|                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|UNITED STATES                                                                                                                                                                           
|SECURITIES AND EXCHANGE COMMISSION                                                                                                                                                      
|Washington, D.C. 20549                                                                                                                                                                  
|                                                                                                                                                                                        
|FORM 10-Q                                                                                                                                                                               
|                                                                                                                                                                                        
|[X] QUARTERLY REPORT
  PURSUANT TO SECTION 13 OR 15(d)                                                                                                                                  
|OF THE SECURITIES
  EXCHANGE ACT OF 1934                                                                                                                                                
|                                                                                                                                                                                        
|For the Quarterly Period
  Ended September 30, 2006                                                                                                                                     
|                                                                                                                                                                                        
|OR                                                                                                                                                                                      
|                                                                                                                                                                                        
|[  ] TRANSITION REPORT
  PURSUANT TO SECTION 13 OR 15 (d)                                                                                                                               
|OF THE SECURITIES
  EXCHANGE ACT OF 1934                                                                                                                                                
|                                                                                                                                                                                        
|For the Transition Period
  from to                                                                                                                                                     
|                                                                                                                                                                                        
|Commission file number
  000-27719                                                                                                                                                      
|                                                                                                                                                                                        
|Greenville First Bancshares, Inc.                                                                                                                                                       
|(Exact name of registrant
  as specified in its charter)                                                                                                                                
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|South Carolina                                                                                                                                                                          
|(State or other
  jurisdiction of incorporation)                                                                                                                                        
|                                                                                                                                                                                        
|112 Haywood Road                                                                                                                                                                        
|Greenville,     S.C.                                                                                                                                                                    
|(Address of principal
  executive offices)                                                                                                                                              
|                                                                                                                                                                                        
|864-679-9000                                                                                                                                                                            
|(Registrant's telephone
  number, including area code)                                                                                                                                  
|                                                                                                                                                                                        
|Not Applicable                                                                                                                                                                          
|(Former name, former
  address, and former fiscal year, if changed since last report)                                                                                                   
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Indicate by check mark
  whether the registrant (1) has filed all reports required to be filed by
  Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months      
|(or for such shorter period that the
  registrant was required to file such reports),
  and (2) has been subject to such filing requirements for the past 90
  days.  Yes [ X ]  No [  ]
|                                                                                                                                                                                        
|Indicate
  by check mark whether the registrant is a large accelerated filer, an accelerated
  filer, or a non-accelerated filer.  See definition of "accelerated filer
	and large      
|accelerated  filer" in Rule 12b-2 of
	the Exchange Act.                                                                                                                                 
|                                                                                                                                                                                        
|Large accelerated filer [   ]                                Accelerated
  filer [   ]                                       Non-accelerated filer [ X ]                                
|                                                                                                                                                                                        
|Indicate
  by check mark whether the registrant is a shell company (as defined in Rule
  12b-2 of the Exchange Act).        Yes [   ]  No [ X ]                                         
|                                                                                                                                                                                        
|Indicate
  the number of shares outstanding of each of the issuer's classes of common
  stock, as of the latest practicable date:  2,933,868 shares of common
	stock,                   
|$.01 par value per share, were issued and outstanding
  as of October 25, 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



|                              |                                                                      |                              |                                              | September 30, |             | December
  31,
|----------------------------- | -------------------------------------------------------------------- | ---------------------------- | -------------------------------------------- | ------------- | ----------- | --------------
|                              |                                                                      |                              |                                              | 2006          |             | 2005          
|                              |                                                                      |                              |                                              | (Unaudited)   |             | (Audited)     
|Assets                        |                                                                      |                              |                                             
|                              | Cash and due from banks                                              | $                            | 10,270,282                                   |               | $           | 6,223,397     
|                              | Federal funds sold                                                   | 5,113,284                    |                                              | 19,380,755   
|                              | Investment securities available for sale                             | 49,440,232                   |                                              | 11,310,956   
|                              | Investment securities held to maturity-                              |                              |                                              |              
|                              | (fair value $16,887,932 and $18,709,112)                             | 17,518,379                   |                                              | 19,345,016   
|                              | Other investments, at cost                                           | 6,880,100                    |                                              | 5,475,400    
|                              | Loans, net                                                           | 385,739,546                  |                                              | 334,040,776  
|                              | Property and equipment, net                                          | 6,340,911                    |                                              | 5,576,882    
|                              | Accrued interest receivable                                          | 2,272,331                    |                                              | 1,694,648    
|                              | Bank owned life insurance                                            | 8,055,000                    |                                              | -            
|                              | Other real estate owned                                              | 779,218                      |                                              | -            
|                              | Other assets                                                         | 2,730,162                    |                                              | 2,264,713    
|                              |                                                                      |                              |                                              |               |             |               
|                              | Total assets                                                         | $                            | 495,139,445                                  |               | $           | 405,312,543   
|                              |                                                                      |                              |                                              |               |             |               
|Liabilities                   |                                                                      |                              |                                             
|                              | Deposits                                                             | $                            | 339,959,604                                  |               | $           | 254,148,041   
|                              | Official checks outstanding                                          | 770,595                      |                                              | 7,786,468    
|                              | Federal funds purchased and repurchase agreements                    | -                            |                                              | 14,680,000   
|                              | Federal Home Loan Bank advances                                      | 104,500,000                  |                                              | 79,500,000   
|                              | Junior subordinated debentures                                       | 13,403,000                   |                                              | 13,403,000   
|                              | Accrued interest payable                                             | 2,173,939                    |                                              | 1,510,635    
|                              | Accounts payable and accrued expenses                                | 998,686                      |                                              | 3,811,652    
|                              |                                                                      |                              |                                              |               |             |               
|                              |                                                                      |                              | Total liabilities                            | 461,805,824   |             | 374,839,796   
|                              |                                                                      |                              |                                              |               |             |               
|Commitments and contingencies |                                                                      |                              |                                             
|                              |                                                                      |                              |                                              |               |             |               
|Shareholders' equity          |                                                                      |                              |                                             
|                              | Preferred stock, par value $.01 per share, 10,000,000 shares         |                              |                                              |              
|                              |                                                                      | authorized, no shares issued | -                                            |               | -          
|                              | Common stock, par value $.01                                         |                              |                                              |              
|                              | Authorized, 10,000,000 shares, issued and outstanding  2,933,868 and |                              |                                              |              
|                              | 2,659,719 at September 30, 2006 and December 31, 2005, respectively  | 29,339                       |                                              | 26,597       
|                              | Additional paid-in capital                                           | 30,820,044                   |                                              | 25,626,740   
|                              | Accumulated other comprehensive loss                                 | (170,538)                    |                                              | (150,602)    
|                              | Retained earnings                                                    | 2,654,776                    |                                              | 4,970,012    
|                              |                                                                      |                              |                                              |               |             |               
|                              |                                                                      |                              | Total shareholders' equity                   | 33,333,621    |             | 30,472,747    
|                              |                                                                      |                              |                                              |               |             |               
|                              |                                                                      |                              | Total liabilities and
  shareholders' equity | $             | 495,139,445 |               
|                              |                                                                      |                              |                                              |               |             |               

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 ended
|--------------------------------------------------- | --------------------------------- | --------- | ---------------------------------- | --------- | ----------------------------
|                                                    |                                   |           |                                    |           | September
  30,             
|                                                    |                                   |           |                                    |           | 2006                        
|                                                    |                                   |           |                                    |           | (Unaudited)                 
|Interest income                                     |                                   |           |                                   
|                                                    | Loans                             | $         | 7,266,867                          |           | $                           
|                                                    | Investment securities             | 766,990   |                                    | 416,249  
|                                                    | Federal funds sold                | 100,211   |                                    | 18,436   
|                                                    |                                   |           |                                    |           |                             
|                                                    | Total interest income             | 8,134,068 |                                    | 5,669,311
|Interest expense                                    |                                   |           |                                   
|Deposits                                            | 3,068,681                         |           | 1,629,321                         
|Borrowings                                          | 1,371,967                         |           | 935,121                           
|Total interest expense                              | 4,440,648                         |           | 2,564,442                         
|                                                    |                                   |           |                                    |           |                             
|Net interest income                                 | 3,693,420                         |           | 3,104,869                         
|Provision for loan losses                           | 400,000                           |           | 225,000                           
|                                                    |                                   |           |                                    |           |                             
|Net interest income after provision for loan losses | 3,293,420                         |           | 2,879,869                         
|                                                    |                                   |           |                                    |           |                             
|Noninterest income                                  |                                   |           |                                   
|                                                    | Loan fee income                   | 29,683    |                                    | 42,000   
|                                                    | Service fees on deposit accounts  | 66,772    |                                    | 58,446   
|                                                    | Other real estate owned activity  | (88,903)  |                                    | -        
|                                                    | Other income                      | 105,375   |                                    | 101,405  
|                                                    |                                   |           |                                    |           |                             
|                                                    | Total noninterest income          | 112,927   |                                    | 201,851  
|                                                   
|Noninterest expenses                                |                                   |           |                                   
|                                                    | Compensation and benefits         | 1,085,922 |                                    | 837,851  
|                                                    | Professional fees                 | 126,386   |                                    | 67,895   
|                                                    | Marketing                         | 108,067   |                                    | 104,834  
|                                                    | Insurance                         | 48,068    |                                    | 39,188   
|                                                    | Occupancy                         | 161,981   |                                    | 211,813  
|                                                    | Data processing and related costs | 225,558   |                                    | 229,167  
|                                                    | Telephone                         | 20,540    |                                    | 11,391   
|                                                    | Other                             | 77,654    |                                    | 83,903   
|                                                    |                                   |           |                                    |           |                             
|                                                    |                                   |           | Total noninterest expenses         | 1,854,176 |                             
|                                                    |                                   |           |                                    |           |                             
|                                                    |                                   |           | Income before income taxes expense | 1,552,171 |                             
|                                                    |                                   |           |                                    |           |                             
|Income tax expense                                  | 532,494                           |           | 568,357                           
|                                                    |                                   |           |                                    |           |                             
|Net income                                          | $                                 | 1,019,677 |                                    | $         | 927,321                     
|                                                    |                                   |           |                                    |           |                             
|Earnings per common share                           |                                   |           |                                   
|                                                    | Basic                             | $         | .35                                |           | $                           
|                                                    | Diluted                           | $         | .32                                |           | $                           
|                                                    |                                   |           |                                    |           |                             
|Weighted average common shares outstanding          |                                   |           |                                   
|Basic                                               | 2,933,721                         |           | 2,925,698                         
|Diluted                                             | 3,231,605                         |           | 3,224,499                         
|                                                    |                                   |           |                                    |           |                             

