UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q[X] QUARTERLY REPORT
  PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
  EXCHANGE ACT OF 1934For the Quarterly Period
  Ended June 30, 2006OR[  ] TRANSITION REPORT
  PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES
  EXCHANGE ACT OF 1934For the Transition Period
  from toCommission file number
  000-27719Greenville 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.)112 Haywood RoadGreenville,
  S.C.
  29607(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 theExchange Act of 1934
  during the preceding 12 months (or for such shorter period that the
  registrant was required to file suchreports),
  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.  Seedefinition
  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:2,666,719
  shares of common stock, $.01 par value per share, were issued and outstanding
  as of July 23, 2006.







GREENVILLE FIRST
BANCSHARES, INC.
PART
I.  FINANCIAL INFORMATION



Item 1.  Financial Statements



The financial statements of Greenville
First Bancshares, Inc. and Subsidiary are set forth in the following pages.



GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED
BALANCE SHEETS



June 30,
  
  December
  31,2006
  
  2005(Unaudited)
  
  (Audited)AssetsCash and due from banks
  $
  9,458,523
  
  $
  6,223,397Federal funds sold
  4,531,295
  
  19,380,755Investment securities available for sale
  31,326,849
  
  11,310,956Investment securities held to maturity-(fair value $17,230,302 and $18,709,112)
  18,203,403
  
  19,345,016Other investments, at cost
  6,565,100
  
  5,475,400Loans, net
  373,399,314
  
  334,040,776Property and equipment, net
  5,716,081
  
  5,576,882Accrued interest receivable
  2,038,293
  
  1,694,648Other real estate owned
  1,594,253
  
  -Other assets
  2,423,012
  
  2,264,713Total assets
  $
  455,256,123
  
  $
  405,312,543LiabilitiesDeposits
  $
  294,941,178
  
  $
  254,148,041Official checks outstanding
  1,336,897
  
  7,786,468Federal funds purchased and repurchase agreements
  13,730,000
  
  14,680,000Federal Home Loan Bank advances
  97,500,000
  
  79,500,000Junior subordinated debentures
  13,403,000
  
  13,403,000Accrued interest payable
  1,786,076
  
  1,510,635Accounts payable and accrued expenses
  583,182
  
  3,811,652Total liabilities
  423,280,333
  
  374,839,796Commitments and contingenciesShareholders' equityPreferred stock, par value $.01 per share, 10,000,000 sharesauthorized, no shares issued
  -
  
  -Common stock, par value $.01Authorized, 10,000,000 shares, issued and outstanding  2,933,391 and2,659,719 at June 30, 2006 and December 31, 2005,
  respectively
  29,334
  
  26,597Additional paid-in capital
  25,722,161
  
  25,626,740Accumulated other comprehensive loss
  (506,108)
  
  (150,602)Retained earnings
  6,730,403
  
  4,970,012Total shareholders' equity
  31,975,790
  
  30,472,747Total liabilities and
  shareholders' equity
  $
  455,256,123
  
  $
  405,312,543




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



2




GREENVILLE
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME



For the
  three months endedJune 30,2006
  
  2005(Unaudited)Interest incomeLoans
  $
  6,797,310
  
  $
  4,771,012Investment securities
  657,156
  
  429,775Federal funds sold
  43,405
  
  27,509Total interest income
  7,497,871
  
  5,228,296Interest expenseDeposits
  2,515,278
  
  1,453,248Borrowings
  1,419,707
  
  853,709Total interest expense
  3,934,985
  
  2,306,957Net interest income
  3,562,886
  
  2,921,339Provision for loan losses
  400,000
  
  265,000Net interest income after provision for loan losses
  3,162,886
  
  2,656,339Noninterest incomeLoan fee income
  28,661
  
  49,745Service fees on deposit accounts
  66,188
  
  62,600Other real estate owned activity
  (14,489)
  
  -Other income
  53,638
  
  105,149Total noninterest income
  133,998
  
  217,494Noninterest expensesCompensation and benefits
  1,057,121
  
  795,855Professional fees
  91,427
  
  85,683Marketing
  103,556
  
  118,029Insurance
  44,674
  
  36,738Occupancy
  158,829
  
  204,585Data processing and related costs
  198,719
  
  232,597Telephone
  23,396
  
  12,082Other
  91,676
  
  63,008Total noninterest expenses
  1,769,398
  
  1,548,577Income before income taxes expense
  1,527,486
  
  1,325,256Income tax expense
  557,531
  
  503,598Net income
  $
  969,955
  
  $
  821,658Earnings per common shareBasic
  $
  .33
  
  $
  .28Diluted
  $
  .30
  
  $
  .26Weighted average common shares outstandingBasic
  2,931,723
  
  2,925,423Diluted
  3,236,262
  
  3,218,699




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

3




GREENVILLE
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME



For the
  six months endedJune 30,2006
  
  2005(Unaudited)Interest incomeLoans
  $
  12,943,359
  
  $
  8,942,273Investment securities
  1,088,846
  
  834,865Federal funds sold
  91,796
  
  33,320Total interest income
  14,124,001
  
  9,810,458Interest expenseDeposits
  4,628,236
  
  2,607,934Borrowings
  2,573,076
  
  1,600,595Total interest expense
  7,201,312
  
  4,208,529Net interest income
  6,922,689
  
  5,601,929Provision for loan losses
  800,000
  
  610,000Net interest income after provision for loan losses
  6,122,689
  
  4,991,929Noninterest incomeLoan fee income
  59,462
  
  96,369Service fees on deposit accounts
  128,259
  
  136,137Other real estate owned activity
  (14,489)
  
  -Other income
  116,341
  
  198,364Total noninterest income
  289,573
  
  430,870Noninterest expensesCompensation and benefits
  2,090,862
  
  1,590,648Professional fees
  181,864
  
  163,926Marketing
  242,125
  
  208,308Insurance
  87,708
  
  73,561Occupancy
  333,606
  
  370,310Data processing and related costs
  396,589
  
  447,805Telephone
  39,278
  
  23,034Other
  186,910
  
  155,196Total noninterest expenses
  3,558,942
  
  3,032,788Income before income taxes expense
  2,853,320
  
  2,390,011Income tax expense
  1,041,461
  
  908,204Net income
  $
  1,811,859
  
  $
  1,481,807Earnings per common shareBasic
  $
  .62
  
  $
  .51Diluted
  $
  .56
  
  $
  .46Weighted average common shares outstandingBasic
  2,929,486
  
  2,919,108Diluted
  3,241,049
  
  3,214,537




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



4




GREENVILLE FIRST
BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
AND COMPREHENSIVE INCOME 
FOR THE SIX MONTHS ENDED JUNE 30, 2006  AND 2005
(Unaudited)



Accumulated
  
  
  
  TotalAdditional
  
  other
  
  
  
  share-Common
  stock
  
  paid-in
  
  comprehensive
  
  Retained
  
  holders'Shares
  
  Amount
  
  capital
  
  income
  (loss)
  
  earnings
  
  equityDecember 31, 2004
  2,647,994
  
  $
  26,480
  
  $
  25,546,259
  
  $
  49,989
  
  $
  2,455,860
  
  $
  28,078,588Net income
  -
  
  -
  
  -
  
  -
  
  1,481,807
  
  1,481,807Comprehensive income, net of tax -Unrealized holding loss on securitiesavailable for sale
  -
  
  -
  
  -
  
  (83,948)
  
  -
  
  (83,948)Comprehensive income
  -
  
  -
  
  -
  
  -
  
  -
  
  1,397,859Proceeds from exercise of stockoptions and warrants
  11,481
  
  115
  
  78,816
  
  -
  
  -
  
  78,931June 30, 2005
  2,659,475
  
  $
  26,595
  
  $
  25,625,075
  
  $
  (33,959)
  
  $
  3,937,667
  
  $
  29,555,378December 31, 2005
  2,659,719
  
  $
  26,597
  
  $
  25,626,740
  
  $
  (150,602)
  
  $
  4,970,012
  
  $
  30,472,747Net income
  -
  
  -
  
  -
  
  -
  
  1,811,859
  
  1,811,859Comprehensive income, net of tax -Unrealized holding loss on securitiesavailable for sale
  -
  
  -
  
  -
  
  (355,506)
  
  -
  
  (355,506)Comprehensive income
  -
  
  -
  
  -
  
  -
  
  -
  
  1,456,353Proceeds from exercise of stockoptions
  7,000
  
  70
  
  46,620
  
  -
  
  -
  
  46,690Stock dividend - 10 percent
  266,672
  
  2,667
  
  48,801
  
  -
  
  (51,468)
  
  -June 30, 2006
  2,933,391
  
  $
  29,334
  
  $
  25,722,161
  
  $
  (506,108)
  
  $
  6,730,403
  
  $
  31,975,790




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

5




GREENVILLE
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS



For the six
  months endedJune 30,2006
  
  2005(Unaudited)Operating activitiesNet income
  $
  1,811,859
  
  $
  1,481,807Adjustments to reconcile net income to cashprovided by (used for) operating activities:Provision for loan losses
  800,000
  
  610,000Depreciation and other amortization
  173,992
  
  116,465Accretion and amortization of securities discounts and premium,
  net
  53,081
  
  62,717Increase in deferred tax asset
  (10,908)
  
  (209,823)Increase in other assets, net
  (307,896)
  
  (349,248)Decrease (increase) in other liabilities, net
  (9,402,600)
  
  90,223Net cash provided by (used for) operating activities
  (6,882,472)
  
  1,802,141Investing activitiesIncrease (decrease) in cash realized from:Origination of loans, net
  (42,276,959)
  
  (30,823,014)Purchase of property and equipment
  (313,191)
  
  (758,200)Purchase of investment securities:Available for sale
  (21,991,570)
  
  -Held to maturity
  -
  
  (10,258,021)Other investments
  (4,014,700)
  
  (3,224,250)Payments and maturity of investment securities:Available for sale
  1,407,356
  
  960,230Held to maturity
  1,118,207
  
  1,503,985Other investments
  2,925,000
  
  2,144,700Proceeds from sale of real estate acquired in settlement of
  loans
  524,168
  
  28,000Net cash used for investing activities
  (62,621,689)
  
  (40,426,570)Financing activitiesIncrease in deposits, net
  40,793,137
  
  24,011,530Increase (decrease) in short-term borrowings
  (950,000)
  
  3,929,001Proceeds from the exercise of stock options
  46,690
  
  78,931Increase in Federal Home Loan Bank advances
  18,000,000
  
  11,840,000Net cash provided by financing activities
  57,889,827
  
  39,859,462Net increase (decrease) in cash and cash equivalents
  (11,614,334)
  
  1,235,033Cash and cash equivalents at beginning of  the period
  25,604,152
  
  5,338,336Cash and cash equivalents at end of the period
  $
  13,989,818
  
  $
  6,573,369Supplemental informationCash paid forInterest
  $
  6,925,871
  
  $
  3,771,000Income taxes
  $
  1,052,369
  
  $
  1,118,000Schedule of non-cash transactionsForeclosure of real estate
  $
  2,118,421
  
  $
  -Unrealized loss on securities, net of income taxes
  $
  (355,506)
  
  $
  (83,948)




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



6




GREENVILLE FIRST
BANCSHARES, INC.  AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note
1 - Nature of Business and Basis of PresentationBusiness activity             Greenville First Bancshares, Inc. is a South Carolina
corporation that owns all of the capital stock of Greenville First Bank, N.A.and all of the stock of Greenville First Statutory Trust I and Trust II (collectively
the "Trusts").  The bank is a national bank organized under the laws of the
United States located in Greenville County, South Carolina.  The bank is
primarily engaged in the business of accepting demand deposits and savings
deposits insured by the Federal Deposit Insurance Corporation, and providing
commercial, consumer and mortgage loans to the general public.  The Trusts are
special purpose subsidiaries for the sole purpose of issuing trust preferred
securities.



Basis
of PresentationThe accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q.  Accordingly, they do not
include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been
included.  Operating results for the three and six month periods ended June 30,
2006 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2006.  For further information, refer to the
consolidated financial statements and footnotes thereto included in the
company's Form 10-K for the year ended December 31, 2005 (Registration Number
000-27719) as filed with the Securities and Exchange Commission.  The
consolidated financial statements include the accounts of Greenville First
Bancshares, Inc., and its wholly owned subsidiary Greenville First Bank, N.A.  The
financial statements related to the special purpose subsidiaries, Greenville
First Statutory Trust I and Trust II, have not been consolidated in accordance with
Financial Accounting Standards Board ("FASB") Interpretation No. 46.



Cash
and Cash Equivalents



For
purposes of the Consolidated Statements of Cash Flows, cash and federal funds
sold are included in "cash and cash equivalents."  These assets have contractual
maturities of less than three months.



Note
2 - Stock Dividend



On
June 20, 2006, the company's Board of Directors approved a 10 percent stock
dividend to the company's shareholders.  The record date was July 24, 2006 and
the distribution date was August 14, 2006.  Earnings per share and average
shares outstanding have been adjusted to reflect the stock dividend in
our Consolidated Statements of Income and in Note 4.



Note
3 - Note Payable



The company has an unused $4.5 million revolving
line of credit with another bank that matures on March 20, 2007.  The line of
credit bears interest at a rate of three-month libor plus 2.00%, which at June
30, 2006 was 7.48%.  The company has pledged the stock of the bank as
collateral for this line of credit.  The line of credit agreement contains
various covenants related to net income and asset quality.  As of June 30, 2006,
the company believes it is in compliance with all covenants.





