance**

**Rate**

** **

**(Dollars in thousands)**

**At  or for the nine months ended September, 2007**

Federal  Home Loan Bank advances

 $

133,500 

4.58 %

 $

133,500 

 $

124,914 

4.59 %

Federal  funds purchased

- 

- %

4,492 

539 

5.72 %

Securities  sold under agreement to

   repurchase

10,000 

3.63 %

10,000 

476 

3.68 %

Junior subordinated debentures

13,403 

7.44 %

13,403 

13,403 

7.58 %

** **

**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.

32
 **** 
**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 September 30, 2007, unfunded commitments to extend credit were $106.8million, of which $64.1 million was at fixed rates and $42.7 million was at variablerates.  At December 31, 2006, unfunded commitments to extend credit were $79.2million, of which approximately $40.6 million was at fixed rates and $38.6million 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 September 30, 2007, there was a $2.2 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.

We were liability sensitive during the latterhalf of the year ended December 31, 2006 and during the nine months ended September 30, 2007.  Our variable rate loans and a majority of our deposits repriceover a 12-month period.  Approximately 40% and 49% of our loans were variablerate loans at September 30, 2007 and December 31, 2006, respectively.  Theratio of cumulative gap to total earning assets after 12 months was (34.5%)because $200.1 million more liabilities than assets will reprice in a 12 monthperiod.  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.  Consequently, net deposit inflows and outflows are farless predictable and are not subject to the same degree of control.

 

33
 ****
             AtSeptember 30, 2007, our liquid assets, consisting of cash and due from banksand federal funds sold, amounted to $27.5 million, or 4.5% of total assets. Our investment securities at September 30, 2007 amounted to $88.7 million, or 14.4%of total assets.  Investment securities traditionally provide a secondarysource of liquidity since they can be converted into cash in a timely manner. However, $62.5 million of these securities are pledged against outstandingdebt.  Therefore, the related debt would need to be repaid prior to thesecurities being sold in order for these securities to be converted to cash. At December 31, 2006, our liquid assets amounted to $16.6 million, or 3.3% oftotal assets.  Our investment securities at December 31, 2006 amounted to $74.3 million, or 14.6% of total assets.  However, substantially all of thesesecurities were pledged against 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 September 30, 2007.  We are also a member of the Federal 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 September 30, 2007 was $10.5 million, basedon the 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.

34
****
The following table sets forth informationregarding our rate sensitivity as of September 30, 2007 for each of the time intervals 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 interest-earning assets and interest-bearing liabilities presented dueto consideration of prepayment speeds under various interest rate changescenarios in the application of the interest rate sensitivity methods describedabove. ** **

**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

$

18,314 

$

- 

$

- 

$

- 

$

18,314 

Investment securities

2,565 

7,119 

29,159 

41,579 

80,422 

Loans

210,627 

43,877 

185,303 

41,069 

480,876 

 

Total interest-earning assets

$

231,506 

$

50,996 

$

214,462 

$

82,648 

$

579,612 

Interest-bearing liabilities:

Money market and NOW

$

124,727 

$

- 

$

- 

$

- 

$

124,727 

Regular savings

1,649 

- 

- 

- 

1,649 

Time deposits

54,560 

181,770 

22,908 

- 

259,238 

Repurchase  agreements 

10,000 

- 

- 

- 

10,000 

FHLB advances

84,000 

12,500 

37,000 

- 

133,500 

Junior  subordinated debentures

13,403 

- 

- 

- 

13,403 

Total interest-bearing liabilities

$

288,339 

$

194,270 

$

59,908 

$

- 

$

542,517 

Period gap

$

(56,833)

$

(143,274)

$

154,554 

$

82,648 

Cumulative gap

(56,833)

(200,107)

(45,553)

37,095 

Ratio of cumulative  gap to total earning assets

(9.8%)

(34.5%)

(7.9%)

6.4 %

** **

The following table setsforth information regarding our rate sensitivity, as of December 31, 2006, at each 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 interest-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 %

** **

35
 **** 
**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. The company does not have adefined benefit pension plan. Therefore, SFAS 158 will not impact our financialposition, 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 retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) a changein accounting principle through retrospective application to all priorperiods.  We currently do not have any postretirement benefits aspectsrelated to our endorsement split-dollar life insurance arrangements. Therefore, EITF 06-4 will not impact our financial position, results ofoperations or 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 effective dateare eligible for the fair value option at that date. If the fair value optionis elected for those securities at the effective date, cumulative unrealizedgains and losses at that date shall be included in the cumulative-effectadjustment and thereafter, such securities will be accounted for as tradingsecurities. SFAS 159 is effective for the company on January 1, 2008. Earlier adoption is permitted in 2007 if the company also elects to apply the provisions ofSFAS 157, "Fair Value Measurement." The company is currently analyzing the fairvalue 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.       

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******Item3. Quantitative and Qualitative Disclosures about Market Risk.**
There have been no material changes in ourquantitative and qualitative disclosures about market risk as of September 30,2007 from 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 September 30, 2007.  There have been no significant changes in our internalcontrols over financial reporting during the fiscal quarter ended September 30,2007 that have materially affected, or are reasonably likely to materiallyaffect, 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.**

                          Notapplicable

**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.  

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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: November 9, 2007

/s/R.  Arthur Seaver, Jr.         	

R. Arthur Seaver, Jr.

Chief Executive Officer
         
Date: November 9, 2007

/s/James M. Austin,  III                      	

James M. Austin, III

Chief Financial Officer

 

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****
**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. 

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