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 nine
  months ended
|--------------------------------------------------- | --------------------------------- | ---------- | ---------------------------------- | ---------- | ---------------------------
|                                                    |                                   |            |                                    |            | September
  30,            
|                                                    |                                   |            |                                    |            | 2006                       
|                                                    |                                   |            |                                    |            | (Unaudited)                
|Interest income                                     |                                   |            |                                   
|                                                    | Loans                             | $          | 20,210,226                         |            | $                          
|                                                    | Investment securities             | 1,855,836  |                                    | 1,251,114 
|                                                    | Federal funds sold                | 192,007    |                                    | 51,756    
|                                                    |                                   |            |                                    |            |                            
|                                                    | Total interest income             | 22,258,069 |                                    | 15,479,769
|Interest expense                                    |                                   |            |                                   
|Deposits                                            | 7,696,917                         |            | 4,237,255                         
|Borrowings                                          | 3,945,043                         |            | 2,535,716                         
|Total interest expense                              | 11,641,960                        |            | 6,772,971                         
|                                                    |                                   |            |                                    |            |                            
|Net interest income                                 | 10,616,109                        |            | 8,706,798                         
|Provision for loan losses                           | 1,200,000                         |            | 835,000                           
|                                                    |                                   |            |                                    |            |                            
|Net interest income after provision for loan losses | 9,416,109                         |            | 7,871,798                         
|                                                    |                                   |            |                                    |            |                            
|Noninterest income                                  |                                   |            |                                   
|                                                    | Loan fee income                   | 89,145     |                                    | 138,369   
|                                                    | Service fees on deposit accounts  | 195,031    |                                    | 194,583   
|                                                    | Other real estate owned activity  | (103,392)  |                                    | -         
|                                                    | Other income                      | 221,716    |                                    | 299,768   
|                                                    |                                   |            |                                    |            |                            
|                                                    | Total noninterest income          | 402,500    |                                    | 632,720   
|                                                   
|Noninterest expenses                                |                                   |            |                                   
|                                                    | Compensation and benefits         | 3,176,784  |                                    | 2,428,499 
|                                                    | Professional fees                 | 308,250    |                                    | 231,821   
|                                                    | Marketing                         | 350,192    |                                    | 313,142   
|                                                    | Insurance                         | 135,776    |                                    | 112,749   
|                                                    | Occupancy                         | 495,587    |                                    | 582,123   
|                                                    | Data processing and related costs | 622,147    |                                    | 676,972   
|                                                    | Telephone                         | 59,818     |                                    | 34,425    
|                                                    | Other                             | 264,564    |                                    | 239,099   
|                                                    |                                   |            |                                    |            |                            
|                                                    |                                   |            | Total noninterest expenses         | 5,413,118  |                            
|                                                    |                                   |            |                                    |            |                            
|                                                    |                                   |            | Income before income taxes expense | 4,405,491  |                            
|                                                    |                                   |            |                                    |            |                            
|Income tax expense                                  | 1,573,955                         |            | 1,476,561                         
|                                                    |                                   |            |                                    |            |                            
|Net income                                          | $                                 | 2,831,536  |                                    | $          | 2,409,127                  
|                                                    |                                   |            |                                    |            |                            
|Earnings per common share                           |                                   |            |                                   
|                                                    | Basic                             | $          | .97                                |            | $                          
|                                                    | Diluted                           | $          | .87                                |            | $                          
|                                                    |                                   |            |                                    |            |                            
|Weighted average common shares outstanding          |                                   |            |                                   
|Basic                                               | 2,930,898                         |            | 2,921,304                         
|Diluted                                             | 3,237,901                         |            | 3,217,858                         

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 NINE MONTHS ENDED SEPTEMBER  30, 2006  AND 2005
(Unaudited)



|                                     |                                       |                |   |            |   | Accumulated   |            |                 |           | Total      
|------------------------------------ | ------------------------------------- | -------------- | - | ---------- | - | ------------- | ---------- | --------------- | --------- | -----------
|                                     |                                       |                |   | Additional |   | other         |            |                 |           | share-     
|                                     |                                       | Common
  stock |   | paid-in    |   | comprehensive |            | Retained        |           | holders'   
|                                     |                                       | Shares         |   | Amount     |   | capital       |            | income
  (loss) |           | earnings   
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|December 31, 2004                    | 2,647,994                             |                | $ | 26,480     |   | $             | 25,546,259 |                 | $         | 49,989     
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Net income                           | -                                     |                | - |            | - |               | -          |                 | 2,409,127 |            
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Comprehensive income, net of tax -   |                                       |                |   |            |   |               |            |                 |           |            
|                                     | Unrealized holding loss on securities |                |   |            |   |               |            |                 |           |            
|                                     | available for sale                    | -              |   | -          |   | -             |            | (106,731)       |           | -          
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Comprehensive income                 | -                                     |                | - |            | - |               | -          |                 | -         |            
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Proceeds from exercise of stock      |                                       |                |   |            |   |               |            |                 |           |            
|                                     | options and warrants                  | 11,731         |   | 117        |   | 80,481        |            | -               |           | -          
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|September 30, 2005                   | 2,659,725                             |                | $ | 26,597     |   | $             | 25,626,740 |                 | $         | (56,742)   
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|December 31, 2005                    | 2,659,719                             |                | $ | 26,597     |   | $             | 25,626,740 |                 | $         | (150,602)  
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Net income                           | -                                     |                | - |            | - |               | -          |                 | 2,831,536 |            
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Comprehensive income, net of tax -   |                                       |                |   |            |   |               |            |                 |           |            
|                                     | Unrealized holding loss on securities |                |   |            |   |               |            |                 |           |            
|                                     | available for sale                    | -              |   | -          |   | -             |            | (19,936)        |           | -          
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Comprehensive income                 | -                                     |                | - |            | - |               | -          |                 | -         |            
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Proceeds from exercise of stock      |                                       |                |   |            |   |               |            |                 |           |            
|                                     | options                               | 7,500          |   | 75         |   | 49,645        |            | -               |           | -          
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|Stock dividend (10%), net of cash in |                                       |                |   |            |   |               |            |                 |           |            
|                                     | lieu of fractional shares             | 266,649        |   | 2,667      |   | 5,143,659     |            | -               |           | (5,146,772)
|                                     |                                       |                |   |            |   |               |            |                 |           |            
|September 30, 2006                   | 2,933,868                             |                | $ | 29,339     |   | $             | 30,820,044 |                 | $         | (170,538)  



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 nine
  months ended
|----------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------- | ------------------ | ---------------------------------------------------- | ---------------------------
|                                                      |                                              |                                                                       |                    |                                                      | September
  30,            
|                                                      |                                              |                                                                       |                    |                                                      | 2006                       
|                                                      |                                              |                                                                       |                    |                                                      | (Unaudited)                
|Operating activities                                  |                                              |                                                                       |                   
|                                                      | Net income                                   | $                                                                     | 2,831,536          |                                                      | $                          
|                                                      | Adjustments to reconcile net income to cash  |                                                                       |                    |                                                     
|                                                      |                                              | provided by (used for) operating activities:                          |                    |                                                      |                            
|                                                      |                                              | Provision for loan losses                                             | 1,200,000          |                                                      | 835,000                    
|                                                      |                                              | Depreciation and other amortization                                   | 259,626            |                                                      | 187,569                    
|                                                      |                                              | Accretion and amortization of securities discounts and premium,
  net | 80,005             |                                                      | 96,280                     
|                                                      |                                              | Gain on sale of real estate owned                                     | (1,065)            |                                                      | -                          
|                                                      |                                              | Increase in deferred tax asset                                        | (402,413)          |                                                      | (124,447)                  
|                                                      |                                              | Increase in other assets, net                                         | (630,448)          |                                                      | (286,791)                  
|                                                      |                                              | Increase (decrease) in other liabilities, net                         | (9,165,535)        |                                                      | 1,157,295                  
|                                                      |                                              |                                                                       |                    |                                                      |                            
|                                                      |                                              |                                                                       |                    | Net cash provided by (used for) operating activities | (5,828,294)                
|                                                      |                                              |                                                                       |                    |                                                      |                            
|Investing activities                                  |                                              |                                                                       |                   
|                                                      | Increase (decrease) in cash realized from:   |                                                                       |                    |                                                     
|                                                      |                                              | Origination of loans, net                                             | (55,017,192)       |                                                      | (43,932,332)               
|                                                      |                                              | Purchase of property and equipment                                    | (1,023,655)        |                                                      | (1,910,389)                
|                                                      |                                              | Purchase of investment securities:                                    |                    |                                                      |                            
|                                                      |                                              |                                                                       | Available for sale | (41,828,730)                                         |                            
|                                                      |                                              |                                                                       | Held to maturity   | -                                                    |                            
|                                                      |                                              |                                                                       | Other investments  | (5,567,200)                                          |                            
|                                                      |                                              | Payments and maturity of investment securities:                       |                    |                                                      |                            
|                                                      |                                              |                                                                       | Available for sale | 3,624,315                                            |                            
|                                                      |                                              |                                                                       | Held to maturity   | 1,791,564                                            |                            
|                                                      |                                              |                                                                       | Other investments  | 4,162,500                                            |                            
|                                                      |                                              | Purchase of bank owned life insurance                                 | (8,055,000)        |                                                      | -                          
|                                                      |                                              | Proceeds from sale of real estate acquired in settlement of
  loans   | 1,340,269          |                                                      | 28,000                     
|                                                      |                                              |                                                                       |                    |                                                      |                            
|                                                      |                                              |                                                                       |                    | Net cash used for investing activities               | (100,573,129)              
|                                                      |                                              |                                                                       |                    |                                                      |                            
|Financing activities                                  |                                              |                                                                       |                   
|                                                      | Increase in deposits, net                    | 85,811,563                                                            |                    | 32,019,790                                          
|                                                      | Increase (decrease) in short-term borrowings | (14,680,000)                                                          |                    | 3,132,001                                           
|                                                      | Proceeds from the exercise of stock options  | 49,720                                                                |                    | 80,598                                              
|                                                      | Increase in Federal Home Loan Bank advances  | 25,000,000                                                            |                    | 20,840,000                                          
|                                                      | Cash in lieu of fractional shares            | (446)                                                                 |                    | -                                                   
|                                                      |                                              |                                                                       |                    |                                                      |                            
|                                                      |                                              |                                                                       |                    | Net cash provided by financing activities            | 96,180,837                 
|                                                      |                                              |                                                                       |                    |                                                      |                            
|                                                      |                                              |                                                                       |                    | Net increase (decrease) in cash and cash equivalents | (10,220,586)               
|                                                      |                                              |                                                                       |                    |                                                      |                            
|Cash and cash equivalents at beginning of  the period | 25,604,152                                   |                                                                       | 5,338,336         
|                                                      |                                              |                                                                       |                    |                                                      |                            
|Cash and cash equivalents at end of the period        | $                                            | 15,383,566                                                            |                    | $                                                    | 12,473,761                 
|                                                      |                                              |                                                                       |                    |                                                      |                            
|Supplemental information                              |                                              |                                                                       |                   
|                                                      | Cash paid for                                |                                                                       |                    |                                                     
|                                                      |                                              | Interest                                                              | $                  | 10,978,656                                           |                            
|                                                      |                                              |                                                                       |                    |                                                      |                            
|                                                      |                                              | Income taxes                                                          | $                  | 1,976,369                                            |                            
|                                                      |                                              |                                                                       |                   
|Schedule of non-cash transactions                     |                                              |                                                                       |                   
|                                                      |                                              | Foreclosure of real estate                                            | $                  | 2,118,421                                            |                            
|                                                      |                                              |                                                                       |                    |                                                     
|                                                      |                                              | Unrealized loss on securities, net of income taxes                    | $                  | (19,936)                                             |                            
|                                                      |                                              |                                                                       |                    |                                                      |                            