7




Note
4 - Earnings per ShareThe
following schedule reconciles the numerators and denominators of the basic and
diluted earnings per share computations for the three months and six months ended
June 30, 2006 and 2005.  Dilutive common shares arise from the potentially
dilutive effect of the company's stock options and warrants that are
outstanding.  The assumed conversion of stock options and warrants can create a
difference between basic and dilutive net income per common share.  The average
dilutive shares have been computed utilizing the "treasury stock" method.



Three months ended June
  30,2006
  
  2005Basic
  Earnings Per ShareAverage common shares
  2,931,723
  
  2,925,423Net income
  $
  969,955
  
  $
  821,658Earnings per share
  $
  0.33
  
  $
  0.28Diluted
  Earnings Per ShareAverage common shares
  2,931,723
  
  2,925,423Average dilutive common shares
  304,539
  
  293,276Adjusted average common shares
  3,236,262
  
  3,218,699Net income
  $
  969,955
  
  $
  821,658Earnings per share
  $
  0.30
  
  $
  0.26






Six months ended June
  30,2006
  
  2005Basic
  Earnings Per ShareAverage common shares
  2,929,486
  
  2,919,108Net income
  $
  1,811,859
  
  $
  1,481,807Earnings per share
  $
  0.62
  
  $
  0.51Diluted
  Earnings Per ShareAverage common shares
  2,929,486
  
  2,919,108Average dilutive common shares
  311,563
  
  295,429Adjusted average common shares
  3,241,049
  
  3,214,537Net income
  $
  1,811,859
  
  $
  1,481,807Earnings per share
  $
  0.56
  
  $
  0.46




Note
5 - Stock Based Compensation



The company has a stock-based employee compensation plan.  On January
1, 2006, the company adopted the fair value recognition provisions of the FASB's
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Accounting
for Stock-Based Compensation, to account for compensation costs under its
stock option plan.  The company previously utilized the intrinsic value method
under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (as amended) ("APB 25").  Under the intrinsic value
method prescribed by APB 25, no compensation costs were recognized for the company's
stock options because the option exercise price in its plans equals the market
price on the date of grant.  Prior to January 1, 2006, the company only
disclosed the pro forma effects on net income and earnings per share as if the
fair value recognition provisions of SFAS No. 123(R) had been utilized. On
December 20, 2005, the Board of Directors approved accelerating the vesting of
45,813 unvested stock options effective December 28, 2005.  The decision to
accelerate vesting of these options was made so as to reduce compensation
expense upon the adoption of SFAS No. 123(R) by approximately $68,000 and
$52,000 in the years ended December 31, 2006 and 2007, respectively, and $4,000
in each of the years ended December 31, 2008 and 2009.



In adopting SFAS No. 123, the company elected to use the modified
prospective method to account for the transition from the intrinsic value
method to the fair value recognition method.  Under the modified prospective
method, compensation cost is recognized from the adoption date forward for all
new stock options granted and for any outstanding unvested awards as if the
fair value method had been applied to those awards as of the date of grant. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method had been applied to all outstanding and unvested
awards in each period.  All stock options were fully vested at June 30, 2006.



8




Three months ended June
  30,2006
  
  2005Net
  income as reported
  $
  969,955
  
  $
  821,658Add: 
  Stock-based employee compensation expense included in reported netIncome,
  net of related tax effects
  
  -
  
  
  -Deduct: 
  Total stock-based employee compensation expense determined under fairvalue
  based method for all awards, net of related tax effects
  
  -
  
  
  (17,992)Pro
  forma net income including stock-based compensation cost based on fair-value
  method
  $
  969,955
  
  $
  803,666Earnings
  per share:Basic - as reported
  $
  0.33
  
  $
  0.28Basic - pro forma
  $
  0.33
  
  $
  0.27Diluted
  - as reported
  $
  0.30
  
  $
  0.26Diluted
  - pro forma
  $
  0.30
  
  $
  0.25




Six months ended June
  30,2006
	
  2005Net
  income as reported
  $
  1,811,859
  
  $
  1,481,807Add: 
  Stock-based employee compensation expense included in reported netIncome,
  net of related tax effects
  
  -
  
  
  -Deduct: 
  Total stock-based employee compensation expense determined under fairvalue
  based method for all awards, net of related tax effects
  
  -
  
  
  (35,984)Pro
  forma net income including stock-based compensation cost based on fair-value
  method
  $
  1,811,859
  
  $
  1,445,823Earnings
  per share:Basic - as reported
  $
  0.62
  
  $
  0.51Basic - pro forma
  $
  0.62
  
  $
  0.50Diluted
  - as reported
  $
  0.56
  
  $
  0.46Diluted
  - pro forma
  $
  0.56
  
  $
  0.45




The fair
value of the option grant is estimated on the date of grant using the
Black-Scholes option-pricing model.  The following assumptions were used for
grants: expected volatility of 6.76% for 2005, risk-free interest rate of 4.02%
for 2005, expected lives of the options 10 years, and the assumed dividend rate
was zero.  No options were granted during the three and six month periods ended
June 30, 2006.



Item
2.Management's Discussion and Analysis of Financial Condition and Results of
Operations.



The
following discussion reviews our results of operations and assesses our
financial condition.  You should read the following discussion and analysis in
conjunction with the accompanying consolidated financial statements.  The
commentary should be read in conjunction with the discussion of forward-looking
statements, the financial statements and the related notes and the other
statistical information included in this report.

DISCUSSION OF FORWARD-LOOKING STATEMENTS



This
report contains "forward-looking statements" relating to, without limitation,
future economic performance, plans and objectives of management for future
operations, and projections of revenues and other financial items that are
based on the beliefs of management, as well as assumptions made by and
information currently available to management.  The words "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate,"
"continue," and "intend," as well as other similar words and expressions of the
future, are intended to identify forward-looking statements.  Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to



9




various risks and uncertainties that are
discussed in detail in our filings with the Securities and Exchange Commission,
including, without limitation:



   
significant
increases in competitive pressure in the banking and financial services
industries;

   
changes
in the interest rate environment which could reduce anticipated or actual
margins;

   
changes
in political conditions or the legislative or regulatory environment;

   
general
economic conditions, either nationally or regionally and especially in our
primary service area, becoming less favorable than expected resulting in, among
other things, a deterioration in credit quality;

   
changes
occurring in business conditions and inflation;

   
changes
in technology;

   
changes
in monetary and tax policies;

   
the
level of allowance for loan loss;

   
the
rate of delinquencies and amounts of charge-offs;

   
the
rates of loan growth and the lack of seasoning of our loan portfolio;

   
adverse
changes in asset quality and resulting credit risk-related losses and expenses;

   
loss
of consumer confidence and economic disruptions resulting from terrorist
activities;

   
changes
in the securities markets; and

   
other
risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission.



Overview



We were incorporated in March 1999 to organize and serve as the holding
company for Greenville First Bank, N.A.  Since we opened our bank in January
2000, we have experienced consistent growth in total assets, loans, deposits,
and shareholders' equity, which has continued during the first six months of
2006.  To support this growth, we conducted an underwritten public offering of
our common stock in September and October 2004.  On September 24, 2004 and  October 15, 2004, we sold 800,000 and 120,000 shares, respectively, of common
stock.  The net proceeds from this offering were approximately $15.0 million.



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



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



In
addition to earning interest on our loans and investments, we earn income
through fees and other charges to our customers.  We have also included a
discussion of the various components of this noninterest income, as well as of
our noninterest expense.



The
following discussion and analysis also identifies significant factors that have
affected our financial position and operating results during the periods
included in the accompanying financial statements.  We encourage you to read
this discussion and analysis in conjunction with our financial statements and
the other statistical information included in our filings with the Securities
and Exchange Commission.



#### Critical
Accounting Policies



We have adopted various accounting policies that govern
the application of accounting principles generally accepted in the United
States and with general practices within the banking industry in the
preparation of our financial statements.  Our significant accounting policies
are described in the footnotes to our audited consolidated financial statements
as of December 31, 2005, as filed in our annual report on Form 10-K.



10




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



We
believe the allowance for loan losses is the critical accounting policy that
requires the most significant judgments and estimates used in preparation of
our consolidated financial statements.  Some of the more critical judgments
supporting the amount of our allowance for loan losses include judgments about
the credit worthiness of borrowers, the estimated value of the underlying
collateral, the assumptions about cash flow, determination of loss factors for estimating
credit losses, the impact of current events, and conditions, and other factors
impacting the level of probable inherent losses.  Under different conditions,
the actual amount of credit losses incurred by us may be different from
management's estimates provided in our consolidated financial statements. 
Refer to the portion of this discussion that addresses our allowance for loan
losses for a more complete discussion of our processes and methodology for
determining our allowance for loan losses.



Effect
of Economic Trends



Beginning in July of 2004 and through the second
quarter of 2006, our short-term or variable rate interest-earning assets and
interest-bearing liabilities increased as the Federal Reserve began to increase
short-term rates as the economy showed signs of strengthening following an
economic decline and historically low interest rates.  During this period, the
Federal Reserve increased rates 16 times for a total of 400 basis points.  Three
of these rate increases occurred during the first six months of 2006 for a
total of 75 basis points.  Many economists believe that the Federal Reserve is
nearing the end of the rate increases.  The following discussion includes our
analysis of the effect we anticipate these rising interest rates will have on
our financial condition.  However, no assurance can be given that the Federal
Reserve will actually end the interest rate hikes or that the results we
anticipate will actually occur.





Results of Operations
Income Statement ReviewSummary



Three months ended June
30, 2006 and 2005



Our net income was $969,955
and $821,658 for the three months ended June 30, 2006 and 2005, respectively,
an increase of $148,297, or 18.1%.  The increase in net income resulted
primarily from an increase of $641,547 in net interest income which was
partially offset by an increase of $135,000 in the provision for loan losses, a
decrease of $83,496 in noninterest income, $220,821 of additional noninterest
expense and a $53,933 increase in income tax expense.  Our efficiency ratio has
continued to improve because our net interest income and other income continue
to increase at a higher rate than the increases in our overhead expenses.  Our
efficiency ratio was 47.9% and 49.3% for the three months ended June 30, 2006
and 2005, respectively.



Six months ended June
30, 2006 and 2005



Our net income was $1,811,859
and $1,481,807 for the six months ended June 30, 2006 and 2005, respectively,
an increase of $330,052, or 22.3%.  The increase in net income resulted
primarily from an increase of $1,320,760 in net interest income, partly offset
by an increase of $190,000 in the provision for loan losses, a decrease of $141,297
in noninterest income, $526,154 of additional noninterest expense and a $133,257
increase in income tax expense.  Our efficiency ratio has continued to improve
because our net interest income and other income continue to increase at a
higher rate than the increases in our overhead expenses.  Our efficiency ratio
was 49.3% and 50.3% for the six months ended June 30, 2006 and 2005,
respectively.



11




Net Interest Income



Our level
of net interest income is determined by the level of earning assets and the
management of our net interest margin.  The continuous growth in our loan
portfolio is the primary driver of the increase in net interest income.  During
the six months ended June 30, 2006, our average loan portfolio was $64.9
million higher compared to the average for the six months ended June 30, 2005. 
The growth in the first six months of 2006 was $39.1 million.  We anticipate
the growth in loans will continue to drive the growth in assets and the growth
in net interest income.  However, no assurance can be given that we will be
able to continue to increase loans at the same levels we have experienced in the
past.



Our decision to grow the loan portfolio at the
current pace created the need to increase deposits and borrowings.  This loan
growth strategy also resulted in a significant portion of our assets being in
higher earning loans than in lower yielding investments.  At June 30, 2006, net
loans represented 82.0% of total assets, while investments and federal funds
sold represented 13.3% of total assets.  While we plan to continue our focus on
increasing the loan portfolio, as rates on investment securities continue to
rise and additional deposits are obtained, we also anticipate increasing the
size of the investment portfolio.



The historically low interest rate environment
in the last four years allowed us to obtain short-term borrowings and wholesale
certificates of deposit generally at rates that were lower than certificate of
deposit rates being offered in our local market.  Therefore, we decided not to
begin our retail deposit office expansion program until the beginning of 2005. 
This funding strategy allowed us to continue to operate in one location until
2005, maintain a smaller staff, and not incur marketing costs to advertise
deposit rates, which in turn allowed us to focus on the fast growing loan
portfolio.  At June 30, 2006, retail deposits represented $218.2 million, or 47.9%
of total assets, borrowings represented $124.6 million, or 27.4% of total
assets, and wholesale out-of-market deposits represented $76.8 million, or 16.9%
of total assets.



In anticipation of rising interest rates, we opened
one retail deposit office in March of 2005 and a second in
November of 2005.  We plan to focus our efforts in these two locations to
obtain low cost transaction accounts that we believe will not be affected as
much by changing rates.  Our goal is to increase both the percentage of assets
being funded by "in market" retail deposits and to increase the percentage of
low-cost transaction accounts to total deposits.  We anticipate that the two
additional retail deposit offices will assist us in meeting these objectives,
although no assurance can be given that these objectives will be achieved.  We
also anticipate that deposit promotions and the opening of the two new offices
will continue to have a negative impact on earnings in the year 2006.  However,
we believe that these two strategies will provide additional clients in our
local market and will provide a lower alternative cost of funding.



As more fully discussed in the - "Market Risk"
and - "Liquidity and Interest Rate Sensitivity" sections below, at June 30,
2006, 54.6% of our loans had variable rates.  Given our percentage of
rate-sensitive loans, our primary focus during the past three years has been to
obtain short-term liabilities to fund our asset growth.  This strategy improves
our ability to manage the impact on our earnings resulting from anticipated changes
in market interest rates.