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 bank owns all of the capital
stock of JB Properties.  This subsidiary is for the purpose of owning real
estate acquired in loan foreclosures.  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 nine month periods ended September 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
the Consolidated Statements of Income and in Note 4.

Note
3 - Line of Credit

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 September 30, 2006 was 7.37%.  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 September 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 nine months ended
 September 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 September 30,
|------------------------------ | --------------------------------
|                               | 2006                            
|                               |                                 
|Basic
  Earnings Per Share     |                                 
|Average common shares          | 2,933,721                       
|Net income                     | $                               
|Earnings per share             | $                               
|                               |                                 
|Diluted
  Earnings Per Share   |                                 
|Average common shares          | 2,933,721                       
|Average dilutive common shares | 297,884                         
|Adjusted average common shares | 3,231,605                       
|Net income                     | $                               
|Earnings per share             | $                               





|                               | Nine months ended September  30,
|------------------------------ | --------------------------------
|                               | 2006                            
|                               |                                 
|Basic
  Earnings Per Share     |                                 
|Average common shares          | 2,930,898                       
|Net income                     | $                               
|Earnings per share             | $                               
|                               |                                 
|Diluted
  Earnings Per Share   |                                 
|Average common shares          | 2,930,898                       
|Average dilutive common shares | 307,003                         
|Adjusted average common shares | 3,237,901                       
|Net income                     | $                               
|Earnings per share             | $                               















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 Financial Accounting Standards Board
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.

8




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 September 30, 2006.



|                                                                                 | Three Months Ended
  September 30
|-------------------------------------------------------------------------------- | ---------------------------------
|                                                                                 | 2006                             
|                                                                                 |                                  
|Net
  income as reported                                                         | $                                
|Add: 
  Stock-based employee compensation expense included in reported net       |                                  
|income, net of related tax effects                                               |                                  
|Deduct: 
  Total stock-based employee compensation expense determined under fair |                                  
|value based method for all awards, net of
  related tax effects                  |                                  
|                                                                                 |                                  
|Pro
  forma net income including stock-based compensation cost based on fair-    |                                  
|value method                                                                     | $                                
|                                                                                 |                                  
|Earnings
  per share:                                                            |                                  
|Basic - as reported                                                              | $                                
|Basic - pro forma                                                                | $                                
|                                                                                 |                                  
|Diluted - as reported                                                            | $                                
|Diluted - pro forma                                                              | $                                



|                                                                                 | Nine Months Ended September
  30
|-------------------------------------------------------------------------------- | --------------------------------
|                                                                                 | 2006                            
|                                                                                 |                                 
|Net
  income as reported                                                         | $                               
|Add: 
  Stock-based employee compensation expense included in reported net       |                                 
|income, net of related tax effects                                               |                                 
|Deduct: 
  Total stock-based employee compensation expense determined under fair |                                 
|value based method for all awards, net of
  related tax effects                  |                                 
|                                                                                 |                                 
|Pro
  forma net income including stock-based compensation cost based on fair-    |                                 
|value method                                                                     | $                               
|                                                                                 |                                 
|Earnings
  per share:                                                            |                                 
|Basic - as reported                                                              | $                               
|Basic - pro forma                                                                | $                               
|                                                                                 |                                 
|Diluted - as reported                                                            | $                               
|Diluted - pro forma                                                              | $                               



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 nine month period ended September 30, 2006.



9




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 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 nine months of
2006.  To support this growth, we conducted an underwritten public offering of
our common stock in 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.

10




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

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 third
quarter of 2006, our rates on both 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 17 times for a total of 425 basis
points.  Three of these rate increases occurred during the first six months of
2006 for a total of 75 basis points.  However, the Federal Reserve allowed
short-term rates to remain unchanged during the third quarter of 2006, leading
many economists to believe that the Federal Reserve is nearing the end of this
cycle of rate increases.  The following discussion includes our analysis of the
effect we anticipate changes in interest rates will have on our financial
condition.  However, no assurance can be given related to future actions that
the Federal Reserve may choose to take or that the results we anticipate will
actually occur.

11






Three months ended September 30, 2006 and 2005

Our net income was $1.0
million and $927,321
for the
three months ended September 30, 2006 and 2005, respectively, an increase of $92,356,
or 10.0%.  The increase in net income resulted primarily from an increase of $588,551
in net interest income and $35,863 decrease in income tax expense which were
partially offset by an increase of $175,000 in the provision for loan losses, a
decrease of $88,924 in noninterest income, and $268,134 of additional
noninterest expense.  Our efficiency ratio was 48.7% and 48.0% for the three months
ended September 30, 2006 and 2005, respectively.  Our efficiency ratio declined
slightly because our net interest income and other income increased at a lower
rate than the increases in our overhead expenses.

Nine months ended September 30, 2006 and 2005

Our net income was $2.8
million and $2.4
million for
the nine months ended September 30, 2006 and 2005, respectively, an increase of
$422,409, or 17.5%.  The increase in net income resulted primarily from an
increase of $1.9 million in net interest income, partly offset by an increase
of $365,000 in the provision for loan losses, a decrease of $230,220 in
noninterest income, $794,288 of additional noninterest expense and a $97,394
increase in income tax expense.  Our efficiency ratio was 49.1% and 49.5% for
the nine months ended September 30, 2006 and 2005, respectively.  Our
efficiency ratio has improved because our net interest income and other income
increased at a higher rate than the increases in our overhead expenses.

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 nine months ended September 30, 2006, our average loan portfolio was $65.4
million higher compared to the average for the nine months ended September 30, 2005.  The growth in the first nine months of 2006 was $51.8 million.  We
anticipate the growth in loans will continue to drive our growth in assets and our
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 September 30, 2006, net loans represented 77.9% of total assets.  However, as described
below, we have also increased our level of deposits significantly.  While we plan
to continue our focus on increasing the loan portfolio, as rates on investment
securities have risen during 2006 and we obtained these additional deposits, we
increased the size of the investment portfolio.  As a result, net loans as a
percentage of total assets has actually decreased from the 84% amount at June 30, 2006.  Our investment portfolio increased by $37.7 million in the first nine
months of 2006.  At September 30, 2006, investments and federal funds sold
represented 15.9% of total assets.

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.

In anticipation of rising interest rates, we
opened one retail deposit office in March of 2005 and a
second in November of 2005.  Our focus for these two locations is to obtain low
cost transaction accounts that we believe will be less impacted by changing market
rates.  Our goal is to increase both the percentage of assets being funded by
"in market" retail deposits and to increase the percentage of low-cost
transaction accounts to total deposits.  The two additional retail deposit
offices are assisting us in meeting these objectives.  We also anticipate
that deposit promotions and the opening of the two new offices will continue 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.  At September 30, 2006, retail deposits represented $247.8 million, or 50.0% of total assets, borrowings
represented $117.9 million, or 23.8% of total assets, and wholesale
out-of-market deposits represented $92.1 million, or 18.6% of total assets.

As more fully discussed in the - "Market Risk"
and - "Liquidity and Interest Rate Sensitivity" sections below, at September 30, 2006, 52.0% 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.

12




At September 30, 2006, 74.3% 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 September 30, 2006, we had $111.5 million more liabilities than assets that reprice within the next twelve months.  Based
on a review of our deposit portfolio, we believe that the majority of our
interest bearing transaction accounts, would only be impacted by a portion of
any change in market rates.  This key assumption is utilized in our overall
evaluation of our level of interest sensitivity.

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 September 30, 2006, the company's regulatory capital levels were over $12.4 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.

Our net interest income margin was 3.25% and 3.35%
for the three months and nine months ended September 3 0, 2006, respectively, while our net interest spread was 2.82% and 2.91% 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 $44.4
million, and $45.4 million for the three and nine months ended September 30, 2006, respectively.

During the three and nine months ended September
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 September 30,
2006.  Given the fact that the Federal Reserve has increased short-term rates
by 425 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 nine months ended September 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 nine-month periods ended September 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 Rates
|------------------------------------------ | -------------------------------------------- | --------------------------------------------------
|                                           |                                              | For the Three Months
  Ended September 30,        
|                                           |                                              | 2006                                              
|                                           |                                              | Average                                           
|                                           |                                              | Balance                                           
|                                           | (Dollars in thousands)                      
|Earnings                                   |                                              |                                                   
|                                           | Federal
  funds sold                         | $                                                 
|                                           | Investment
  securities                      |                                                   
|                                           | Loans                                        |                                                   
|                                           | Total earning-assets                         |                                                   
|                                           | Non-earning
  assets                         |                                                   
|                                           | Total assets                                 | $                                                 
|Interest-bearing
  liabilities             |                                              |                                                   
|                                           | NOW
  accounts                               | $                                                 
|                                           | Savings
  & money market                     |                                                   
|                                           | Time
  deposits                              |                                                   
|                                           | Total
  interest-bearing deposits            |                                                   
|                                           | FHLB
  advances                              |                                                   
|                                           | Other
  borrowings                           |                                                   
|                                           | Total interest-bearing liabilities           |                                                   
|                                           | Non-interest
  bearing liabilities           |                                                   
|Shareholders'
  equity                     |                                              | 33,029                                            
|                                           | Total
  liabilities and shareholders' equity | $                                                 
|Net
  interest spread                      |                                              |                                                   
|Net
  interest income / margin             |                                              |                                                   
|                                           |                                              |                                                   
|(1) Annualized for the three month period.
|                                           |                                              |                                                   

Our net interest spread was 2.82% for the three
months ended September 30, 2006, compared to 3.02% for the three months ended September 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 20
basis points in the three months ended September 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 September 30, 2006 was 3.25%, compared to 3.45% for the three months ended September 30, 2005.  During the three months ended September 30, 2006, interest-earning assets averaged
$451.0 million, compared to $357.1 million in the three months ended September 30, 2005.  Interest earning assets exceeded interest bearing liabilities by $44.4
million and $47.1 million for the three month periods ended September 30, 2006 and 2005, respectively.

Our loan yield increased 97 basis points for the
three months ended September 30, 2006 compared to the three months ended September 30, 2005 as a result of approximately 52% of the loan portfolio having variable
rates, combined with the increase in rates over the twelve months ended September 30, 2006.  Offsetting the increase in our loan yield is a 108 basis point
increase in the cost of our interest-bearing deposits for the third 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 164 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 86 basis point increase in FHLB
advances and the 256 basis point increase in other borrowed funds in the third quarter
of 2006 compared to the same period in 2005 resulted primarily from the impact
of the 150 basis point increase in short-term market rates over the past twelve
months.  The rate on other borrowings increased more than the increase in
market rates as a result of the additional $7.2 million trust preferred
securities that were obtained at a higher cost at the end of 2005.  As of September 30, 2006, approximately 48% 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 $3.7 million and $3.1 million for the three months ended September 30, 2006 and 2005, respectively, an increase of $588,551.  Average earning
assets were $93.9 million higher during the three months ended September 30, 2006 compared to the same period in 2005 and average interest-bearing
liabilities increased by $96.6 million during the same period.  The higher
average balances resulted in $636,000 additional net interest income.  Net
interest income did not increase by the total impact of higher volumes due to
the negative net impact that higher interest rates on both interest-earning
assets and interest-bearing liabilities had on earnings.

Interest income for the three months ended September 30, 2006 was $8.1 million, consisting of $7.3 million on loans, $766,990 on
investments, and $100,211 on federal funds sold.  Interest income for the three
months ended September 30, 2005 was $5.7 million, consisting of $5.2 million on
loans, $416,249
on
investments, and $18,436
on federal
funds sold.  Interest on loans for the three months ended September 30, 2006 and 2005 represented 89.3% and 92.3%, respectively, of total interest income, while
income from investments and federal funds sold represented 10.7% and 7.7% 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 85.1% and 89.0% of average interest-earning assets for the three
months ended September 30, 2006 and 2005, respectively.  Included in interest
income on loans for the three months ended September 30, 2006 and 2005 was $124,731 and $164,185, respectively, related
to the net amortization of loan fees and capitalized loan origination costs.

Interest expense for the three months ended September 30, 2006 was $4.4 million, consisting of $3.1 million related to deposits and $1.4
million related to borrowings.  Interest expense for the three months ended September 30, 2005 was $2.6 million, consisting of $1.6 million related to deposits and $935,121 related to borrowings. 
Interest expense on deposits for the three months ended September 30, 2006 and 2005 represented 69.1% and 63.5%, respectively, of total interest expense,
while interest expense on borrowings represented 30.9% and 36.5%, respectively,
of total interest expense for the same three month periods.  During the three
months ended September 30, 2006, average interest-bearing deposits increased by
$83.1 million over the same period in 2005, while FHLB and other borrowings
during the three months ended September 30, 2006 increased $13.6 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 Rates
|----------------------------------------- | -------------------------------------------- | --------------------------------------------------
|                                          |                                              | For the Nine Months
  Ended September 30,         
|                                          |                                              | 2006                                              
|                                          |                                              | Average                                           
|                                          |                                              | Balance                                           
|                                          | (Dollars in thousands)                      
|Earnings                                  |                                              |                                                   
|                                          | Federal
  funds sold                         | $                                                 
|                                          | Investment
  securities                      |                                                   
|                                          | Loans                                        |                                                   
|                                          | Total earning-assets                         |                                                   
|                                          | Non-earning
  assets                         |                                                   
|                                          | Total assets                                 | $                                                 
|Interest-bearing
  liabilities            |                                              |                                                   
|                                          | NOW
  accounts                               | $                                                 
|                                          | Savings
  & money market                     |                                                   
|                                          | Time
  deposits                              |                                                   
|                                          | Total
  interest-bearing deposits            |                                                   
|                                          | FHLB
  advances                              |                                                   
|                                          | Other
  borrowings                           |                                                   
|                                          | Total interest-bearing liabilities           |                                                   
|                                          | Non-interest
  bearing liabilities           |                                                   
|Shareholders'
  equity                    |                                              | 32,121                                            
|                                          | Total
  liabilities and shareholders' equity | $                                                 
|Net
  interest spread                     |                                              |                                                   
|Net
  interest income / margin            |                                              |                                                   
|                                          |                                              |                                                   
|(1) Annualized for the nine month period.
|                                          |                                              |                                                   

Our net interest spread was 2.91% for the nine
months ended September 30, 2006, compared to 2.99% for the nine months ended September 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 8 basis points in the nine months ended September 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 nine months ended September 30, 2006 was 3.35%, compared to 3.39% for the nine months ended September 30, 2005.  During the nine months ended September 30, 2006, interest-earning assets averaged
$424.1 million, compared to $343.9 million in the nine months ended September 30, 2005.  Interest earning assets exceeded interest bearing liabilities by $45.4
million and $44.5 million for the nine month periods ended September 30, 2006 and 2005, respectively.

Our loan yield increased 108 basis points for
the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 as a result of approximately 52% of the loan portfolio having variable
rates, combined with the increase in rates over the twelve months ended September 30, 2006.  Offsetting the increase in our loan yield is a 105 basis point
increase in the cost of our interest-bearing deposits for the first nine 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 164 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 95 basis point increase in FHLB
advances and the 223 basis point increase in other borrowed funds in the first nine
months of 2006 compared to the same period in 2005 resulted primarily from the
impact of the 150 basis point increase in short-term market
rates over the past twelve months.  The rate on other borrowings increased more
than the increase in market rates as a result of the additional $7.2 million
trust preferred securities that were obtained at a higher cost at the end of
2005.  As of September 30, 2006, approximately 48% 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 $10.6 million and $8.7 million for the nine months ended September 30, 2006 and 2005, respectively.  Of the $1.9 million increase in net interest
income, approximately $1.8 million related to the impact of higher average
earning assets and interest-bearing liabilities in the nine months ended September 30, 2006 compared to the same period in 2005.  Average earning assets were $80.2
million higher during the nine months ended September 30, 2006 compared to the same period in 2005, and average interest-bearing liabilities increased by
$79.3 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 nine months ended September 30, 2006 was $22.3 million, consisting of $20.2
million on loans, $1.9 million on investments, and $192,007 on federal funds
sold.  Interest income for the nine months ended September 30, 2005 was $15.5 million, consisting of $14.2 million on loans, $1.3 million on investments, and $51,756 on federal funds sold. 
Interest on loans for the nine months ended September 30, 2006 and 2005 represented 90.8% and 91.6%, respectively, of total interest income, while income
from investments and federal funds sold represented only 9.2% and 8.4% 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 87.1%
and 88.5% of average interest-earning assets for the nine months ended September 30, 2006 and 2005, respectively.  Included in interest income on loans for the nine
months ended September 30, 2006 and 2005, was $402,167 and $441,024, respectively, related
to the net amortization of loan fees and capitalized loan origination costs.

Interest expense for the nine months ended September 30, 2006 was $11.6 million, consisting of $7.7 million related to deposits and $3.9
million related to borrowings.  Interest expense for the nine months ended September 30, 2005 was $6.8 million, consisting of $4.2 million related to deposits and $2.5
million related to borrowings.  Interest expense on deposits for the nine
months ended September 30, 2006 and 2005 represented 66.1% and 62.6%,
respectively, of total interest expense, while interest expense on borrowings
represented 33.9% and 37.4%, respectively, of total interest expense for the
same periods.  During the nine months ended September 30, 2006, average interest-bearing deposits increased by $65.1 million over the same period in 2005,
while FHLB and other borrowings during the nine months ended September 30, 2006 increased $14.2 million over the same period in 2005.  During the nine
months ended September 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




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 Ended          
|---------------------- | ----------------------------
|                       | September 30, 2006 vs. 2005 
|                       | Increase (Decrease) Due
  to
|                       | Volume                      
|                       |                             
|                       |                             
|Interest income        |                             
|Loans                  | $                           
|Investment securities  |                             
|Federal funds sold     |                             
|Total interest income  |                             
|                       |                             
|Interest
  expense     |                             
|Deposits               |                             
|FHLB advances          |                             
|Other borrowings       |                             
|Total interest expense |                             
|                       |                             
|Net
  interest income  | $                           





|                       | Nine Months Ended           
|---------------------- | ----------------------------
|                       | September 30, 2006 vs. 2005 
|                       | Increase (Decrease) Due
  to
|                       | Volume                      
|                       |                             
|                       |                             
|Interest income        |                             
|Loans                  | $                           
|Investment securities  |                             
|Federal funds sold     |                             
|Total interest income  |                             
|                       |                             
|Interest
  expense     |                             
|Deposits               |                             
|FHLB advances          |                             
|Other borrowings       |                             
|Total interest expense |                             
|                       |                             
|Net
  interest income  | $                           



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




For the three months
ended September 30, 2006, we incurred a noncash expense related to the
provision for loan losses of $400,000, bringing the allowance for loan losses
to $4.6 million, or 1.18% of gross loans, as of September 30, 2006.  During the three month period ended September 30, 2006, we charged-off $49,472 in loans
and recorded $36,197 of recoveries on loans previously charged-off.  In
contrast, for the third quarter of 2005, we added $225,000 to the provision for
loan losses, resulting in an allowance of $4.6 million at September 30, 2005.  As of September 30, 2005, the allowance was at 1.41% of gross loans.  This higher
than normal level was a result of only $29,661 of charged-off loans during the
three months ended September 30, 2005, offset by recoveries of $62,286 for the same
period, and other key factors which indicated potential underlying weaknesses
in specific loans in the portfolio at the time.