At June 30, 2006, 76.5% of our interest-bearing
liabilities had a maturity of less than one year.   Therefore, we believe that
we are positioned to benefit from future decreases in short-term rates.  Conversely,
future increases in short-term rates would likely have a negative effect on our
earnings.  At June 30, 2006, we had $58.0 million more liabilities than assets
that reprice within the next twelve months.



We intend to maintain a capital
level for the bank 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 in assets, in 2003 we issued $6.2 million in junior subordinated
debentures in connection with our trust preferred securities offering.  During
2004, we issued 920,000 additional shares of common stock that resulted in
$14.9 million of additional capital.  In 2005, we issued an additional $7.2
million in junior subordinated debentures in a second trust preferred
securities offering.  We also
have a $4.5 million unused
short-term holding company line of credit that could be utilized to
provide additional capital for the bank if deemed necessary. As of June 30,
2006, the company's regulatory capital levels were over $13.7 million in excess of the various well capitalized requirements.



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



12




Our net interest income margin was
3.33% and 3.40% for the three months and six months ended June 30, 2006, while
our net
interest spread was 2.90% and 2.96% for the same periods, respectively.  During these
periods, our net interest margin exceeded our net interest spread because we
had more interest-earning assets than interest-bearing liabilities.  Average
interest-earning assets exceeded average interest-bearing liabilities by $45.4
million, and $45.8 million for the three and six months ended June 30, 2006 and
2005, respectively.



During the three and six months ended June 30,
2006, our rates on both short-term or variable rate earning-assets and
short-term or variable rate interest-bearing liabilities continued to increase primarily
as a result of the actions taken by the Federal Reserve over the last twelve
months to raise short-term rates.  The impact of the Federal Reserve's actions
resulted in an increase in both the yields on our variable rate assets and the
rates that we paid for our short-term deposits and borrowings.  Our net
interest spread declined since more of our rate sensitive liabilities repriced than
our rate sensitive assets during the 12 month period ending June 30, 2006.  Given
the fact that the Federal Reserve has increased short-term rates by 400 basis
points since July 2004, we believe that short-term interest rates are currently
at or near their peak.  Therefore, we have chosen to increase the amount of
fixed rate loans in our loan portfolio and targeted to have a significant
portion of our liabilities to reprice within a twelve month period.



We have included a number of tables to assist in
our description of various measures of our financial performance.  For example,
the "Average Balances" tables show the average balance of each category of our
assets and liabilities as well as the yield we earned or the rate we paid with
respect to each category during the three and six months ended June 30, 2006
and 2005.  A review of these tables show that our loans typically provide
higher interest yields than do other types of interest-earning assets, which is
why we direct a substantial percentage of our earning assets into our loan
portfolio.  Similarly, the "Rate/Volume Analysis" tables demonstrate the effect
of changing interest rates and changing volume of assets and liabilities on our
financial condition during the periods shown.  A review of these tables shows that
the significant portion of the increases in net interest income in both the
2006 and 2005 periods have resulted from the increased levels of assets and
liabilities in each period.  We also track the sensitivity of our various
categories of assets and liabilities to changes in interest rates, and we have
included tables to illustrate our interest rate sensitivity with respect to
interest-earning accounts and interest-bearing accounts.  Finally, we have
included various tables that provide detail about our investment securities,
our loans, our deposits, and other borrowings.



The following table sets forth information
related to our average balance sheets, average yields on assets, and average
costs of liabilities.  We derived these yields by dividing income or expense by
the average balance of the corresponding assets or liabilities.  We derived
average balances from the daily balances throughout the periods indicated. 
During the three-month and six-month periods ended June 30, 2006 and 2005, we
had no interest-bearing deposits in other banks or any securities purchased
with agreements to resell.  All investments were owned at an original maturity
of over one year.  Nonaccrual loans are included in the following tables.  Loan
yields have been reduced to reflect the negative impact on our earnings of
loans on nonaccrual status.  The net of capitalized loan costs and fees are
amortized into interest income on loans.



13




Average Balances,
  Income and Expenses, and RatesFor the Three Months
  Ended June 30,2006
  
  2005Average
  
  Income/
  
  Yield/
  
  Average
  
  Income/
  
  Yield/Balance
  
  Expense
  
  Rate(1)
  
  Balance
  
  Expense
  
  Rate(1)(Dollars in thousands)EarningsFederal
  funds sold
  $
  3,554
  $
  44
  
  4.85%
  $
  3,533
  $
  27
  
  3.07%Investment
  securities
  
  52,958
  
  657
  
  4.98%
  
  38,318
  
  430
  
  4.50%Loans
  
  372,734
  
  6,797
  
  7.31%
  
  306,669
  
  4,771
  
  6.24%Total earning-assets
  
  429,246
  
  7,498
  
  7.01%
  
  348,520
  
  5,228
  
  6.02%Non-earning
  assets
  
  15,063
  
  
  
  
  
  6,113Total assets
  $
  444,309
  
  
  
  
  $
  354,663Interest-bearing
  liabilitiesNOW
  accounts
  $
  45,057
  
  210
  
  1.87%
  $
  28,284
  
  98
  
  1.39%Savings
  & money market
  
  78,484
  
  708
  
  3.62%
  
  45,809
  
  202
  
  1.77%Time
  deposits
  
  140,698
  
  1,597
  
  4.55%
  
  131,436
  
  1,153
  
  3.52%Total
  interest-bearing deposits
  
  264,239
  
  2,515
  
  3.82%
  
  205,529
  
  1,453
  
  2.84%FHLB
  advances
  
  89,173
  
  958
  
  4.31%
  
  73,016
  
  609
  
  3.35%Other
  borrowings
  
  30,475
  
  462
  
  6.08%
  
  25,036
  
  245
  
  3.93%Total interest-bearing liabilities
  
  383,887
  
  3,935
  
  4.11%
  
  303,581
  
  2,307
  
  3.05%Non-interest
  bearing liabilities
  
  28,367
  
  
  
  
  
  21,694Shareholders'
  equity
  
  32,055
  
  
  
  
  
  29,358Total
  liabilities and shareholders' equity
  $
  444,309
  
  
  
  
  $
  354,633Net
  interest spread
  
  
  
  
  
  2.90%
  
  
  
  
  
  2.97%Net
  interest income / margin
  
  
  $
  3,563
  
  3.33%
  
  
  $
  2,921
  
  3.36%(1) Annualized for the three month period.




Our net interest spread was 2.90% for the three
months ended June 30, 2006, compared to 2.97% for the three months ended June
30, 2005.  The net interest spread is the difference between the yield we earn
on our interest-earning assets and the rate we pay on our interest-bearing
liabilities.  Because we had more interest-bearing liabilities than
interest-earning assets that repriced, our net interest spread decreased 7
basis points in the three months ended June 30, 2006, compared to the same
period in 2005.



Our net interest margin is
calculated as net interest income divided by average interest-earning assets. 
Our net interest margin for the three months ended June 30, 2006 was 3.33%,
compared to 3.36% for the three months ended June 30, 2005.  During the three
months ended June 30, 2006, interest-earning assets averaged $429.2 million,
compared to $348.5 million in the three months ended June 30, 2005.  Interest
earning assets exceeded interest bearing liabilities by $45.4 million and $44.9
million for the three month periods ended June 30, 2006 and 2005,
respectively.



Our loan yield increased 107 basis points for
the three months ended June 30, 2006 compared to the three months ended June 30,
2005 as a result of approximately 55% of the loan portfolio having variable
rates, combined with the increase in rates over the twelve months ended June 30,
2006.  Offsetting the increase in our loan yield is a 98 basis point increase
in the cost of our interest-bearing deposits for the second quarter of 2006
compared to the same period in 2005.  The increase in the rate on our time
deposits is due to the renewal rates on time deposits being much higher than
the original rates as a result of the number of increases in the market rate in
the past twenty-four months.  In addition, the cost of our savings and money
market accounts has increased by 185 basis points as we have increased the
rates we offer on these products to stay competitive in response to the
increase in short-term market rates.  The 96 basis point increase in FHLB
advances and the 215 basis point increase in other borrowed funds in the second
quarter of 2006 compared to the same period in 2005 resulted primarily from the
impact of the 175 basis point increase in short-term market rates over the past
twelve months.  As of June 30, 2006, approximately 41% of our FHLB advances had
variable rates, while all of our other borrowings had variable rates.



14




Net interest income, the largest component of
our income, was $3.6 million and $2.9 million for the three months ended June
30, 2006 and 2005, respectively.  Of the $641,547 increase in net interest
income in the second quarter of 2006, approximately $579,000 related to the
impact of higher average earning assets and interest-bearing liabilities in the
three months ended June 30, 2006 compared to the same period in 2005.  Average
earning assets were $80.7 million higher during the three months ended June 30,
2006 compared to the same period in 2005 and average interest-bearing
liabilities increased by $80.3 million during the same period.  The remaining
increase in net interest income is largely a result of the net impact of higher
interest rates on both interest-earning assets and interest-bearing
liabilities.



Interest income for the three months ended June
30, 2006 was $7.5 million, consisting of $6.8 million on loans, $657,156 on
investments, and $43,405 on federal funds sold.  Interest income for the three
months ended June 30, 2005 was $5.2 million, consisting of $4.8 million on
loans, $429,775 on investments, and $27,509 on federal funds sold.  Interest on
loans for the three months ended June 30, 2006 and 2005 represented 90.7% and
91.3%, respectively, of total interest income, while income from investments
and federal funds sold represented only 9.3% and 8.7% of total interest
income.  The high percentage of interest income from loans relates to our
strategy to maintain a significant portion of our assets in higher earning
loans compared to lower yielding investments.  Average loans represented 86.8%
and 88.0% of average interest-earning assets for the three months ended June
30, 2006 and 2005, respectively.  Included in interest income on loans for the
three months ended June 30, 2006 and 2005 was $137,239 and $158,042,
respectively, related to the net amortization of loan fees and capitalized loan
origination costs.



Interest expense for the three months ended June
30, 2006 was $3.9 million, consisting of $2.5 million related to deposits and
$1.4 million related to borrowings.  Interest expense for the three months
ended June 30, 2005 was $2.3 million, consisting of $1.5 million related to
deposits and $853,709 related to borrowings.  Interest expense on deposits for
the three months ended June 30, 2006 and 2005 represented 63.9% and 63.0%,
respectively, of total interest expense, while interest expense on borrowings
represented 36.1% and 37.0%, respectively, of total interest expense for the
same three month periods.  During the three months ended June 30, 2006, average
interest-bearing deposits increased by $58.7 million over the same period in
2005, while FHLB and other borrowings during the three months ended June 30,
2006 increased $21.6 million over the same
period in 2005.  Both the short-term borrowings from the FHLB and the sale of
securities under agreements to repurchase provide us with the opportunity to
obtain low cost funding with various maturities similar to the maturities on
our loans and investments.



15




Average Balances,
  Income and Expenses, and RatesFor the Six Months
  Ended June 30,2006
  
  2005Average
  
  Income/
  
  Yield/
  
  Average
  
  Income/
  
  Yield/Balance
  
  Expense
  
  Rate(1)
  
  Balance
  
  Expense
  
  Rate(1)(Dollars in thousands)EarningsFederal
  funds sold
  $
  3,720
  $
  92
  
  4.99%
  $
  2,270
  $
  33
  
  2.93%Investment
  securities
  
  44,417
  
  1,089
  
  4.94%
  
  37,534
  
  835
  
  4.49%Loans
  
  362,288
  
  12,943
  
  7.20%
  
  297,350
  
  8,942
  
  6.06%Total earning-assets
  
  410,425
  
  14,124
  
  6.94%
  
  337,154
  
  9,810
  
  5.87%Non-earning
  assets
  
  13,008
  
  
  
  
  
  5,724Total assets
  $
  423,433
  
  
  
  
  $
  342,878Interest-bearing
  liabilitiesNOW
  accounts
  $
  39,053
  
  357
  
  1.84%
  $
  29,013
  
  199
  
  1.38%Savings
  & money market
  
  69,328
  
  1,136
  
  3.30%
  
  47,726
  
  398
  
  1.68%Time
  deposits
  
  144,211
  
  3,135
  
  4.38%
  
  119,780
  
  2,011
  
  3.39%Total
  interest-bearing deposits
  
  252,592
  
  4,628
  
  3.69%
  
  196,519
  
  2,608
  
  2.68%FHLB
  advances
  
  82,421
  
  1,711
  
  4.19%
  
  72,595
  
  1,146
  
  3.18%Other
  borrowings
  
  29,567
  
  862
  
  5.88%
  
  24,880
  
  454
  
  3.68%Total interest-bearing liabilities
  
  364,580
  
  7,201
  
  3.98%
  
  293,994
  
  4,208
  
  2.89%Non-interest
  bearing liabilities
  
  27,194
  
  
  
  
  
  20,071Shareholders'
  equity
  
  31,659
  
  
  
  
  
  28,813Total
  liabilities and shareholders' equity
  $
  423,433
  
  
  
  
  $
  342,878Net
  interest spread
  
  
  
  
  
  2.96%
  
  
  
  
  
  2.98%Net
  interest income / margin
  
  
  $
  6,923
  
  3.40%
  
  
  $
  5,602
  
  3.35%(1) Annualized for the six month period.




Our net interest spread was 2.96% for the six
months ended June 30, 2006, compared to 2.98% for the six months ended June 30,
2005.  The net interest spread is the difference between the yield we earn on
our interest-earning assets and the rate we pay on our interest-bearing
liabilities.  Because we had more interest-bearing liabilities than
interest-earning assets that repriced, our net interest spread decreased 2
basis points in the six months ended June 30, 2006, compared to the same period
in 2005.



Our net interest margin
is calculated as net interest income divided by average interest-earning
assets.  Our net interest margin for the six months ended June 30, 2006 was 3.40%,
compared to 3.35% for the six months ended June 30, 2005.  During the six
months ended June 30, 2006, interest-earning assets averaged $410.4 million,
compared to $337.2 million in the six months ended June 30, 2005.  Interest
earning assets exceeded interest bearing liabilities by $45.8 million and $43.2
million for the six month periods ended June 30, 2006 and 2005, respectively.



Our loan yield increased 114 basis points for
the six months ended June 30, 2006 compared to the six months ended June 30,
2005 as a result of approximately 55% of the loan portfolio having variable
rates, combined with the increase in rates over the twelve months ended June
30, 2006.  Offsetting the increase in our loan yield is a 101 basis point
increase in the cost of our interest-bearing deposits for the first six months
of 2006 compared to the same period in 2005.  The increase in the rate on our
time deposits is due to the renewal rates on time deposits being much higher
than the original rates due to the number of increases in the market rate in
the past twenty-four months.  In addition, the cost of our savings and money
market accounts has increased by 162 basis points as we have increased the
rates we offer on these products to stay competitive in response to the
increase in short-term market rates.  The 101 basis point increase in FHLB
advances and the 220 basis point increase in other borrowed funds in the first
six months of 2006 compared to the same period in 2005 resulted primarily from
the impact of the 175 basis point increase in short-term market rates over the
past twelve months.  As of June 30, 2006, approximately 41% of our FHLB
advances had variable rates, while all of our other borrowings had variable
rates.



Net interest income, the largest component of
our income, was $6.9 million and $5.6 million for the six months ended June 30,
2006 and 2005, respectively.  Of the $1.3 million increase in net interest
income, approximately $1.1 million related to the impact of higher average
earning assets and interest-bearing liabilities in the six months ended June
30, 2006 compared to the same period in 2005.  Average earning assets were $73.3
million higher during the six months ended June 30, 2006 compared to the same
period in 2005, and average interest-bearing liabilities increased by $70.6
million during the same period.  The remaining increase in net interest income
is largely a result of the net impact of higher interest rates on both
interest-earning assets and interest-bearing liabilities.



Interest income for the six months ended June
30, 2006 was $14.1 million, consisting of $12.9 million on loans, $1.1 million
on investments, and $91,796 on federal funds sold.  Interest income for the six
months ended June 30, 2005 was $9.8 million, consisting of $8.9 million on
loans, $834,865 on investments, and $33,320 on federal funds sold.  Interest on
loans for the six months ended June 30, 2006 and 2005 represented 91.6% and 91.1%,
respectively, of total interest income, while income from investments and
federal funds sold represented only 8.4% and 8.9% of total interest income. 
The high percentage of interest income from loans relates to our strategy to
maintain a significant portion of our assets in higher earning loans compared
to lower yielding investments.  Average loans represented 88.3% and 88.2% of
average interest-earning assets for the six months ended June 30, 2006 and
2005, respectively.  Included in interest income on loans for the six months
ended June 30, 2006 and 2005, was $277,436 and $276,839, respectively, related
to the net amortization of loan fees and capitalized loan origination costs.



Interest expense for the six months ended June
30, 2006 was $7.2 million, consisting of $4.6 million related to deposits and $2.6
million related to borrowings.  Interest expense for the six months ended June
30, 2005 was $4.2 million, consisting of $2.6 million related to deposits and $1.6
million related to borrowings.  Interest expense on deposits for the six months
ended June 30, 2006 and 2005 represented 64.3% and 62.0%, respectively, of
total interest expense, while interest expense on borrowings represented 35.7%
and 38.0%, respectively, of total interest expense for the same periods. 
During the six months ended June 30, 2006, average interest-bearing deposits
increased by $56.1 million over the same period in 2005, while FHLB and other
borrowings during the six months ended June 30, 2006 increased $14.5 million
over the same period in 2005.  During the six months ended June 30, 2006, we
pledged additional collateral to the FHLB, allowing us to increase our FHLB
borrowings.  Both the short-term borrowings from the FHLB and the sale of
securities under agreements to repurchase provide us with the opportunity to
obtain low cost funding with various maturities similar to the maturities on
our loans and investments.



16




Rate/Volume
Analysis



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



Three Months EndedJune 30, 2006 vs. 2005
  
  June 30, 2005 vs. 2004Increase (Decrease) Due
  to
  
  Increase (Decrease) Due
  toVolume
  
  Rate
  
  Rate/
  Volume
  
  Total
  
  Volume
  
  Rate
  
  Rate/
  Volume
  
  Total(Dollars in thousands)Interest incomeLoans
  $
  1,024
  $
  818
  $
  184
  $
  2,026
  $
  922
  $
  685
  $
  213
  $
  1,820Investment securities
  
  164
  
  45
  
  18
  
  227
  
  179
  
  17
  
  14
  
  210Federal funds sold
  
  -
  
  16
  
  -
  
  16
  
  4
  
  10
  
  8
  
  22Total interest income
  
  1,188
  
  879
  
  202
  
  2,269
  
  1,105
  
  712
  
  235
  
  2,052Interest
  expenseDeposits
  
  421
  
  493
  
  148
  
  1,062
  
  220
  
  311
  
  82
  
  613FHLB advances
  
  135
  
  175
  
  39
  
  349
  
  118
  
  161
  
  73
  
  352Other borrowings
  
  53
  
  135
  
  29
  
  217
  
  12
  
  105
  
  10
  
  127Total interest expense
  
  609
  
  803
  
  216
  
  1,628
  
  350
  
  577
  
  165
  
  1,092Net
  interest income
  $
  579
  $
  76
  $
  (14)
  $
  641
  $
  755
  $
  135
  $
  70
  $
  960






Six Months EndedJune 30, 2006 vs. 2005
  
  June 30, 2005 vs. 2004Increase (Decrease) Due
  to
  
  Increase (Decrease) Due
  toVolume
  
  Rate
  
  Rate/
  Volume
  
  Total
  
  Volume
  
  Rate
  
  Rate/
  Volume
  
  Total(Dollars in thousands)Interest incomeLoans
  $
  1,949
  $
  1,678
  $
  374
  $
  4,001
  $
  1,800
  $
  1,103
  $
  352
  $
  3,255Investment securities
  
  153
  
  85
  
  16
  
  254
  
  355
  
  19
  
  16
  
  390Federal funds sold
  
  21
  
  23
  
  15
  
  59
  
  1
  
  21
  
  2
  
  24Total interest income
  
  2,123
  
  1,786
  
  405
  
  4,314
  
  2,156
  
  1,143
  
  370
  
  3,669Interest
  expenseDeposits
  
  758
  
  974
  
  288
  
  2,020
  
  367
  
  545
  
  129
  
  1,041FHLB advances
  
  155
  
  361
  
  49
  
  565
  
  242
  
  296
  
  162
  
  700Other borrowings
  
  86
  
  271
  
  51
  
  408
  
  38
  
  156
  
  25
  
  219Total interest expense
  
  999
  
  1,606
  
  388
  
  2,993
  
  647
  
  997
  
  316
  
  1,960Net
  interest income
  $
  1,124
  $
  180
  $
  17
  $
  1,321
  $
  1,509
  $
  146
  $
  54
  $
  1,709




Provision
for Loan Losses

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



17




Three and six months
ended June 30, 2006 and 2005



For the three months
ended June 30, 2006, we incurred a noncash expense related to the provision for
loan losses of $400,000, bringing the allowance for loan losses to $4.2
million, or 1.12% of gross loans, as of June 30, 2006.  The $400,000 provision for
the three months ended June 30, 2006 related primarily to the level of
charge-offs that occurred during the second quarter of 2006.  During the three
month period ended June 30, 2006, we charged-off $730,936 in loans and recorded
$49,339 of recoveries on loans previously charged-off.  In contrast, for the
second quarter of 2005, we added $265,000 to the provision for loan losses,
resulting in an allowance of $4.4 million at June 30, 2005.  As of June 30,
2005, the allowance was at 1.41% of gross loans.  This higher than normal level
was a result of only $12,044 of charged-off loans during the three months ended
June 30, 2005, offset by recoveries of $50,220 for the same period, and other
key factors which indicated potential underlying weaknesses in the loan
portfolio at the time.



The substantial portion,
or $713,737, of loans charged-off in the three months ended June 30, 2006
relates to a group of loans with a common interest totaling $2.9 million.  These
loans were secured by diversified real estate or vehicles, on which we have
foreclosed.  We charged-off $318,000 related to this group of loans in the
first quarter of 2006 and $713,737 in the second quarter of 2006 in order to
reduce the carrying value of these loans to what we believe is their fair
market value.  During the second quarter of 2006, we sold $524,168 of the property
which had secured these loans.  At June 30, 2006, the remaining $1.3 million in
property which had secured these loans is recorded at their fair market value as
other real estate owned on our consolidated balance sheet.



For the six months ended
June 30, 2006, we incurred a noncash expense related to the provision for loan
losses of $800,000, bringing the allowance for loan losses to $4.2 million, or
1.12% as a percentage of gross loans, as of June 30, 2006.  The $800,000 provision
for the six months ended June 30, 2006 related primarily to the level of
charge-offs that occurred during this period.   During the six month period
ended June 30, 2006, we charged-off $1.1 million in loans and recorded $82,955
of recoveries on loans previously charged-off.  In contrast, for the six months
ended June 30, 2005, we added $610,000 to the provision for loan losses,
resulting in an allowance of $4.4 million at June 30, 2005.



At June 30, 2006, the
allowance for loan losses represented 6.2 times the amount of non-performing
loans, compared to 6.6 times at June 30, 2005.  As a result of this level of
coverage on non-performing loans, we determined that the provisions of $400,000
and $800,000 for the three and six months ended June 30, 2006 were adequate.



Noninterest
IncomeThe following table sets
forth information related to our noninterest income.

Three months
  ended
  
  Six months
  endedJune 30,
  
  June 30,2006
  
  2005
  
  2006
  
  2005Loan fee income
  $
  28,661
  $
  49,745
  $
  59,462
  $
  96,369Service fees on deposit accounts
  
  66,188
  
  62,600
  
  128,259
  
  136,137Other real estate
  owned activity
  
  (14,489)
  
  -
  
  (14,489)
  
  -Other income
  
  53,638
  
  105,149
  
  116,341
  
  198,364Total noninterest income
  $
  133,998
  $
  217,494
  $
  289,573
  $
  430,870




Three months ended June 30,
2006 and 2005



Noninterest
income in the three month period ended June 30, 2006 was $133,998, a decrease
of 38.4% over noninterest income of $217,494 in the same period of 2005.  The
$83,496 decrease in noninterest income is related to decreases of $21,084 in
loan fee income, $14,489 in real estate owned operations, and $51,511 in other
income, partially offset by a $3,588 increase in service fees on deposit
accounts.



Loan
fee income consists primarily of late charge fees, fees from issuance of
letters of credit and mortgage origination fees we receive on residential loans
funded and closed by a third party.  Loan fees were $28,661 and $49,745 for the
three months ended June 30, 2006 and 2005, respectively.  The $21,084 decrease
for the three months ended June 30, 2006 compared to the same period in 2005
related primarily to an $8,314 reduction in mortgage origination fees, a $11,356
decrease in fees received from the issuance of letters of credit, and a
decrease of $1,414 in late charge fees.  Mortgage origination fees were $0 and
$8,314 for the three months ended June 30, 2006 and 2005, respectively, while
income related to amortization of fees on letters of credit was $8,062 and $19,418
for the second quarter of 2006 and 2005, respectively.  Late charge fees were $20,599and
$22,013 for the three months ended June 30, 2006 and 2005, respectively.



18




Service
fees on deposits were $66,188 and $62,600 for the three months ended June 30,
2006 and 2005, respectively.  The $3,588 increase relates primarily to additional
service charges on deposit accounts resulting from an increase in our number of
client accounts.  Service charges on deposit accounts were $26,380 and $19,848
for the three months ended June 30, 2006 and 2005, respectively.  Partially
offsetting the increase in service charges on deposits was a $3,659 decrease in
NSF fees collected in the second quarter of 2006 compared to the same period in
2005.  NSF income was $34,166 and $37,825 for the three months ended June 30,
2006 and 2005, respectively, representing 51.6% of total service fees on
deposits in the 2006 period compared to 60.4% of total service fees on deposits
in the 2005 period.



As a
result of loans that were transferred into real estate owned in the first and
second quarters of 2006, our cost of owning the real estate exceeded income
derived from the property by $14,489 for the three months ended June 30, 2006. 
We had no income or expenses on real estate owned for the same period in 2005.



Other
income consisted primarily of fees received on debit card transactions and sale
of customer checks.  Other income was $53,638 and $105,149 for the three months
ended June 30, 2006 and 2005, respectively.  A significant portion of the $51,511
decrease is related to a change in merchant service providers whereby we now
receive a net fee related to the service provided to our merchant clients.  In
prior years, we received a substantially higher fee, but also incurred
additional transaction costs.  Debit card transaction fees were $38,507 and $93,647
for the three months ended June 30, 2006 and 2005, respectively and represented
71.8% and 89.1% of total other income for the second quarters of 2006 and 2005,
respectively.  The corresponding transaction costs associated with debit card
transactions are included in noninterest outside service expense.  The debit
card transaction costs were $15,614 and $77,589 for the three months ended June
30, 2006 and 2005, respectively.  The net impact of the fees received and the
related cost of the debit card transactions on earnings for the three months
ended June 30, 2006 and 2005 was $22,893 and $16,058, respectively.