For the nine months
ended September 30, 2006, we incurred a noncash expense related to the
provision for loan losses of $1.2 million, bringing the allowance for loan
losses to $4.6 million, or 1.18% as a percentage of gross loans, as of September 30, 2006.  The $1.2 million provision for the nine
months ended September 30, 2006 related primarily to the level of charge-offs
that occurred during this period.   During the nine month period ended September 30, 2006, we charged-off $1.2 million in loans and recorded $119,152 of
recoveries on loans previously charged-off.  In contrast, for the nine months
ended September 30, 2005, we added $835,000 to the provision for loan losses,
resulting in an allowance of $4.6 million at September 30, 2005.

The substantial portion,
or $1.0 million, of loans charged-off in the nine months ended September 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 and third quarters of 2006, we sold
$1.3 million of the property which had secured these loans.  At September 30, 2006, the remaining $779,218 in property which had secured these loans is
recorded at their fair market value as other real estate owned on our
consolidated balance sheet.

At September 30, 2006, the allowance for loan losses represented 7.1 times the amount of non-performing
loans, compared to 3.8 times at September 30, 2005.  As a result of this level
of coverage on non-performing loans, we determined that the provisions of
$400,000 and $1.2 million for the three and nine months ended September 30, 2006 to be adequate.

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



|                                   |   | Three months
  ended |   | Nine months
  ended
|---------------------------------- | - | -------------------- | - | -------------------
|                                   |   | September 30,        |   | September 30,      
|                                   |   | 2006                 |   | 2005               
|                                   |   |                      |   |                    
|Loan fee income                    | $ | 29,683               | $ | 42,000             
|Service fees on deposit accounts   |   | 66,772               |   | 58,446             
|Other real estate
  owned activity |   | (88,903)             |   | -                  
|Other income                       |   | 105,375              |   | 101,405            
|Total noninterest income           | $ | 112,927              | $ | 201,851            
|                                   |   |                      |   |                    

Three months ended September 30, 2006 and 2005

Noninterest
income in the three month period ended September 30, 2006 was $112,927, a decrease of 44.1% over noninterest income of $201,851 in the same period of 2005.  The
$88,924 decrease in noninterest income is related to decreases of $12,317 in
loan fee income and a net loss of $88,903 in real estate owned operations,
partially offset by an $8,326 increase in service fees on deposit accounts and
a $3,970 increase in other income.

18




Service
fees on deposits were $66,772 and $58,446 for the three months ended September 30, 2006 and 2005, respectively.  The $8,326 increase relates primarily to additional
NSF fees collected on deposit accounts in the third quarter of 2006.  NSF
income was $39,402 and $33,267 for the three months ended September 30, 2006 and 2005, respectively, representing 59.0% of total service fees on deposits in the
2006 period compared to 56.9% of total service fees on deposits in the 2005 period. 
Partially offsetting the increase in NSF fees collected was a $1,969 decrease
in service charges on deposit accounts which were $18,298 and $20,267 for the
three months ended September 30, 2006 and 2005, respectively.

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 $88,903 for the three months ended September 30, 2006.  We had no income or expenses on real estate owned for the same period
in 2005.

Other
income consisted primarily of income from bank owned life insurance, fees
received on debit card transactions and sale of customer checks.  Other income
was $105,375 and $101,405 for the three months ended September 30, 2006 and 2005, respectively.  A significant portion of the $3,970 increase is related to
income earned on bank owned life insurance which we purchased in the third
quarter of 2006.  Income derived from life insurance was $55,000 for the three
months ended September 30, 2006.  Offsetting the income from life insurance was
a $53,377 decrease in debit card transaction fees due 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 $36,661 and $90,038 for
the three months ended September 30, 2006 and 2005, respectively and represented
34.8% and 88.8% of total other income for the third 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 $21,387 and $75,790 for the three months ended September 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 September 30, 2006 and 2005 was $15,274 and $14,248, respectively.

Nine months ended September 30, 2006 and 2005

Noninterest
income in the nine month period ended September 30, 2006 was $402,500, a decrease of 36.4% over noninterest income of $632,720 in
the same period of 2005.  The $230,220 decrease in noninterest income is
related to decreases of $49,224 in loan fee income and $78,052 in other income,
and a net loss of $103,392 in real estate owned operations.

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 $89,145 and $138,369 for
the nine months ended September 30, 2006 and 2005, respectively.  The $49,224
decrease for the nine months ended September 30, 2006 compared to the same period in 2005 related primarily to a $25,109 reduction in mortgage origination
fees and a $29,486 decrease in fees received from the issuance of letters of
credit which were offset by a $5,371 increase in late charge fees.  Mortgage
origination fees were $2,885 and $27,994 for the nine months ended September 30, 2006 and 2005, respectively, while income related to amortization of fees on
letters of credit was $24,118 and $53,604 for the first nine months of 2006 and
2005, respectively.  Late charge fees were $62,142 and $56,771 for the nine
months ended September 30, 2006 and 2005, respectively.

Service
fees on deposits were $195,031 and $194,583 for
the nine months ended September 30, 2006 and 2005, respectively.  While the
number of client accounts continues to grow, service fees on deposits increased
only slightly due primarily to the amount of NSF fees collected in the first nine
months of 2006 compared to the same period in 2005.  NSF income decreased $5,722
to $110,493 for the nine months ended September 30, 2006 from $116,215 for the same period in 2005,
representing 56.7% of total service fees on deposits in the 2006 period
compared to 59.7% of total service fees on deposits in the 2005 period.   Partially
offsetting the decrease in NSF fees collected was a $1,600 increase in service
charges on deposit accounts which were $66,414 for the nine months ended September 30, 2006 compared to $64,814 for the same
period ended September 30, 2005.

19




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 $103,392 for the nine months ended September 3 0, 2006.  We had no income or expenses on real estate owned for the same
period in 2005.



Other
income consisted primarily of income from bank owned life insurance, fees
received on debit card transactions and sale of customer checks.  Other income
was $221,716 and $299,768 for the nine
months ended September 30, 2006 and 2005, respectively.  A significant portion
of the $78,052 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, offset by income from bank owned life insurance which we
purchased in the third quarter of 2006.  Income derived from life insurance was
$55,000 for the nine months ended September 30, 2006. Debit card transaction fees decreased during the nine months ended September 30, 2006, because in prior years, we received a substantially higher fee, but also incurred additional
transaction costs.  Debit card transaction fees were $106,775 and $262,810 for the nine months ended September 30, 2006 and 2005, respectively and represented 48.2% and 87.7% of total other
income for the first nine 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 $60,199 and $218,021 for the nine
months ended September 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 nine months ended September 30, 2006 and 2005 was $46,576 and $44,789, respectively.



Noninterest
expensesThe
following table sets forth information related to our noninterest expenses.

Three months
  ended
  
  Nine months
  endedSeptember 30,
  
  September 30,2006
  
  2005
  
  2006
  
  2005Compensation and benefits
  $
  1,085,922
  $
  837,851
  $
  3,176,784
  $
  2,428,499Professional fees
  
  126,386
  
  67,895
  
  308,250
  
  231,821Marketing
  
  108,067
  
  104,834
  
  350,192
  
  313,142Insurance
  
  48,068
  
  39,188
  
  135,776
  
  112,749Occupancy
  
  161,981
  
  211,813
  
  495,587
  
  582,123Data processing and related costs
  
  225,558
  
  229,167
  
  622,147
  
  676,972Telephone
  
  20,540
  
  11,391
  
  59,818
  
  34,425Other
  
  77,654
  
  83,903
  
  264,564
  
  239,099Total noninterest expense
  $
  1,854,176
  $
  1,586,042
  $
  5,413,118
  $
  4,618,830




Three
months ended September 30, 2006 and 2005



We
incurred noninterest expenses of $1.9 million for the three months ended September 30, 2006 compared to $1.6 million for the three months ended September 30, 2005.  Average interest-earning assets increased 26.3% during this period,
while general and administrative expense increased 16.9%.



For
the three months ended September 30, 2006, compensation and benefits,
occupancy, and data processing and related costs represented 79.5% of the total
noninterest expense compared to 80.6% for the same period in 2005.



Nine
 months ended September 30, 2006 and 2005



We
incurred noninterest expenses of $5.4 million for the nine months ended September 30, 2006 compared to $4.6 million for the nine months ended September 30, 2005.  Average interest-earning assets increased 23.3% during this period, while general
and administrative expense increased 17.2%.



For
the nine months ended September 30, 2006 compensation and benefits, occupancy,
and data processing and related costs represented 79.3% of the total
noninterest expense compared to 79.8% for the same period in 2005.