Six months ended June 30, 2006 and 2005



Noninterest
income in the six month period ended June 30, 2006 was $289,573, a decrease of 32.8%
over noninterest income of $430,870 in the same period of 2005.  The $141,297
decrease in noninterest income is related to decreases of $36,907in loan fee
income, $7,878 in service fees on deposit accounts, $14,489 in real estate
owned operations, and $82,023 in other income.



Loan
fee income consists primarily of late charge fees, fees from issuance of
letters of credit and mortgage origination fees we receive on residential loans
funded and closed by a third party.  Loan fees were $59,462 and $96,369 for the
six months ended June 30, 2006 and 2005, respectively.  The $36,907 decrease
for the six months ended June 30, 2006 compared to the same period in 2005
related primarily to a $15,322 reduction in mortgage origination fees and a $23,868
decrease in fees received from the issuance of letters of credit which were
offset by a $2,283 increase in late charge fees.  Mortgage origination fees
were $2,885 and $18,207 for the six months ended June 30, 2006 and 2005,
respectively, while income related to amortization of fees on letters of credit
was $16,654 and $40,522 for the first six months of 2006 and 2005,
respectively.  Late charge fees were $39,923 and $37,640 for the six months
ended June 30, 2006 and 2005, respectively.



Service
fees on deposits were $128,259 and $136,137 for the six months ended June 30,
2006 and 2005, respectively.  While the number of client accounts continues to
grow, the $7,878 decrease is primarily related to the amount of NSF fees
collected in the first six months of 2006 compared to the same period in 2005. 
NSF income decreased $11,857 to $71,091 for the six months ended June 30, 2006
from $82,948 for the same period in 2005, representing 55.4% of total service
fees on deposits in the 2006 period compared to 60.9% of total service fees on
deposits in the 2005 period.   Partially offsetting the decrease in NSF fees
collected was a $3,570 increase in service charges on deposit accounts which
were $48,116 for the six months ended June 30, 2006 compared to $44,546 for the
same period ended June 30, 2005.



As a
result of loans that were transferred into real estate owned in the first and
second quarters of 2006, our cost of owning the real estate exceeded income
derived from the property by $14,489 for the six months ended June 30, 2006. 
We had no income or expenses on real estate owned for the same period in 2005.



19




Other
income consists primarily of fees received on debit card transactions and sale
of customer checks.  Other income was $116,341 and $198,364 for the six months
ended June 30, 2006 and 2005, respectively.  A significant portion of the $82,023
decrease is related to a change in merchant service providers whereby we now
receive a net fee related to the service provided to our merchant clients.  In
prior years, we received a substantially higher fee, but also incurred additional
transaction costs.  Debit card transaction fees were $70,114 and $172,772 for
the six months ended June 30, 2006 and 2005, respectively and represented 60.3%
and 87.1% of total other income for the first six months of 2006 and 2005,
respectively.  The corresponding transaction costs associated with debit card
transactions are included in noninterest outside service expense.  The debit
card transaction costs were $38,812 and $142,231 for the six months ended June
30, 2006 and 2005, respectively.  The net impact of the fees received and the
related cost of the debit card transactions on earnings for the six months
ended June 30, 2006 and 2005 was $31,302 and $30,541, respectively.



Noninterest
expenses



The
following table sets forth information related to our noninterest expenses.



Three months
  ended
  
  Six months
  endedJune 30,
  
  June 30,2006
  
  2005
  
  2006
  
  2005Compensation and benefits
  $
  1,057,121
  
  795,855
  $
  2,090,862
  $
  1,590,648Professional fees
  
  91,427
  
  85,683
  
  181,864
  
  163,926Marketing
  
  103,556
  
  118,029
  
  242,125
  
  208,308Insurance
  
  44,674
  
  36,738
  
  87,708
  
  73,561Occupancy
  
  158,829
  
  204,585
  
  333,606
  
  370,310Data processing and related costs
  
  198,719
  
  232,597
  
  396,589
  
  447,805Telephone
  
  23,396
  
  12,082
  
  39,278
  
  23,034Other
  
  91,676
  
  63,008
  
  186,910
  
  155,196Total noninterest expense
  $
  1,769,398
  
  1,548,577
  $
  3,558,942
  $
  3,032,788


Three
months ended June 30, 2006 and 2005



We
incurred noninterest expenses of $1.8 million for the three months ended June
30, 2006 compared to $1.5 million for the three months ended June 30, 2005. 
Average interest-earning assets increased 23.2% during this period, while
general and administrative expense increased 14.3%.



For
the three months ended June 30, 2006,compensation and benefits, occupancy, and
data processing and related costs represented 80.0% of the total noninterest
expense compared to 79.6% for the same period in 2005.



Six
months ended June 30, 2006 and 2005



We
incurred noninterest expenses of $3.6 million for the six months ended June 30,
2006 compared to $3.0 million for the six months ended June 30, 2005.  Average
interest-earning assets increased 21.7% during this period, while general and
administrative expense increased 17.3%.



For
the six months ended June 30, 2006 compensation and benefits, occupancy, and
data processing and related costs represented 79.3% of the total noninterest
expense compared to 79.4% for the same period in 2005.



The
following table sets forth information related to our compensation and
benefits.



Three months
  ended
  
  Six months
  endedJune 30,
  
  June 30,2006
  
  2005
  
  2006
  
  2005Base compensation
  $
  752,415
  $
  554,544
  $
  1,478,247
  $
  1,092,107Incentive compensation
  
  181,000
  
  165,000
  
  323,000
  
  295,500Total compensation
  
  933,415
  
  719,544
  
  1,801,247
  
  1,387,607Benefits
  
  157,856
  
  110,526
  
  364,085
  
  268,766Capitalized loan origination costs
  
  (34,150)
  
  (34,215)
  
  (74,470)
  
  (65,725)Total compensation and benefits
  $
  1,057,121
  $
  795,855
  $
  2,090,862
  $
  1,590,648




20




Three
months ended June 30, 2006 and 2005



Compensation
and benefits expense was $1,057,121 and $795,855 for the three months ended June
30, 2006 and 2005, respectively.   Compensation and benefits represented 59.7%
and 51.4% of our total noninterest expense for the three months June 30, 2006
and 2005, respectively.  The $261,266 increase in compensation and benefits in
the second quarter of 2006 compared to the same period in 2005 resulted from
increases of $197,871 in base compensation,  $16,000 in additional incentive
compensation, and $47,330 higher benefits expense.  Capitalized loan
origination costs, which are required to be capitalized and amortized over the
life of the loan as a reduction of loan interest income decreased slightly,
having virtually no impact on total compensation and benefits expense.



The $197,871
increase in base compensation expense related to the cost of 20 additional
employees as well as annual salary increases. Five of the new employees relate
to the staff that was hired for the new retail office that opened in the third quarter
of 2005.  The remaining fifteen employees were hired to support the growth in
both loans and deposits.   Incentive
compensation represented 17.1% and 20.7 % of total compensation and benefits
for the three months ended June 30, 2006 and 2005, respectively.  The incentive
compensation expense recorded for the second quarter of 2006 and 2005
represented an accrual of the portion of the estimated incentive compensation
earned during the second quarter of the respective year.  Benefits expense
increased $47,330 in the second quarter of 2006 compared to the same period in
2005.  Benefits expense represented 16.9% and 15.4% of the total compensation
for the three months ended June 30, 2006 and 2005, respectively.



Six
months ended June 30, 2006 and 2005



Compensation
and benefits expense was $2,090,862 and $1,590,648 for the six months ended
June 30, 2006 and 2005, respectively.   Compensation and benefits represented 58.7%
and 52.4% of our total noninterest expense for the six months ended June 30,
2006 and 2005, respectively.  The $500,214 increase in compensation and
benefits in the first six months of 2006 compared to the same period in 2005
resulted from increases of $386,140 in base compensation,  $27,500 in
additional incentive compensation, and $95,319 higher benefits expense.  These
amounts were partly offset by an increase of $8,745 in loan origination
compensation expense, which is required to be capitalized and amortized over
the life of the loan as a reduction of loan interest income.



The $386,140
increase in base compensation expense related to the cost of 20 additional
employees as well as annual salary increases. Five of the new employees relate
to the staff hired for the new retail office that opened in the third quarter
of 2005.  The remaining fifteen employees were
hired to support the growth in both loans and deposits.  Incentive compensation
represented 15.4% and 18.6 % of total compensation and benefits for the six
months ended June 30, 2006 and 2005, respectively.  The incentive compensation
expense recorded for the first six months of 2006 and 2005 represented an
accrual of the portion of the estimated incentive compensation earned during
the first six months of the respective year.  Benefits expense increased $95,319
in the first six months of 2006 compared to the same period in 2005.  Benefits
expense represented 20.2% and 19.4% of the total compensation for the six
months ended June 30, 2006 and 2005, respectively.



The
following tables set forth information related to our data processing and
related costs.



Three months
  ended
  
  Six months
  endedJune 30,
  
  June 30,2006
  
  2005
  
  2006
  
  2005Data processing costs
  $
  132,198
  $
  111,811
  $
  259,284
  $
  224,184Debit card transaction expense
  
  15,614
  
  77,589
  
  38,812
  
  142,231Courier expense
  
  21,956
  
  21,055
  
  45,166
  
  40,012Other expenses
  
  28,951
  
  22,142
  
  53,327
  
  41,378Total data
  processing and related costs
  $
  198,719
  $
  232,597
  $
  396,589
  $
  447,805




Data
processing and related costs were $198,719 and $232,597, a decrease of $33,878,
for the three months ended June 30, 2006 and 2005, respectively.  During the
first six months of 2006 and the same period of 2005, our data processing and
related costs were $396,589 and $447,805, respectively, a decrease of $51,216.



21




During
the three months ended June 30, 2006, our data processing costs for our core
processing system were $132,198 compared to $111,811 for the three months ended
June 30, 2005.   We have contracted with an outside computerservice
company to provide our core data processing services.  During the six months
ended June 30, 2006 and 2005, data processing costs were $259,284 and $224,184,
respectively.



Data
processing costs increased $20,387, or 18.2%, for the three months ended June
30, 2006 compared to the same period in 2005.  For the six months ended June
30, 2006, data processing costs increased $35,100, or 15.7%, compared to the
same period in 2005.  The increases in costs were caused by the higher number
of loan and deposit accounts.  A significant portion of the fee charged by the
third party processor is directly related to the number of loan and deposit
accounts and the related number of transactions.



We
receive income from debit card transactions performed by our clients.  Since we
outsource this service, we are charged related transaction expenses from our merchant
service provider.  Debit card transaction expense was $15,614 and $77,589 for
the three months ended June 30, 2006 and 2005, respectively.    The decrease of
$61,975 relates primarily to a change in merchant service card providers,
whereby we now receive net fee income related to the service provided to our
merchant clients.  In prior years, we received a substantially higher fee, but
also incurred a higher transaction cost.  During the first six months of 2006
and 2005, debit card transaction expense was $38,812 and $142,231,
respectively.  The decrease of $103,419 relates primarily to a change in
merchant service card providers as discussed above.



Occupancy
expense, which represented 9.0% and 13.2% of total noninterest expense for the
three months ended June 30, 2006 and 2005, respectively, decreased $45,756, in
spite of the addition of two new retail offices.  The additional costs of the
two new retail offices were largely offset because we purchased our main retail
office and headquarter building at the end of 2005.  The depreciation expense
related to our main office and headquarter building is significantly less than
the rent expense paid in prior years.  Occupancy expense was $158,829 and $204,585
for the three months ended June 30, 2006 and 2005, respectively.  For the six
months ended June 30, 2006, occupancy expense decreased $36,704 to $333,606
from $370,310 for the same period ended June 30, 2005.  Occupancy expense represented
9.4% and 12.2% of total noninterest expense for the first six months of 2006
and 2005, respectively.



The
remaining $39,189 increase in noninterest expense for the three month period ended
June 30, 2006 compared to the same period in 2005 was primarily a result of
increases in telephone expenses and other expenses  which increased by $11,314 and
$28,668, respectively.  Other expenses increased due to additional dues and
subscriptions and postage expenses.  Offsetting these increases was a decrease
of $14,473 in marketing expenses for the three months ended June 30, 2006 as
our marketing strategy focused on several promotions earlier in the year.  For
the six month period ended June 30, 2006, remaining noninterest expenses
increased $113,860 from the same period in 2005.  Of this amount, marketing
expenses represented $33,817 of the increase, professional fees represented $17,938of
the increase, and other expenses represented $31,714 of the increase.  The
increase in marketing expenses relates to expanding our market awareness in the
Greenville market, while the additional professional fees relates primarily to
additional legal and accounting fees related to SEC reporting requirements and
the overall growth of our company.  A significant portion of the increase in
other expenses was due to increased costs of postage and office supplies,
additional staff education and training, and higher dues and subscription
costs.



Income
tax expense was $557,531 for the three months ended June 30, 2006 compared to $503,598
during the same period in 2005.   For the six months ended June 30, 2006, income
tax expense was $1.0 million compared to $908,204 for the same period in 2005. 
The increases related primarily to the higher level of income before taxes.



Balance
Sheet Review



General



At June 30, 2006, we had total assets of $455.3
million, consisting principally of $373.4 million in loans, $56.1 million in
investments, $4.5 million in federal funds sold, and $9.5 million in cash and
due from banks.  Our liabilities at June 30, 2006 totaled $423.3 million, which
consisted principally of $294.9 million in deposits, $97.5 million in FHLB
advances, $13.7 million in short-term borrowings, $1.3 million of official
checks outstanding, and $13.4 million in junior subordinated debentures.  At June
30, 2006, our shareholders' equity was $32.0 million.