20




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



|                                   |   | Three months
  ended |   | Nine months
  ended
|---------------------------------- | - | -------------------- | - | -------------------
|                                   |   | September 30,        |   | September 30,      
|                                   |   | 2006                 |   | 2005               
|                                   |   |                      |   |                    
|Base compensation                  | $ | 758,877              | $ | 595,485            
|Incentive compensation             |   | 189,000              |   | 162,000            
|Total compensation                 |   | 947,877              |   | 757,485            
|Benefits                           |   | 170,055              |   | 113,731            
|Capitalized loan origination costs |   | (32,010)             |   | (33,365)           
|Total compensation and benefits    | $ | 1,085,922            | $ | 837,851            



Three
months ended September30, 2006 and 2005

Compensation
and benefits expense was $1.1 million and $837,851 for the three months ended September 30, 2006 and 2005, respectively.   Compensation and benefits represented 58.6%
and 52.8% of our total noninterest expense for the three months ended September 30, 2006 and 2005, respectively.  The $248,071 increase in compensation and
benefits in the third quarter of 2006 compared to the same period in 2005
resulted from increases of $163,392 in base compensation,  $27,000 in
additional incentive compensation, $56,324 higher benefits expense, and a
decrease of $1,355 in capitalized loan origination costs.  Loan origination
costs are required to be capitalized and amortized over the life of the loan as
a reduction of loan interest income.

The $248,071
increase in base compensation expense related to the cost of 8 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 fourth
quarter of 2005.  The remaining employees were hired to support the growth in
both loans and deposits.   Incentive compensation represented 17.4% and 19.3 %
of total compensation and benefits for the three months ended September 30, 2006 and 2005, respectively.  The incentive compensation expense recorded
for the third quarter of 2006 and 2005 represented an accrual of the portion of
the estimated incentive compensation earned during the third quarter of the
respective year.  Benefits expense increased $56,324 in the third quarter of
2006 compared to the same period in 2005 and represented 17.9% and 15.0% of the
total compensation for the three months ended September 30, 2006 and 2005, respectively.

Nine
months ended September 30, 2006 and 2005

Compensation
and benefits expense was $3.2 million and $2.4 million for the nine months
ended September 30, 2006 and 2005, respectively.   Compensation and benefits
represented 58.7% and 52.6% of our total noninterest expense for the nine
months ended September 30, 2006 and 2005, respectively.  The $748,285 increase
in compensation and benefits in the first nine months of 2006 compared to the
same period in 2005 resulted from increases of $549,531 in base compensation, 
$54,500 in additional incentive compensation, and $151,644 higher benefits
expense.  These amounts were partly offset by an increase of $7,390 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 $549,531
increase in base compensation expense related to the cost of 8 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 fourth quarter
of 2005.  The remaining employees were hired to support the growth in both loans
and deposits.  Incentive compensation represented 16.1% and 18.8 % of total
compensation and benefits for the nine months ended September 30, 2006 and 2005, respectively.  The incentive compensation expense recorded for the first nine
months of 2006 and 2005 represented an accrual of the portion of the estimated
incentive compensation earned during the first nine months of the respective
year.  Benefits expense increased $151,644 in the first nine months of 2006
compared to the same period in 2005.  Benefits expense represented 19.4% and 17.8%
of the total compensation for the nine months ended September 30, 2006 and 2005, respectively.

21




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



|                                          |   | Three months
  ended |   | Nine months
  ended
|----------------------------------------- | - | -------------------- | - | -------------------
|                                          |   | September 30,        |   | September 30,      
|                                          |   | 2006                 |   | 2005               
|                                          |   |                      |   |                    
|Data processing costs                     | $ | 150,661              | $ | 111,527            
|Debit card transaction expense            |   | 21,387               |   | 75,790             
|Courier expense                           |   | 23,080               |   | 20,509             
|Other expenses                            |   | 30,430               |   | 21,341             
|Total data
  processing and related costs | $ | 225,558              | $ | 229,167            



Data
processing and related costs were $225,558 and $229,167, a decrease of $3,609, for
the three months ended September 30, 2006 and 2005, respectively.  During the
first nine months of 2006 and the same period of 2005, our data processing and
related costs were $622,147 and $676,972, respectively, a decrease of $54,825.



During
the three months ended September 30, 2006, our data processing costs for our
core processing system were $150,661 compared to $111,527 for the three months
ended September 30, 2005.   We have contracted with an outside computerservice
company to provide our core data processing services.  During the nine months
ended September 30, 2006 and 2005, data processing costs were $409,945 and $335,711,
respectively.



Data
processing costs increased $39,134, or 35.1%, for the three months ended September 30, 2006 compared to the same period in 2005.  For the nine months ended September 30, 2006, data processing costs increased $74,234, or 22.1%, 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 $21,387 and $75,790 for
the three months ended September 30, 2006 and 2005, respectively.    The decrease
of $54,403 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 nine months of 2006
and 2005, debit card transaction expense was $60,199 and $218,021,
respectively.  The decrease of $157,822 relates primarily to a change in
merchant service card providers as discussed above.

Occupancy
expense, which represented 8.7% and 13.4% of total noninterest expense for the
three months ended September 30, 2006 and 2005, respectively, decreased $49,832,
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 $161,981
and $211,813 for the three months ended September 30, 2006 and 2005, respectively.  For the nine months ended September 30, 2006, occupancy expense decreased $86,536
to $495,587 from $582,123 for the same period ended September 30, 2005.  Occupancy expense represented 9.2% and 12.6% of total noninterest expense for the
first nine months of 2006 and 2005, respectively.

The
remaining $73,504 increase in noninterest expense for the three month period ended
 September 30, 2006 compared to the same period in 2005 was primarily a result
of a $58,491increase in professional fees.  In addition, insurance and telephone
expenses increased by $8,880 and $9,149, respectively, and other noninterest
expenses decreased by $6,249.  Professional fees increased as a result of legal
fees related to research of certain strategic business opportunities and the
overall growth of our company.  For the nine month period ended September 30, 2006, remaining noninterest expenses increased $187,364 from the same period
in 2005.  Of this amount, professional fees and marketing expenses represented
$76,429 and $37,050 of the increase, respectively.  Of the remaining $73,885
increase, insurance costs represented $23,027, telephone expenses represented
$25,393, and other expenses represented $25,465.  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
fees related to research of certain strategic business opportunities and the
overall growth of our company.

22




Income
tax expense was $532,494 for the three
months ended September 30, 2006 compared to $568,357
during the same period in 2005.   The decrease for the third quarter
2006 compared to the same period in 2005 is due to a lower effective tax rate
resulting primarily from the tax exempt income on bank owned life insurance which
we purchased in the third quarter of 2006.  For the nine months ended September 30, 2006, income tax expense was $1.6 million compared to $1.5 million for the
same period in 2005.  The increase for the nine month period related primarily to
the higher level of income before taxes.

Balance
Sheet ReviewGeneralAt September 30, 2006, we had total assets of $495.1 million, consisting principally of $385.7 million in net loans, $73.8
million in investments, $5.1 million in federal funds sold, and $10.3 million
in cash and due from banks.  Our liabilities at September 30, 2006 totaled $461.8 million, which consisted principally of $340.0 million in deposits, $104.5
million in FHLB advances, and $13.4 million in junior subordinated debentures. 
At September 30, 2006, our shareholders' equity was $33.3 million.

At December 31, 2005, we had total assets of $405.3 million, consisting principally of $334.0 million in net 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 SoldAt
 September 30, 2006, our federal funds sold were $5.1 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.

InvestmentsContractual maturities and yields on our
investments that are available for sale and are held to maturity at September 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.  We had no
investments maturing in less than one year as of September 30, 2006.

|                                   |   | One to Five Years      |       | Five to Ten Years |        | Over Ten Years |   | Total 
|---------------------------------- | - | ---------------------- | ----- | ----------------- | ------ | -------------- | - | ------
|                                   |   | Amount                 | Yield |                   | Amount | Yield          |   | Amount
|                                   |   | (Dollars in thousands)
|Available for Sale                 |   |                        |       |                   |        |                |   |       
|Federal agencies                   | $ | 1,980                  | 5.06% | $                 | -      | -              | $ | -     
|State and
  political subdivisions |   | -                      | -     |                   | -      | -              |   | 1,285 
|Mortgage-backed
  securities       |   | -                      | -     |                   | 4,840  | 5.32%          |   | 41,335
|Total                              | $ | 1,980                  | 5.06% | $                 | 4,840  | 5.32%          | $ | 42,620
|                                   |   |                        |       |                   |        |                |   |       
|Held to Maturity                   |   |                        |       |                   |        |                |   |       
|Mortgage-backed
  securities       | $ | -                      | -     | $                 | 469    | 3.92%          | $ | 17,049

At September 30, 2006, our investments included securities issued by Federal Home
Loan Mortgage Corporation and Federal National Mortgage Association with
carrying values of $12.9 million and $33.0 million, respectively.

23




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



|                                 |                        | September 30, 2006 |   | December 31, 2005
|-------------------------------- | ---------------------- | ------------------ | - | -----------------
|                                 |                        | Amortized          |   | Fair             
|                                 |                        | Cost               |   | Value            
|                                 | (Dollars in thousands)
|Available
  for Sale             |                       
|Federal agencies                 | $                      | 1,996              | $ | 1,980            
|State and political subdivisions |                        | 1,291              |   | 1,285            
|Mortgage-backed
  securities     |                        | 46,412             |   | 46,175           
|Total                            | $                      | 49,699             | $ | 49,440           
|                                 |                        |                    |   |                  
|Held
  to Maturity               |                        |                    |   |                  
|Mortgage-backed
  securities     | $                      | 17,518             | $ | 16,888           
|                                 |                        |                    |   |                  

Other
investments totaled $6.9 million at September 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 $5.5 million.

At September 30, 2006, we had $73.8 million in our investment securities portfolio which represented
approximately 14.9% of our total assets.  We held U.S. Government agency
securities, municipal securities, and mortgage-backed securities with a fair
value of $66.3 million and an amortized cost of $67.2 million for an unrealized
loss of approximately $889,000.  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 intend 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, through
December 31, 2005 we had maintained a lower than normal level of investments.  During
the first nine months of 2006, as rates on investment securities have risen and
we attracted a material amount of additional deposits, we increased 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 |  | Total 
|---------------------------------- | - | ------------------------ |  | ----------------- | - | -------------- |  | ------
|                                   |   | Amount                   |  | Yield             |   | Amount         |  | Yield 
|                                   |   | (Dollars in
  thousands)
|                                   |   |                         
|Available for Sale                 |   |                          |  |                   |   |                |  |       
|Federal agencies                   | $ | 1,012                    |  | 5.49 %            | $ | -              |  | -     
|State and
  political subdivisions |   | -                        |  | -                 |   | -              |  | -     
|Mortgage-backed securities         |   | -                        |  | -                 |   | 1,186          |  | 4.64 %
|Total                              | $ | 1,012                    |  | 5.49 %            | $ | 1,186          |  | 4.64 %
|                                   |   |                          |  |                   |   |                |  |       
|Held to Maturity                   |   |                          |  |                   |   |                |  |       
|Mortgage-backed securities         | $ | -                        |  | -                 | $ | 576            |  | 3.78 %



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.

24




LoansSince 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 nine months
ended September 30, 2006 and 2005, average loans were $369.6 million and $304.2
million, respectively.  Before the allowance for loan losses, total loans
outstanding at September 30, 2006 were $390.4 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.

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

|                                 |   | September 30, 2006     |  | December 31, 2005
|-------------------------------- | - | ---------------------- |  | -----------------
|                                 |   | Amount                 |  | %  of Total      
|Real
  estate:                   |   | (Dollars in thousands)
|Commercial:                      |   |                        |  |                  
|Owner occupied                   | $ | 74,492                 |  | 19.1 %           
|Non-owner occupied               |   | 113,268                |  | 29.0 %           
|Construction                     |   | 24,780                 |  | 6.4 %            
|Total commercial real estate     |   | 212,540                |  | 54.5 %           
|Consumer:                        |   |                        |  |                  
|Residential                      |   | 57,746                 |  | 14.8 %           
|Home equity                      |   | 37,512                 |  | 9.6 %            
|Construction                     |   | 10,726                 |  | 2.7 %            
|Total consumer real estate       |   | 105,984                |  | 27.1 %           
|Total real estate                |   | 318,524                |  | 81.6 %           
|Commercial
  business            |   | 63,985                 |  | 16.4 %           
|Consumer-other                   |   | 8,688                  |  | 2.2 %            
|Deferred
  origination fees, net |   | (837)                  |  | (0.2)%           
|Total gross loans, net of        |   |                        |  |                  
|deferred fees                    |   | 390,360                |  | 100.0 %          
|Less-allowance
  for loan losses |   | (4,620)                |  |                  
|Total loans, net                 | $ | 385,740                |  |                  
|                                 |   |                        |  |                  

Maturities and Sensitivity of Loans to
Changes in Interest RatesThe 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.

25




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



|                                            |   |                  |   |                        |   | After one but within
  five years |   |         |  | 
|------------------------------------------- | - | ---------------- | - | ---------------------- | - | --------------------------------- | - | ------- |  | 
|                                            |   | One year or less |   | After five years       |   |                                  
|                                            |   |                  |   | Total                 
|                                            |   |                  |   | (Dollars in thousands) |   |                                  
|                                            |   |                  |   |                        |   |                                   |   |        
|Real
  estate - mortgage                    | $ | 54,878           | $ | 190,924                | $ | 37,216                            | $ | 283,018
|Real
  estate - construction                |   | 16,255           |   | 16,104                 |   | 3,147                             |   | 35,506 
|Total real estate                           |   | 71,133           |   | 207,028                |   | 40,363                            |   | 318,524
|                                            |   |                  |   |                        |   |                                   |   |        
|Commercial
  business                       |   | 39,344           |   | 23,749                 |   | 892                               |   | 63,985 
|Consumer-other                              |   | 3,979            |   | 4,375                  |   | 334                               |   | 8,688  
|Deferred
  origination fees, net            |   | (259)            |   | (488)                  |   | (90)                              |   | (837)  
|Total gross loans,
  net of   deferred fees | $ | 114,197          | $ | 234,664                | $ | 41,499                            | $ | 390,360
|Loans maturing after one year with:         |   |                  |   |                        |   |                                  
|Fixed interest rates                        |   |                  |   |                        | $ | 132,448                          
|Floating interest rates                     |   |                  |   |                        | $ | 143,715                          



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



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





26




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 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.

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

|                                                |   | September 30,         
|----------------------------------------------- | - | ----------------------
|                                                |   | 2006                  
|                                                |   | (Dollars in thousands)
|                                                |   |                       
|Balance,
  beginning of period                  | $ | 4,490                 
|                                                |   |                       
|Loans
  charged-off                             |   | (1,189)               
|                                                |   |                       
|Recoveries
  of loans previously charged-off    |   | 119                   
|                                                |   |                       
|Net
  loans (charged-off) recovery              | $ | (1,070)               
|                                                |   |                       
|Provision
  for loan losses                     |   | 1,200                 
|                                                |   |                       
|Balance,
  end of period                        | $ | 4,620                 
|                                                |   |                       
|Allowance
  for loan losses to gross loans      |   | 1.18%                 
|                                                |   |                       
|Net
  charge-offs to average loans (annualized) |   | 0.39%                 

We evaluate the adequacy of the allowance for
loan losses utilizing our credit grading system which we apply to each loan.  All
loans graded substandard or below are individually evaluated for impairment and
a specific reserve applied as appropriate.  We have retained an independent
consultant to review the loan files on a test basis to confirm the grading of our
loans.



27




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



|                                                              |   | September 30, 2006       |   | December
   31,  2005
|------------------------------------------------------------- | - | ------------------------ | - | ---------------------
|                                                              |   | (Dollars
  in thousands)
|                                                              |   |                          |   |                      
|Loans
  over 90 days past due                                 | $ | 399                      | $ | 351                  
|                                                              |   |                          |   |                      
|Loans
  on nonaccrual:                                        |   |                          |   |                      
|Mortgage                                                      |   | 559                      |   | 419                  
|Commercial                                                    |   | 54                       |   | 41                   
|Consumer                                                      |   | 35                       |   | 6                    
|Total nonaccrual loans                                        |   | 648                      |   | 466                  
|                                                              |   |                          |   |                      
|Troubled
  debt restructuring                                 |   | -                        |   | -                    
|                                                              |   |                          |   |                      
|Total of nonperforming loans                                  |   | 648                      |   | 466                  
|                                                              |   |                          |   |                      
|Other
  nonperforming assets                                  |   | 779                      |   | -                    
|                                                              |   |                          |   |                      
|Total nonperforming assets                                    | $ | 1,427                    | $ | 466                  
|                                                              |   |                          |   |                      
|Percentage
  of total assets                                  |   | 0.29%                    |   | 0.12%                
|                                                              |   |                          |   |                      
|Percentage
  of nonperforming loans and assets to gross loans |   | 0.37%                    |   | 0.14%                
|                                                              |   |                          |   |                      

The allowance for loan
losses was $4.6 million at September 30, 2006 and $4.5 million at December 31, 2005, or 1.18% 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 nine
months ended September 30, 2006 we had net charge-offs of $1.1 million, and a net
recovery of $32,625 for the same period in 2005.

The substantial portion,
or $1.0 million, of loans charged-off during the nine months ended September 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 and third quarters of
2006, we sold $524,168 and $546,100, respectively, of the property which had secured
these loans.  At September 30, 2006, the remaining $779,218 in property which
had secured these loans is recorded as other real estate owned our balance sheet.

At September 30, 2006, the allowance for loan losses represented 7.1 times the amount of non-performing
loans compared to 3.8 times at September 30, 2005.  As a result of this level
of coverage on non-performing loans, we determined that the allowance for loan
losses at September 30, 2006 was adequate.

At September 30, 2006 and December 31, 2005, nonaccrual loans represented 0.17% and 0.14% of
total loans, respectively.  At September 30, 2006 and December 31, 2005, we had $648,428 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 nine months of 2006 was approximately $32,000.  
The amount of interest income recorded in the first nine months of 2006 for
loans that were on nonaccrual at September 30, 2006 was approximately $10,000.

28




Deposits
and Other Interest-Bearing LiabilitiesOur 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 to those 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 $92.2 million at September 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 115% and 133% at September 30, 2006 and December 31, 2005, respectively.

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

|                                      |   |                        | 2006   |        | 2005
|------------------------------------- | - | ---------------------- | ------ | ------ | ----
|                                      |   |                        | Amount |        | Rate
|                                      |   | (Dollars in thousands) |       
|                                      |   |                        |        |        |     
|Noninterest
  bearing demand deposits | $ | 24,550                 |        | - %    | $   
|Interest
  bearing demand deposits    |   | 36,279                 |        | 1.85 % |     
|Money
  market accounts               |   | 76,292                 |        | 3.43 % |     
|Saving
  accounts                     |   | 1,347                  |        | 0.43 % |     
|Time
  deposits less than $100,000    |   | 33,243                 |        | 4.24 % |     
|Time
  deposits greater than $100,000 |   | 119,612                |        | 4.67 % |     
|Total deposits                        | $ | 291,323                |        | 3.53 % | $   

Money market accounts and time deposits of
$100,000 or more increased considerably for the nine months ended September 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 as well as an increase 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 $192.7 million, $136.5 million, and $122.1 million at September 30, 2006, December 31, 2005, and September 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 September 30, 2006 (in thousands) was as follows:

|
|
|
|
|
|
|



Capital Resources

Total
shareholders' equity at September 30, 2006 was $33.3 million.  At December 31, 2005, total shareholders' equity was $30.5 million.  The increase during the
first nine months of 2006 resulted primarily from the $2.8 million of net
income earned.

29




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 nine months ended September 30, 2006 and the year ended December 31, 2005.  Since our inception, we have not paid cash dividends.



|                           | September  30, 2006 |  | December 31, 2005
|-------------------------- | ------------------- |  | -----------------
|Return
  on average assets | 0.86 %              |  | 0.70 %           
|Return
  on average equity | 11.79 %             |  | 8.44 %           
|Equity
  to assets ratio   | 7.31 %              |  | 8.36 %           



Our return on average
assets was 0.86% for the nine months ended September 30, 2006, an increase from 0.70% for the year ended December 31, 2005.  In addition, our return on
average equity increased to 11.79% for the nine months ended September 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 on the
purchase of the building that occurred in the late 2005.   The decrease in the
equity to assets ratio from December 31, 2005 is a function of the $82.2
million increase in average assets compared to the $2.3 million increase in
average equity.