22




At December 31, 2005, we had total assets
of $405.3 million, consisting principally of $334.0 million in loans, $36.1
million in investments, $19.4 million in federal funds sold, and $6.2 million
in cash and due from banks.  Our liabilities at December 31, 2005 totaled
$374.8 million, consisting principally of $254.1 million in deposits, $79.5
million in FHLB advances, $14.7 million of short-term borrowings, $7.8 million
of official checks outstanding, and $13.4 million of junior subordinated
debentures.  At December 31, 2005, our shareholders' equity was $30.5 million.



Federal
Funds Sold



At
June 30, 2006, our federal funds sold were $4.5 million, or 1.0% of total
assets.  At December 31, 2005, our $19.4 million in short-term investments in
federal funds sold on an overnight basis comprised 4.8% of total assets.  Due
to the large amount of official checks outstanding, our federal funds sold were
higher than normal at December 31, 2005.



Investments



Contractual maturities and yields on our
investments that are available for sale and are held to maturity at June 30,
2006 are shown in the following table.  Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.



Less than One Year
  
  One to Five Years
  
  Five to Ten Years
  
  Over Ten Years
  
  TotalAmount
  Yield
  
  Amount
  Yield
  
  Amount
  Yield
  
  Amount
  Yield
  
  Amount
  Yield(Dollars in thousands)Available for SaleFederal agencies
  $
  1,002
  5.48%
  $
  1,952
  5.06%
  $
  -
  -
  $
  -
  -
  $
  2,954
  5.20%State and
  political subdivisions
  
  -
  -
  
  -
  -
  
  -
  -
  
  1,255
  3.83%
  
  1,255
  3.83%Mortgage-backed
  securities
  
  -
  -
  
  -
  -
  
  5,001
  5.32%
  
  22,117
  5.28%
  
  27,118
  5.29%Total
  $
  1,002
  5.48%
  $
  1,952
  5.06%
  $
  5,001
  5.32%
  $
  23,372
  5.21%
  $
  31,327
  5.23%Held to MaturityMortgage-backed
  securities
  $
  -
  -
  $
  -
  -
  $
  499
  3.77%
  $
  17,704
  4.59%
  $
  18,203
  4.57%


At
June 30, 2006, our investments included securities issued by Federal Home Loan
Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage
Association with carrying values of $1.0 million, $15.3 million, and $32.0
million, respectively.



The amortized costs and the fair value of
our investments at June 30, 2006 and December 31, 2005 are shown in the
following table.



June 30, 2006
  
  December 31, 2005Amortized
  
  Fair
  
  Amortized
  
  FairCost
  
  Value
  
  Cost
  
  Value(Dollars in thousands)Available
  for SaleFederal agencies
  $
  2,997
  $
  2,954
  $
  1,005
  $
  1,012State and political subdivisions
  
  1,291
  
  1,255
  
  1,292
  
  1,292Mortgage-backed
  securities
  
  27,806
  
  27,118
  
  9,242
  
  9,007Total
  $
  32,094
  $
  31,327
  $
  11,539
  $
  11,311Held
  to MaturityMortgage-backed securities
  $
  18,203
  $
  17,230
  $
  19,345
  $
  18,709




Other
investments totaled $6.6 million at June 30, 2006 and consisted of Federal
Reserve Bank stock with a cost of $968,700, investments in Greenville First
Statutory Trust I and Trust II of $186,000 and $217,000, respectively, and
Federal Home Loan Bank stock with a cost of $5.2 million.



23




At June 30, 2006, we had
$56.1 million in our investment securities portfolio which represented
approximately 12.3% of our total assets.  We held U.S. Government agency securities,
municipal securities, and mortgage-backed securities with a fair value of $48.6
million and an amortized cost of $50.3 million for an unrealized loss of $1.7
million.  We
believe, based on industry analyst reports and credit ratings, that the deterioration
in value is attributed to changes in market interest rates and not in the
credit quality of the issuer.  Therefore, these losses are not considered
other-than-temporary.  We have the ability and intent to hold these
securities until such time as the value recovers or the securities mature.



At December 31, 2005,
the $36.1 million in our investment securities portfolio represented
approximately 8.9% of our total assets.  We held U.S. Government agency
securities, municipal securities, and mortgage-backed securities with a fair
value of $30.0 million and an amortized cost of $30.9 million for an unrealized
loss of $864,088.  As a result of the strong growth in our loan portfolio and
the historical low fixed rates that were available during the last two and
one-half years, we have maintained a lower than normal level of investments. 
As rates on investment securities rise and additional capital and deposits are
obtained, we anticipate increasing the size of the investment portfolio.



Contractual maturities and yields on our
available for sale and held to maturity investments at December 31, 2005 are
shown in the following table.  Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.  At December 31, 2005, we had no
securities with a maturity of one to five years.



Less than One Year
  
  Five to Ten Years
  
  Over Ten Years
  
  TotalAmount
  
  Yield
  
  Amount
  
  Yield
  
  Amount
  
  Yield
  
  Amount
  
  Yield(Dollars in thousands)Available for SaleFederal agencies
  $
  1,012
  
  5.49 %
  $
  -
  
  -
  $
  -
  
  -
  $
  1,012
  
  5.49 %State and
  political subdivisions
  
  -
  
  -
  
  -
  
  -
  
  1,292
  
  4.00 %
  
  1,292
  
  4.00 %Mortgage-backed securities
  
  -
  
  -
  
  1,186
  
  4.64 %
  
  7,821
  
  4.42 %
  
  9,007
  
  4.44 %Total
  $
  1,012
  
  5.49 %
  $
  1,186
  
  4.64 %
  $
  9,113
  
  4.36 %
  $
  11,311
  
  4.49 %Held to MaturityMortgage-backed securities
  $
  -
  
  -
  $
  576
  
  3.78 %
  $
  18,769
  
  4.55 %
  $
  19,345
  
  4.53 %




At December 31, 2005, our investments included
securities issued by Federal Home Loan Bank, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association with carrying values of
$1.1 million, $4.1 million, and $24.3 million, respectively.



Other investments totaled $5.5 million at
December 31, 2005.  Other
investments at December 31, 2005 consisted of Federal Reserve Bank stock with a
cost of $863,700, investments in Greenville First Statutory Trust I and II of
$186,000 and $217,000, respectively, and Federal Home Loan Bank stock with a
cost of $4.2 million.



Loans



Since loans typically provide higher interest
yields than other types of interest earning assets, a substantial percentage of
our earning assets are invested in our loan portfolio.  For the six months
ended June 30, 2006 and 2005, average loans were $362.3 million and $297.4
million, respectively.  Before the allowance for loan losses, total loans
outstanding at June 30, 2006 were $377.6 million.  Average loans for the year
ended December 31, 2005 were $310.3 million.  Before the allowance for loan
losses, total loans outstanding at December 31, 2005 were $338.5 million.



The principal component of our loan portfolio is
loans secured by real estate mortgages.    Most of our real estate loans are
secured by residential or commercial property.  We do not generally originate
traditional long term residential mortgages, but we do issue traditional second
mortgage residential real estate loans and home equity lines of credit.  We
obtain a security interest in real estate whenever possible, in addition to any
other available collateral.  This collateral is taken to increase the
likelihood of the ultimate repayment of the loan.  Generally, we limit the loan-to-value
ratio on loans we make to 80%.  Due to the short time our portfolio has
existed, the current mix may not be indicative of the ongoing portfolio mix. 
We attempt to maintain a relatively diversified loan portfolio to help reduce
the risk inherent in concentration in certain types of collateral.



24




The following table summarizes the composition
of our loan portfolio June 30, 2006 and December 31, 2005.



June 30, 2006
  
  December 31, 2005Amount
  
  %  of Total
  
  Amount
  
  %  of TotalReal
  estate:
  
  (Dollars in thousands)Commercial:Owner occupied
  $
  73,963
  
  19.6 %
  $
  72,222
  
  21.3 %Non-owner occupied
  
  113,692
  
  30.1 %
  
  96,950
  
  28.7 %Construction
  
  21,441
  
  5.7 %
  
  14,661
  
  4.3 %Total commercial real estate
  
  209,096
  
  55.4 %
  
  183,833
  
  54.3 %Consumer:Residential
  
  55,227
  
  14.6 %
  
  50,756
  
  15.0 %Home equity
  
  36,900
  
  9.8 %
  
  37,254
  
  11.0 %Construction
  
  6,969
  
  1.8 %
  
  5,409
  
  1.6 %Total consumer real estate
  
  99,096
  
  26.2 %
  
  93,419
  
  27.6 %Total real estate
  
  308,192
  
  81.6 %
  
  277,252
  
  81.9 %Commercial
  business
  
  62,954
  
  16.7 %
  
  53,753
  
  15.9 %Consumer-other
  
  7,306
  
  1.9 %
  
  8,211
  
  2.4 %Deferred
  origination fees, net
  
  (819)
  
  (0.2)%
  
  (685)
  
  (0.2)%Total gross loans, net ofdeferred fees
  
  377,633
  
  100.0 %
  
  338,531
  
  100.0 %Less-allowance
  for loan losses
  
  (4,234)
  
  
  
  (4,490)Total loans, net
  $
  373,399
  
  
  $
  334,041




Maturities and Sensitivity of Loans to
Changes in Interest Rates



The information in the following tables is based
on the contractual maturities of individual loans, including loans which may be
subject to renewal at their contractual maturity.  Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
maturity.  Actual repayments of loans may differ from the maturities reflected
below because borrowers have the right to prepay obligations with or without
prepayment penalties.



The following table
summarizes the loan maturity distribution by type and related interest rate
characteristics at June 30, 2006.



After one but within
  five yearsOne year or less
  
  After five yearsTotal(Dollars in thousands)Real
  estate - mortgage
  $
  51,959
  $
  190,460
  $
  37,363
  $
  279,782Real
  estate - construction
  
  11,357
  
  15,035
  
  2,018
  
  28,410Total real estate
  
  63,316
  
  205,495
  
  39,381
  
  308,192Commercial
  business
  
  38,228
  
  23,916
  
  810
  
  62,954Consumer-other
  
  4,137
  
  2,851
  
  318
  
  7,306Deferred
  origination fees, net
  
  (225)
  
  (506)
  
  (88)
  
  (819)Total gross loans,
  net of   deferred fees
  $
  105,456
  $
  231,756
  $
  40,421
  $
  377,633Loans maturing after
  one year with:Fixed interest rates
  
  
  
  
  $
  123,704Floating interest rates
  
  
  
  
  $
  148,473




25




The following table summarizes the loan maturity
distribution by type and related interest rate characteristics at December 31,
2005.



After one but within
  five yearsOne year or less
  
  After five yearsTotal(Dollars in thousands)Real
  estate - mortgage
  $
  48,762
  $
  173,373
  $
  35,047
  $
  257,182Real
  estate - construction
  
  9,359
  
  6,708
  
  4,003
  
  20,070Total real estate
  
  58,121
  
  180,081
  
  39,050
  
  277,252Commercial
  business
  
  31,849
  
  21,564
  
  340
  
  53,753Consumer
  - other
  
  4,210
  
  3,689
  
  312
  
  8,211Deferred
  origination fees, net
  
  (188)
  
  (399)
  
  (98)
  
  (685)Total gross loans,
  net of   deferred fees
  $
  93,992
  $
  204,935
  $
  39,604
  $
  338,531Loans maturing after
  one year with:Fixed interest rates
  
  
  
  
  $
  95,346Floating interest rates
  
  
  
  
  $
  149,193




Provision and Allowance for Loan Losses



We have established an allowance for loan losses
through a provision for loan losses charged to expense on our statement of
income.  The allowance for loan losses represents an amount which we believe
will be adequate to absorb probable losses on existing loans that may become
uncollectible.  Our judgment as to the adequacy of the allowance for loan
losses is based on a number of assumptions about future events, which we
believe to be reasonable, but which may or may not prove to be accurate.  Our
determination of the allowance for loan losses is based on evaluations of the
collectibility of loans, including consideration of factors such as the balance
of impaired loans, the quality, mix, and size of our overall loan portfolio,
economic conditions that may affect the borrower's ability to repay, the amount
and quality of collateral securing the loans, our historical loan loss
experience, and a review of specific problem loans.  We also consider
subjective issues such as changes in the lending policies and procedures,
changes in the local/national economy, changes in volume or type of credits,
changes in volume/severity of problem loans, quality of loan review and board
of director oversight, concentrations of credit, and peer group comparisons. 
Due to our limited operating history, the provision for loan losses has been
made primarily as a result of our assessment of general loan loss risk compared
to banks of similar size and maturity.  Due to the rapid growth of our bank
over the past several years and our short operating history, a large portion of
the loans in our loan portfolio and of our lending relationships are of
relatively recent origin.  In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for some
period of time, a process known as seasoning.  As a result, a portfolio of
older loans will usually behave more predictably than a newer portfolio. 
Because our loan portfolio is relatively new, the current level of
delinquencies and defaults may not be representative of the level that will
prevail when the portfolio becomes more seasoned, which may be higher than
current levels.  If delinquencies and defaults increase, we may be required to
increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.  Periodically, we adjust the
amount of the allowance based on changing circumstances.  We charge recognized
losses to the allowance and add subsequent recoveries back to the allowance for
loan losses.  There can be no assurance that charge-offs of loans in future
periods will not exceed the allowance for loan losses as estimated at any point
in time or that provisions for loan losses will not be significant to a
particular accounting period.



26




The following table summarizes the activity
related to our allowance for loan losses for the six months ended June 30, 2006
and 2005:



June 30,2006
  
  2005(Dollars in thousands)Balance,
  beginning of period
  $
  4,490
  $
  3,717Loans
  charged-off
  
  (1,139)
  
  (12)Recoveries
  of loans previously charged-off
  
  83
  
  62Net
  loans (charged-off) recovery
  $
  (1,056)
  $
  50Provision
  for loan losses
  
  800
  
  610Balance,
  end of period
  $
  4,234
  $
  4,377Allowance
  for loan losses to gross loans
  
  1.12 %
  
  1.41 %Net
  charge-offs to average loans (annualized)
  
  0.58 %
  
  0.00 %


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



Nonperforming
Assets



The following table
shows the nonperforming assets, percentages of net charge-offs, and the related
percentage of allowance for loan losses for the six months ended June 30, 2006
and the year ended December 31, 2005.  All loans over 90 days past due are on and
included in loans on nonaccrual.



June 30, 2006
  
  December
  31,  2005(Dollars
  in thousands)Loans
  over 90 days past due
  $
  528
  $
  351Loans
  on nonaccrual:Mortgage
  
  587
  
  419Commercial
  
  21
  
  41Consumer
  
  74
  
  6Total nonaccrual loans
  
  682
  
  466Troubled
  debt restructuring
  
  -
  
  -Total of nonperforming loans
  
  682
  
  466Other
  nonperforming assets
  
  1,594
  
  -Total nonperforming assets
  $
  2,276
  $
  466Percentage
  of total assets
  
  0.50 %
  
  0.12 %Percentage
  of nonperforming loansand assets to
  gross loans
  
  0.60 %
  
  0.14 %


27




The allowance for loan
losses was $4.2 million at June 30, 2006 and $4.5 million at December 31, 2005,
or 1.12% and 1.33% of outstanding loans, respectively.  During the year ended
December 31, 2005, we had net charged-off loans of $227,048.  During the six months
ended June 30, 2006 we had net charge-offs of $1.1 million, and a net recovery
of $49,969 for the same period in 2005.



The substantial portion,
or $1.0 million, of loans charged-off during the six months ended June 30, 2006
relates to a group of loans with a common interest totaling $2.9 million. 
These loans were secured by diversified real estate or vehicles, on which we
have foreclosed.  We charged-off $318,000 related to this group of loans in the
first quarter of 2006 and approximately $714,000 in the second quarter of 2006
in order to reduce the carrying value of these loans to what we believe is their
fair market value.  During the second quarter of 2006, we sold $524,168 of the property
which had secured these loans.  At June 30, 2006, the remaining $1.3 million in
property which had secured these loans is recorded as other real estate owned our
balance sheet.



At June 30, 2006, the
allowance for loan losses represented 6.2 times the amount of non-performing
loans compared to 6.6 times at June 30, 2005.  As a result of this level of
coverage on non-performing loans, we determined that the allowance for loan
losses at June 30, 2006 was adequate.



At June
30, 2006 and December 31, 2005, nonaccrual loans represented 0.18% and 0.14% of
total loans, respectively.  At June 30, 2006 and December 31, 2005, we had $681,790
and $466,333 of loans, respectively, on nonaccrual status.   Generally, we
place a loan on nonaccrual status when it becomes 90 days past due as to
principal or interest or when we believe, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of the loan is doubtful.  A payment of
interest on a loan that is classified as nonaccrual is recognized as income
when received.



The amount of foregone interest income on the
nonaccrual loans in the first six months of 2006 was approximately $74,000.  
The amount of interest income recorded in the first six months of 2006 for
loans that were on nonaccrual at June 30, 2006 was approximately $28,000.



Deposits
and Other Interest-Bearing Liabilities



Our primary source of funds for loans and
investments is our deposits, advances from the FHLB, and short-term repurchase
agreements.  National and local market trends over the past several years
suggest that consumers have moved an increasing percentage of discretionary
savings funds into investments such as annuities, stocks, and fixed income
mutual funds.  Accordingly, it has become more difficult to attract deposits. 
We have chosen to obtain a portion of our certificates of deposit from areas outside
of our market.  The deposits obtained outside of our market area generally have
comparable rates compared to rates being offered for certificates of deposits
in our local market.  We also utilize out-of-market deposits in certain
instances to obtain longer-term deposits than are readily available in our
local market.  We anticipate that the amount of out-of-market deposits will
decline as our new retail deposit offices become established.  The amount of
out-of-market deposits was $81.4 million at December 31, 2005 and $76.8 million
at June 30, 2006.



We anticipate being able to either renew or
replace these out-of-market deposits when they mature, although we may not be
able to replace them with deposits with the same terms or rates.  Our loan-to-deposit
ratio was 128% and 133% at June 30, 2006 and December 31, 2005, respectively.

28




The following table shows the average balance
amounts and the average rates paid on deposits held by us for the six months
ended June 30, 2006 and 2005.

2006
  
  2005Amount
  
  Rate
  
  Amount
  
  Rate(Dollars in thousands)Noninterest
  bearing demand deposits
  $
  23,325
  
  - %
  $
  17,149
  
  - %Interest
  bearing demand deposits
  
  39,053
  
  1.84 %
  
  29,013
  
  1.38 %Money
  market accounts
  
  67,989
  
  3.36 %
  
  46,389
  
  1.73 %Saving
  accounts
  
  1,339
  
  0.42 %
  
  1,337
  
  0.34 %Time
  deposits less than $100,000
  
  31,389
  
  4.10 %
  
  23,967
  
  3.11 %Time
  deposits greater than $100,000
  
  112,822
  
  4.46 %
  
  95,813
  
  3.45 %Total deposits
  $
  275,917
  
  3.38 %
  $
  213,668
  
  2.46 %


Money market accounts and time deposits of
$100,000 or more increased considerably for the six months ended June 30, 2006 compared
to the same period in 2005.  The significant increase in money market accounts
is attributed to the aggressive rates we offered on checking and money market
accounts in conjunction with the addition of our two new retail offices.  The
increase in time deposits is also related to the addition of the new retail offices,
while a portion of the increase was offset by a decrease in wholesale deposits.

Core deposits, which exclude out-of-market
deposits and time deposits of $100,000 or more, provide a relatively stable
funding source for our loan portfolio and other earning assets.  Our core
deposits were $181.1 million, $136.5 million, and $113.1 million at June 30,
2006, December 31, 2005, and June 30, 2005, respectively.

All of our time deposits are certificates of
deposits.  The maturity distribution of our time deposits of $100,000 or more
at June 30, 2006 (in thousands) was as follows:

Three months or less
  $
  22,075Over three through six months
  
  21,195Over six  through twelve months
  
  29,730Over twelve months
  
  40,865Total
  $
  113,865


Capital Resources

Total
shareholders' equity at June 30, 2006 was $32.0 million.  At December 31, 2005,
total shareholders' equity was $30.5 million.  The increase during the first six
months of 2006 resulted primarily from the $1.8 million of net income earned.

The
following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), and equity to assets ratio (average equity divided by average total
assets) for the six months ended June 30, 2006 and the year ended December 31,
2005.  Since our inception, we have not paid cash dividends.

June 30, 2006
  December 31, 2005Return
  on average assets
  0.86 %
  0.70 %Return
  on average equity
  11.54 %
  8.44 %Equity
  to assets ratio
  7.48 %
  8.36 %


Our return on average
assets was .86% for the six months ended June 30, 2006, an increase from .70%
for the year ended December 31, 2005.  In addition, our return on average
equity increased to 11.54% for the six months ended June 30, 2006, from 8.44%
for the year ended December 31, 2005.  The lower returns for the year ended
December 31, 2005 relate to the one-time impairment charge that occurred in the
late 2005.   The decrease in the equity to assets ratio from December 31, 2005
is a function of the $66.4 million increase in average assets compared to the
$1.8 million increase in average equity.

29




The Federal Reserve
guidelines contain an exemption from the capital requirements for "small
bank holding companies."  On March 31, 2006, the Federal Reserve changed
the definition of a small bank holding company to bank holding companies with
less than $500 million in total assets (an increase from $150 million under the
prior rule).  However, bank holding companies will not qualify under the new
definition if they (i) are engaged in significant nonbanking activities either
directly or indirectly through a subsidiary, (ii) conduct significant
off-balance sheet activities, including securitizations or managing or
administering assets for third parties, or (iii) have a material amount of debt
or equity securities (including trust preferred securities) outstanding that
are registered with the SEC.  Although we have less than $500 million in
assets, it is unclear at this point whether we otherwise meet the requirements
for qualifying as a "small bank holding company."  According to the
Federal Reserve Board, the revision of the criterion to exclude any bank
holding company that has outstanding a material amount of SEC-registered debt
or equity securities reflects the fact that SEC registrants typically exhibit a
degree of complexity of operations and access to multiple funding sources that
warrants excluding them from the new policy statement and subjecting them to
the capital guidelines.   In the adopting release for the new rule, the Federal
Reserve Board stated that what constitutes a "material" amount of
SEC-registered debt or equity for a particular bank holding company depends on
the size, activities and condition of the relevant bank holding company.  In
lieu of using fixed measurable parameters of materiality across all
institutions, the rule provides the Federal Reserve with supervisory
flexibility in determining, on a case-by-case basis, the significance or
materiality of activities or securities outstanding such that a bank holding
company should be excluded from the policy statement and subject to the capital
guidelines.  Prior to adoption of this new rule, our holding company was
subject to these capital guidelines, as it had more than $150 million in
assets.  Until the Federal Reserve provides further guidance on the new rules,
it will be unclear whether our holding company will be subject to the exemption
from the capital requirements for small bank holding companies.  Regardless,
our bank is subject to these minimum capital requirements as set per bank
regulatory agencies.

The
following table sets forth the holding company's and the bank's various capital
ratios at June 30, 2006 and at December 31, 2005.  For all periods, the bank
was considered "well capitalized" and the holding company met or exceeded its
applicable regulatory capital requirements.

June
  30, 2006
  
  December
  31, 2005Holding
  
  
  HoldingCompany
  Bank
  
  Company
  BankTotal risk-based capital
  13.8 %
  12.8 %
  
  14.9 %
  13.7 %Tier 1 risk-based capital
  12.6 %
  11.7
  %
  
  13.6
  %
  12.4 %Leverage
  capital
  10.3 %
  9.4 %
  
  11.6 %
  10.5 %




Borrowings



The following table
outlines our various sources of borrowed funds during the six months ended June
30, 2006 and the year ended December 31, 2005, the amounts outstanding at the
end of each period, at the maximum point for each component during the periods
and on average for each period, and the average interest rate that we paid for
each borrowing source.  The maximum month-end balance represents the high
indebtedness for each component of borrowed funds at any time during each of
the periods shown.



30






Maximum
		Average for theEnding
		Period-
		Month-end
		Average for the PeriodBalance
		End Rate
		Balance
		Balance
		Rate(Dollars in thousands)At
  or for the six monthsended
  June 30, 2006Federal
  Home Loan Bank advances
		$
		97,500
		4.33 %
		$
		100,500
		$
		82,421
		4.19 %Securities
  sold under agreement torepurchase
		13,730
		5.22 %
		14,434
		14,198
		4.83 %Federal
  funds purchased
		-5.27 %
1,471
		921
		5.41 %Junior subordinated debentures
		13,403
		7.69 %
		13,403
		13,403
		6.99 %At
  or for the yearended
  December 31, 2005Federal
  Home Loan Bank advances
		$
		79,500
		3.84 %
		$
		81,500
		$
		74,013
		3.44 %Securities
  sold under agreement torepurchase
		14,680
		4.32 %
		18,947
		16,710
		3.35 %Federal
  funds purchased
		-
		4.60 %
		-
		755
		2.93 %Junior
  subordinated debentures
		13,403
		6.74 %
		13,403
		6,384
		6.57 %




Effect of Inflation and
Changing Prices



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



Unlike
most industrial companies, our assets and liabilities are primarily monetary in
nature.  Therefore, the effect of changes in interest rates will have a more
significant impact on our performance than will the effect of changing prices
and inflation in general.  In addition, interest rates may generally increase
as the rate of inflation increases, although not necessarily in the same
magnitude.  As discussed previously, we seek to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide rate fluctuations, including those resulting from inflation.



Off-Balance
Sheet Risk



Commitments to extend credit are
agreements to lend to a client as long as the client has not violated any
material condition established in the contract.  Commitments generally have
fixed expiration dates or other termination clauses and may require the payment
of a fee.  At June 30, 2006, unfunded commitments to extend credit were $75.9
million, of which $34.5 million was at fixed rates and $41.4 million was at
variable rates.  At December 31, 2005, unfunded commitments to extend credit
were $70.8 million, of which approximately $27.6 million was at fixed rates and
$43.2 million was at variable rates.  A significant portion of the unfunded
commitments related to consumer equity lines of credit.  Based on historical
experience, we anticipate that a significant portion of these lines of credit
will not be funded.  We evaluate each client's credit worthiness on a
case-by-case basis.  The amount of collateral obtained, if deemed necessary by
us upon extension of credit, is based on our credit evaluation of the
borrower.  The type of collateral varies but may include accounts receivable,
inventory, property, plant and equipment, and commercial and residential real
estate.



At June 30, 2006, there was a $1.8 million
commitment under letters of credit.  At December 31, 2005, there was a $3.8
million commitment under a letter of credit.  The credit risk and collateral
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.  Since most of the letters of credit
are expected to expire without being drawn upon, they do not necessarily
represent future cash requirements.



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



Market
Risk



Market risk is the risk
of loss from adverse changes in market prices and rates, which principally
arises from interest rate risk inherent in our lending, investing, deposit
gathering, and borrowing activities.  Other types of market risks, such as
foreign currency exchange rate risk and commodity price risk, do not generally
arise in the normal course of our business.  Our asset/liability management committee
("ALCO") monitors and considers methods of managing exposure to interest rate
risk.  We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly.  The ALCOs are responsible for maintaining the level of interest rate
sensitivity of our interest sensitive assets and liabilities within
board-approved limits.