The
following table sets forth the holding company's and the bank's various capital
ratios at September 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.

|                          | September
   30, 2006 |          | December
   31, 2005
|------------------------- | --------------------- | -------- | --------------------
|                          | Holding               |          |                     
|                          | Company               | Bank     |                     
|                          |                       |          |                     
|Total risk-based capital  | 13.2 %                | 12.4 %   |                     
|Tier 1 risk-based capital | 12.0 %                | 11.2
  % |                     
|Leverage
  capital        | 9.9 %                 | 9.2 %    |                     

30




Borrowings

The following table
outlines our various sources of borrowed funds during the nine months ended September
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.



-

|                                                |                        |          | Maximum   |                        |        
|----------------------------------------------- | ---------------------- | -------- | --------- | ---------------------- | -------
|                                                | Ending                 | Period-  | Month-end | Average for the Period
|                                                | Balance                | End Rate | Balance   | Balance                | Rate   
|                                                | (Dollars in thousands)
|At
  or for the nine months                     |                       
|ended September 30, 2006                        |                       
|Federal
  Home Loan Bank advances               | $                      | 104,500  | 4.42 %    | $                      | 104,500
|Securities sold under agreement to repurchase   | -                      | 0.00 %   | 14,434    | 11,181                 | 4.92 % 
|Federal
  funds purchased                       | -                      | 5.73 %   | 3,345     | 765                    | 5.47 % 
|Junior subordinated debentures                  | 13,403                 | 7.58 %   | 13,403    | 13,403                 | 7.21 % 
|                                                |                        |          |           |                        |        
|At
  or for the year                            |                        |          |           |                        |        
|ended December 31, 2005                         |                        |          |           |                        |        
|Federal
  Home Loan Bank advances               | $                      | 79,500   | 3.84 %    | $                      | 81,500 
|Securities
  sold under agreement to repurchase | 14,680                 | 4.32 %   | 18,947    | 16,710                 | 3.35 % 
|Federal
  funds purchased                       | -                      | 4.60 %   | -         | 755                    | 2.93 % 
|Junior
  subordinated debentures                | 13,403                 | 6.74 %   | 13,403    | 6,384                  | 6.57 % 
|                                                |                        |          |           |                        |        
|                                                |                        |          |           |                        |        

Effect of Inflation and
Changing PricesThe 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.

Commitments
and Off-Balance Sheet RiskCommitments 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 September 30, 2006, unfunded commitments to extend credit were $80.0
million, of which $38.4 million was at fixed rates and $41.6 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.

31




Prior to September 30, 2006,
the company entered into a commitment for approximately $1.3 million to upfit
an existing office building in order to relocate our headquarters and main
office.  As of September 30, 2005, approximately $934,000 has been paid. The
office is expected to be completed in the first quarter of 2007.

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
RiskMarket 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.

We were asset sensitive during most of the year
ended December 31, 2005 and through the first six months of 2006.  As we
obtained more fixed rate loans and retail deposits, our gap position has
shifted to being liability sensitive.  As of September 30, 2006, we expect to be liability for the next twelve months.  Our variable rate loans and a
majority of our deposits reprice over a 12-month period.  Approximately 52% and
61% of our loans were variable rate loans at September 30, 2006 and December 31, 2005, respectively.  The ratio of cumulative gap to total earning assets
after 12 months was (24.1%) because $111.5 million more liabilities will
reprice in a 12 month period than assets.   However, our gap
analysis is not a precise indicator of our interest sensitivity position.  The
analysis presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally.  For example, rates paid on a
substantial portion of core deposits may change contractually within a
relatively short time frame, but those rates are viewed by us as significantly
less interest-sensitive than market-based rates such as those paid on noncore
deposits.  Net interest income may be affected by other significant factors in
a given interest rate environment, including changes in the volume and mix of
interest-earning assets and interest-bearing liabilities.



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.



32




At
 September 30, 2006, our liquid assets, consisting of cash and due from banks
and federal funds sold, amounted to $15.4 million, or 3.1% of total assets. 
Our investment securities at September 30, 2006 amounted to $73.8 million, or 14.9%
of total assets.  Investment securities traditionally provide a secondary
source of liquidity since they can be converted into cash in a timely manner. 
However, $30.9 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 nine
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 September 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 September 30, 2006 was $13.6 million, based on the bank's $5.5 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 January 2007.  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.

33




The following table sets
forth information regarding our rate sensitivity as of September 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 |   | After   |  |      
|------------------------------------------------------------- | - | ------------------------ | - | --------- | - | ----------------- | - | --------------- | - | ------- |  | -----
|                                                              |   |                          |   | three     |   | within
  twelve   |   | within five     |   | five    |  |      
|                                                              |   |                          |   | months    |   | months            |   | years           |   | years   |  | Total
|                                                              |   | (Dollars in
  thousands)
|Interest-earning assets:                                      |   |                          |   |           |   |                   |   |                 |   |        
|Federal funds sold                                            | $ | 5,113                    | $ | -         | $ | -                 | $ | -               | $ | 5,113  
|Investment securities                                         |   | 2,447                    |   | 6,875     |   | 28,994            |   | 28,643          |   | 66,959 
|Loans                                                         |   | 212,081                  |   | 19,259    |   | 124,788           |   | 34,421          |   | 390,549
|                                                              |   |                          |   |           |   |                   |   |                 |   |        
|Total earning assets                                          | $ | 219,641                  | $ | 26,134    | $ | 153,782           | $ | 63,064          | $ | 462,621
|                                                              |   |                          |   |           |   |                   |   |                 |   |         | 
|Interest-bearing liabilities:                                 |   |                          |   |           |   |                   |   |                 |   |        
|Money market and NOW                                          | $ | 118,985                  | $ | -         | $ | -                 | $ | -               | $ | 118,985
|Regular savings                                               |   | 1,316                    |   | -         |   | -                 |   | -               |   | 1,316  
|Time deposits                                                 |   | 38,159                   |   | 112,904   |   | 37,396            |   | 167             |   | 188,626
|FHLB advances                                                 |   | 60,000                   |   | 12,500    |   | 32,000            |   | -               |   | 104,500
|Junior
  subordinated debentures                              |   | 13,403                   |   | -         |   | -                 |   | -               |   | 13,403 
|                                                              |   |                          |   |           |   |                   |   |                 |   |         |  |      
|Total interest-bearing liabilities                            | $ | 231,863                  | $ | 125,404   | $ | 69,396            | $ | 167             | $ | 426,830
|                                                              |   |                          |   |           |   |                   |   |                 |   |        
|Period gap                                                    | $ | (12,222)                 | $ | (99,270)  | $ | 84,386            | $ | 62,897          |   |        
|Cumulative gap                                                |   | (12,222)                 |   | (111,492) |   | (27,106)          |   | 35,791          |   |        
|                                                              |   |                          |   |           |   |                   |   |                 |   |         | 
|Ratio of
  cumulative gap total assets   total earning assets |   | (2.6 %)                  |   | (24.1 %)  |   | (5.9 %)           |   | 7.7 %           |   |        
|                                                              |   |                          |   |           |   |                   |   |                 |   |         |  |      



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



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

34




Accounting,
Reporting, and Regulatory Matters



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





In March 2006, the FASB
issued SFAS No. 156, *Accounting for Servicing of Financial Assets-an
amendment of FASB Statement No. 140.*This
Statement amends FASB No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract;
requires all separately recognized servicing assets and servicing liabilities
to be initially measured at fair value, if practicable; permits an entity to
choose its subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities; at its initial adoption,
permits a one-time reclassification of available-for-sale securities to trading
securities by entities with recognized servicing rights, without calling into
question the treatment of other available-for-sale securities under Statement
115, provided that the available-for-sale securities are identified in some
manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value; and requires separate presentation of servicing
assets and servicing liabilities subsequently measured at fair value in the
statement of financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities. An entity should
adopt SFAS No. 156 as of the beginning of its first fiscal year that begins
after September 15, 2006. We do not believe the adoption of SFAS No. 156 will
have a material impact on our financial position, results of operations and
cash flows.

In
July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises' financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions.  FIN 48 is effective for fiscal years
beginning after December 15, 2006.  We are currently analyzing the effects of
FIN 48.

In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements.  SFAS 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective on January 1, 2008 and is not expected to have a significant impact on our financial statements.

In September, 2006, The
FASB ratified the consensuses reached by the FASB's Emerging Issues Task
Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that
provide a benefit to an employee that extends to postretirement periods should
recognize a liability for future benefits in accordance with FASB Statement of
Financial Accounting Standards (SFAS) No. 106, *Employers' Accounting for
Postretirement Benefits Other Than Pensions,*or Accounting Principles
Board (APB) Opinion No. 12, *Omnibus Opinion-1967.*EITF 06-4 is
effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained
earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption or (b) a change
in accounting principle through retrospective application to all prior periods. 
We are currently analyzing the effects the adoption of EITF 06-4 will have on our financial
position, results of operations and cash flows.

35




On
 September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
108"). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a potential current year misstatement. Prior to SAB 108, Companies
might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income
statement approach focusing
on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a company's
balance sheet. Misstatements that would be material under one approach could be
viewed as immaterial under another approach, and not be corrected. SAB 108 now
requires that companies view financial statement misstatements as material if
they are material according to either the income statement or balance sheet
approach. We have analyzed SAB 108 and determined that upon adoption it will
have no impact on our reported results of operations or financial conditions.

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 September 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 September 30, 2006.  There have been no significant changes in our internal
controls over financial reporting during the fiscal quarter ended September 30,
2006 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

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



PART
II.  OTHER INFORMATION

Item 1.             Legal Proceedings.

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

Item 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

36




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

Not
applicable

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.

37




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: November 13, 2006 |  | /s/R.
  Arthur Seaver, Jr.                  
|                        |  | R. Arthur Seaver, Jr.                       
|                        |  | Chief Executive Officer                     
|                        |  | Principal Executive
  Officer               
|                        |  |                                             
|                        |  |                                             
|                        |  |                                             
|Date: November 13, 2006 |  | /s/James M. Austin,
  III                   
|                        |  | James M. Austin, III                        
|                        |  | Chief Financial Officer                     
|                        |  | Principal Financial and
  Accounting Officer

38




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.

39