We actively monitor and manage our interest rate
risk exposure principally by measuring our interest sensitivity "gap," which is
the positive or negative dollar difference between assets and liabilities that
are subject to interest rate repricing within a given period of time.  Interest
rate sensitivity can be managed by repricing assets or liabilities, selling securities
available for sale, replacing an asset or liability at maturity, or adjusting
the interest rate during the life of an asset or liability.  Managing the
amount of assets and liabilities repricing in this same time interval helps to
hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.  We generally would benefit from increasing market
rates of interest when we have an asset-sensitive gap position and generally
would benefit from decreasing market rates of interest when we are
liability-sensitive.



31




We were asset sensitive during most of the year
ended December 31, 2005 and during the six months ended June 30, 2006.  As
of June 30, 2006, we expect to be asset sensitive for the first three months,
then we expect to be liability sensitive for the following nine months.  Our
variable rate loans and a majority of our deposits reprice over a 12-month
period.  Approximately 55% and 61% of our loans were variable rate loans at June
30, 2006 and December 31, 2005, respectively.  The ratio of cumulative gap to
total earning assets after 12 months was (13.4%) because $58.0 million more liabilities
will reprice in a 12 month period than assets.   However, our gap
analysis is not a precise indicator of our interest sensitivity position.  The
analysis presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally.  For example, rates paid on a
substantial portion of core deposits may change contractually within a
relatively short time frame, but those rates are viewed by us as significantly
less interest-sensitive than market-based rates such as those paid on noncore
deposits.  Net interest income may be affected by other significant factors in
a given interest rate environment, including changes in the volume and mix of
interest-earning assets and interest-bearing liabilities.



Liquidity and Interest
Rate Sensitivity



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



At
June 30, 2006, our liquid assets, consisting of cash and due from banks and
federal funds sold, amounted to $14.0 million, or 3.1% of total assets.  Our
investment securities at June 30, 2006 amounted to $56.1 million, or 12.3% of
total assets.  Investment securities traditionally provide a secondary source
of liquidity since they can be converted into cash in a timely manner. 
However, $22.1 million of these securities are pledged against outstanding
debt.  Therefore, the related debt would need to be repaid prior to the
securities being sold in order for these securities to be converted to cash. 
At December 31, 2005, our liquid assets amounted to $25.6 million, or 6.3% of
total assets.  Our investment securities at December 31, 2005 amounted to $36.1
million, or 8.9% of total assets.  However, substantially all of these
securities were pledged against outstanding debt.



Our ability to maintain and expand our deposit
base and borrowing capabilities serves as our primary source of liquidity.  We
plan to meet our future cash needs through the liquidation of temporary
investments, the generation of deposits, and from additional borrowings.  In
addition, we will receive cash upon the maturity and sale of loans and the
maturity of investment securities.  During most of 2005 and the first six
months of 2006, as a result of historically low rates that were being earned on
short-term liquidity investments, we chose to maintain a lower than normal
level of short-term liquidity securities.  In addition, we maintain three federal
funds purchased lines of credit with correspondent banks totaling $23.1 million
for which there were no borrowings against the lines at June 30, 2006.  We are
also a member of the Federal Home Loan Bank of Atlanta, from which applications
for borrowings can be made for leverage purposes.  The FHLB requires that
securities, qualifying mortgage loans, and stock of the FHLB owned by the bank
be pledged to secure any advances from the FHLB.  The unused borrowing capacity
currently available from the FHLB at June 30, 2006 was $5.4 million, based on
the bank's $5.2 million investment in FHLB stock, as well as qualifying
mortgages available to secure any future borrowings.



We have signed a
ten-year, five-month lease on a new site for our headquarters and main office
that are to be relocated in 2006.  The lease provides for a substantial
reduction in the rent rate for the first five months of the lease in order to
induce us to enter into the agreement.  In accordance with SFAS No. 13,
"Accounting for Leases," we will amortize the discounted rent over the initial
lease term.  Beginning in the fourth quarter of 2006, the monthly rent expense
will be approximately $41,000.  The lease provides for annual lease rate
escalations based on cost of living adjustments.



We believe that our existing stable base of core
deposits, borrowings from the FHLB, and short-term repurchase agreements will
enable us to successfully meet our liquidity needs.



Asset/liability management is the process by
which we monitor and control the mix and maturities of our assets and
liabilities. The essential purposes of asset/liability management are to ensure
adequate liquidity and to maintain an appropriate balance between interest
sensitive assets and liabilities in order to minimize potentially adverse
impacts on earnings from changes in market interest rates.  We have both an
internal ALCO consisting of senior management that meets at various times
during each month and a board ALCO that meets monthly.  The ALCOs are
responsible for maintaining the level of interest rate sensitivity of our
interest sensitive assets and liabilities within board-approved limits.



32




The following table sets
forth information regarding our rate sensitivity as of June 30, 2006 for each
of the time intervals indicated. The information in the table may not be
indicative of our rate sensitivity position at other points in time.  In
addition, the maturity distribution indicated in the table may differ from the
contractual maturities of the earning assets and interest-bearing liabilities
presented due to consideration of prepayment speeds under various interest rate
change scenarios in the application of the interest rate sensitivity methods
described above.



Within
  
  After three
  but
  
  After one
  but
  
  Afterthree
  
  within
  twelve
  
  within five
  
  fivemonths
  
  months
  
  years
  
  years
  
  Total(Dollars in
  thousands)Interest-earning assets:Federal funds sold
  $
  4,531
  $
  -
  $
  -
  $
  -
  $
  4,531Investment securities
  
  2,754
  
  4,946
  
  21,771
  
  20,058
  
  49,529Loans
  
  215,522
  
  16,640
  
  112,987
  
  32,622
  
  377,771Total earning assets
  $
  222,807
  $
  21,586
  $
  134,758
  $
  52,680
  $
  431,831Interest-bearing liabilities:Money market and NOW
  $
  117,883
  $
  -
  $
  -
  $
  -
  $
  117,883Regular savings
  
  1,305
  
  -
  
  -
  
  -
  
  1,305Time deposits
  
  27,636
  
  80,938
  
  42,237
  
  407
  
  151,218Repurchase agreements
  
  13,730
  
  -
  
  -
  
  -
  
  13,730FHLB advances
  
  25,000
  
  22,500
  
  47,000
  
  3,000
  
  97,500Junior
  subordinated debentures
  
  13,403
  
  -
  
  -
  
  -
  
  13,403Total interest-bearing liabilities
  $
  198,957
  $
  103,438
  $
  89,237
  $
  3,407
  $
  395,039Period gap
  $
  23,850
  $
  (81,852)
  $
  45,521
  $
  49,273Cumulative gap
  
  23,850
  
  (58,002)
  
  (12,481)
  
  36,792Ratio of
  cumulative gap  to total earning assets
  
  5.5 %
  
  (13.4 %)
  
  (2.9 %)
  
  8.5 %




The following table sets
forth information regarding our rate sensitivity, as of December 31, 2005, at
each of the time intervals.



33






Within
  
  After three
  but
  
  After one
  but
  
  Afterthree
  
  within
  twelve
  
  within five
  
  fivemonths
  
  months
  
  years
  
  years
  
  Total(Dollars in
  thousands)Interest-earning assets:Federal funds sold
  $
  19,381
  $
  -
  $
  -
  $
  -
  $
  19,381Investment securities
  
  1,414
  
  5,255
  
  16,322
  
  7,664
  
  30,655Loans
  
  213,020
  
  14,672
  
  80,434
  
  30,601
  
  338,727Total earning assets
  $
  233,815
  $
  19,927
  $
  96,756
  $
  38,265
  $
  388,763Interest-bearing liabilities:Money market and NOW
  $
  85,738
  $
  -
  $
  -
  $
  -
  $
  85,738Regular savings
  
  1,319
  
  -
  
  -
  
  -
  
  1,319Time deposits
  
  19,468
  
  71,692
  
  50,749
  
  3,469
  
  145,378Repurchase agreements
  
  14,680
  
  -
  
  -
  
  -
  
  14,680FHLB advances
  
  27,000
  
  10,000
  
  39,500
  
  3,000
  
  79,500Junior
  subordinated debentures
  
  13,403
  
  -
  
  -
  
  -
  
  13,403Total interest-bearing liabilities
  $
  161,608
  $
  81,692
  $
  90,249
  $
  6,469
  $
  340,018Period gap
  $
  72,207
  $
  (61,765)
  $
  6,507
  $
  31,796Cumulative gap
  
  72,207
  
  10,442
  
  16,949
  
  48,745Ratio of
  cumulative gap to total earning assets
  
  18.6 %
  
  2.7 %
  
  4.4 %
  
  12.5 %




Accounting,
Reporting, and Regulatory Matters



Recently
Issued Accounting Standards



The
following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by us:



``



Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.



Item
3. Quantitative and Qualitative Disclosures about Market Risk.



There have been no
material changes in our quantitative and qualitative disclosures about market
risk as of June 30, 2006 from that presented in our annual report on Form 10-K
for the year ended December 31, 2005.  See "Market Risk" and "Liquidity and
Interest Rate Sensitivity" in Item 2, Management Discussion and Analysis of
Financial Condition and Results of Operations for quantitative and qualitative
disclosures about market risk, which information is incorporated herein by
reference.



Item
4.  Controls and Procedures.



As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our current disclosure controls and procedures are effective as
of June 30, 2006.  There have been no significant changes in our internal
controls over financial reporting during the fiscal quarter ended June 30, 2006
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.



34




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





PART
II.  OTHER INFORMATION



Item 1.             Legal Proceedings.



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



Item 1A.          Risk Factors.



There were no material
changes from the risk factors presented in our annual report on Form 10-K for
the year ended December 31, 2005.



Item 2.             Unregistered Sales of Equity Securities and Use of
Proceeds.



Not applicable



Item 3.             Defaults Upon Senior Securities.



Not applicable



Item 4.             Submission of Matters to a Vote of Security
Holders.



At the company's
annual meeting of shareholders held May 17, 2006, the election of three members
of the board of directors as Class I directors for a three-year term and the
ratification for adoption of the 2006 Greenville First Bancshares, Inc.
Restricted Stock Plan were the only matters submitted to a vote of security
holders during the three months ended June 30, 2006. The following
paragraph describes the matters voted upon at the annual meeting and sets forth
the number of votes cast for, against or withheld and the number of abstentions
as to each matter (except as provided below, there were no broker non-votes).



Our
board of directors is divided into three classes with each class to be nearly
equal in number as possible.  The three classes of directors are to have
staggered terms, so that the terms of only approximately one-third of the board
members will expire at each annual meeting of shareholders.  The current Class
I directors are Mark A. Cothran, Rudolph G. Johnstone, III, M.D., and R. Arthur
Seaver, Jr.  The current Class II directors are Leighton M. Cubbage, David G.
Ellison, James B. Orders, and Willam B. Sturgis.  The current Class III
directors are Andrew B. Cajka, Anne S. Ellefson, Fred Gilmer, Jr. and Tecumseh
Hooper, Jr.



The
previous terms of the Class I directors expired at the annual meeting.  Each of
the three current Class I directors was nominated for election and stood for
election at the annual meeting on May 17, 2006 for a three-year term. The
number of votes for the election of the Class I directors were as follows:  For
Mr. Cothran - 2,296,760; for Dr. Johnstone - 2,296,760; and for Mr. Seaver - 2,296,760. 
The number of votes against the directors were as follows:  Mr. Cothran - 0;
Dr. Johnstone - 0; and Mr. Seaver - 0.   No shareholders voted to abstain.



Since
a plurality of the votes were attained for the directors that stood for
re-election, the approval of the Class I directors to serve a three-year term,
expiring at the 2009 annual meeting of sharehlders was recorded in our minute
book from the annual meeting of shareholders.



35




On
March 21, 2006, our board of directors adopted, subject to shareholder
approval, the 2006 Greenville First Restricted Stock Plan that provides for the
grant of stock awards to our employees, directors, and consultants.  A total of
10,000 shares of common stock have been reserved for issuance pursuant to
awards under the plan, subject to the anti-dilution provisions of the plan.  As
of June 30, 2006, no stock grants have been awarded.  The number of votes for
the ratification of the Restricted Stock Plan was 1,211,258.  The number of
votes against the ratification of the Restricted Stock Plan was 18,679, while
23,500 votes were abstained.  Because we received the affirmative vote of the
holders of a majority of the shares of common stock present and entitled to
vote on this item at the annual meeting, the approval of the 2006 Greenville
First Restricted stock Plan was recorded in our minute book.



There
were no other matters voted on by the company's shareholders at our annual
meeting held on May 17, 2006.



Item 5.             Other Information.



Not applicable



Item 6.             Exhibits.



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



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



32                     Section
1350 Certifications.



36




SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





|                     |  | GREENVILLE
  FIRST BANCSHARES, INC.         
|-------------------- |  | --------------------------------------------
|                     |  | Registrant                                  
|                     |  |                                             
|                     |  |                                             
|                     |  |                                             
|                     |  |                                             
|                     |  |                                             
|Date: August 8, 2006 |  | /s/R.
  Arthur Seaver, Jr.                  
|                     |  | R. Arthur Seaver, Jr.                       
|                     |  | Principal Executive
  Officer               
|                     |  |                                             
|                     |  |                                             
|                     |  |                                             
|                     |  |                                             
|Date: August 8, 2006 |  | /s/James M. Austin,
  III                   
|                     |  | James M. Austin, III                        
|                     |  | Principal Financial and
  Accounting Officer





37




INDEX
TO EXHIBITS

ExhibitNumber                        Description



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



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



32            Section
1350 Certifications.





38