UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2010ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934
                        For the Transition Period from                      toCommission file number 000-27719  d26423_proxy.jpg
 Southern First Bancshares, Inc. (Exact name of registrant as specified in its charter) South Carolina
                           
                           
                           
                           
                           
                           58-2459561(State or other jurisdiction of incorporation)
                           
                           
                           
                           
                           
                           (I.R.S. Employer Identification No.)100 Verdae Boulevard, Suite 100Greenville, S.C.
                           
                           
                           
                           
                           
                           29606(Address of principal executive offices)
                           
                           
                           
                           
                           
                           (Zip Code) 864-679-9000(Registrant's telephone number, including area code)Not Applicable(Former name, former address, and former fiscal year, if changed
                     since last report) Indicate by check mark whether the registrant (1) has filed all
                     reports required to be filed by Section 13 or 15(d) of the Exchange
                     Act of 1934 during the preceding 12 months (or for such shorter
                     period that the registrant was required to file such reports), and
                     (2) has been subject to such filing requirements for the past 90
                     days.  Yes x No o Indicate by check mark whether the registrant has submitted
                     electronically and posted on its corporate Web site, if any, every
                     Interactive Data File required to be submitted and posted pursuant to
                     Rule 405 of Regulation S-T (§232.405 of this chapter) during the
                     preceding12 months (or for such shorter period that the registrant
                     was required to submit and post such files).
                      Yes o  No o Indicate by check mark whether the registrant is a large accelerated
                     filer, an accelerated filer, or a non-accelerated filer. See
                     definitions of "accelerated filer" and "large accelerated filer" in
                     Rule 12b-2 of the Exchange Act). Large accelerated filer  o
                           
                           
                           Accelerated filer                 oNon-accelerated filer    o
                           
                           
                           Smaller Reporting Company  x Indicate by check mark whether the registrant is a shell company (as
                     defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuer's
                     classes of common stock, as of the latest practicable date: 3,143,181
                     shares of common stock, $.01 par value per share, were issued and
                     outstanding as of August 9, 2010.


PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data) June 30,2010
                           
                           
                           
                           
                           
                           December 31,2009(Unaudited)
                           
                           
                           
                           
                           
                           (Audited)ASSETSCash and cash equivalents:Cash and due from banks
                           
                           $
                           5,101
                           
                           
                           
                           
                           $
                           5,620Federal funds sold
                           
                           
                           22,567
                           
                           
                           
                           
                           
                           6,462Total cash and cash equivalents
                           
                           
                           27,668
                           
                           
                           
                           
                           
                           12,082Investment securities:Investment securities available for sale
                           
                           
                           85,201
                           
                           
                           
                           
                           
                           76,195Investment securities held to maturity (fair value $125 and $9,516)
                           
                           
                           120
                           
                           
                           
                           
                           
                           9,225Other investments, at cost
                           
                           
                           9,203
                           
                           
                           
                           
                           
                           9,213Total investment securities
                           
                           
                           94,524
                           
                           
                           
                           
                           
                           94,633Loans
                           
                           
                           580,707
                           
                           
                           
                           
                           
                           574,270Less allowance for loan losses
                           
                           
                           (8,352
                           )
                           
                           
                           
                           
                           (7,760
                           )Loans, net
                           
                           
                           572,355
                           
                           
                           
                           
                           
                           566,510Bank owned life insurance
                           
                           
                           14,274
                           
                           
                           
                           
                           
                           13,974Property and equipment, net
                           
                           
                           16,139
                           
                           
                           
                           
                           
                           16,410Deferred income taxes
                           
                           
                           3,592
                           
                           
                           
                           
                           
                           3,486Other assets
                           
                           
                           12,839
                           
                           
                           
                           
                           
                           12,202Total assets
                           
                           $
                           741,391
                           
                           
                           
                           
                           $
                           719,297LIABILITIES AND SHAREHOLDERS' EQUITYDeposits
                           
                           $
                           536,331
                           
                           
                           
                           
                           $
                           494,084Federal Home Loan Bank advances and related debt
                           
                           
                           122,700
                           
                           
                           
                           
                           
                           142,700Note payable
                           
                           
                           4,000
                           
                           
                           
                           
                           
                           4,250Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           13,403Other liabilities
                           
                           
                           5,038
                           
                           
                           
                           
                           
                           5,019Total liabilities
                           
                           
                           681,472
                           
                           
                           
                           
                           
                           659,456Shareholders' equity:Preferred stock, par value $.01 per share, 10,000,000 shares
                              authorized, 17,299 shares issued and outstanding
                           
                           
                           15,192
                           
                           
                           
                           
                           
                           15,432Common stock, par value $.01 per share, 10,000,000 shares authorized,
                              3,143,181 and 3,094,481 shares issued and outstanding at June 30,
                              2010 and December 31, 2009, respectively
                           
                           
                           31
                           
                           
                           
                           
                           
                           31Nonvested restricted stock
                           
                           
                           (7
                           )
                           
                           
                           
                           
                           (14
                           )Additional paid-in capital
                           
                           
                           34,744
                           
                           
                           
                           
                           
                           34,097Accumulated other comprehensive income
                           
                           
                           468
                           
                           
                           
                           
                           
                           484Retained earnings
                           
                           
                           9,491
                           
                           
                           
                           
                           
                           9,811Total shareholders' equity
                           
                           
                           59,919
                           
                           
                           
                           
                           
                           59,841Total liabilities and shareholders' equity
                           
                           $
                           741,391
                           
                           
                           
                           
                           $
                           719,297  See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 2


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(dollars in thousands, except share data) For the three months endedJune 30,
                           
                           
                           
                           
                           
                           For the six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Interest income
                           
                           
                           (Unaudited)Loans
                           
                           $
                           8,077
                           
                           
                           
                           
                           $
                           7,911
                           
                           
                           
                           
                           $
                           16,037
                           
                           
                           
                           
                           $
                           15,709Investment securities
                           
                           
                           854
                           
                           
                           
                           
                           
                           1,167
                           
                           
                           
                           
                           
                           1,741
                           
                           
                           
                           
                           
                           2,260Federal funds sold
                           
                           
                           11
                           
                           
                           
                           
                           
                           3
                           
                           
                           
                           
                           
                           21
                           
                           
                           
                           
                           
                           8Total interest income
                           
                           
                           8,942
                           
                           
                           
                           
                           
                           9,081
                           
                           
                           
                           
                           
                           17,799
                           
                           
                           
                           
                           
                           17,977Interest expenseDeposits
                           
                           
                           2,487
                           
                           
                           
                           
                           
                           2,446
                           
                           
                           
                           
                           
                           4,885
                           
                           
                           
                           
                           
                           5,235Borrowings
                           
                           
                           1,558
                           
                           
                           
                           
                           
                           1,716
                           
                           
                           
                           
                           
                           3,236
                           
                           
                           
                           
                           
                           3,362Total interest expense
                           
                           
                           4,045
                           
                           
                           
                           
                           
                           4,162
                           
                           
                           
                           
                           
                           8,121
                           
                           
                           
                           
                           
                           8,597Net interest income
                           
                           
                           4,897
                           
                           
                           
                           
                           
                           4,919
                           
                           
                           
                           
                           
                           9,678
                           
                           
                           
                           
                           
                           9,380Provision for loan losses
                           
                           
                           2,300
                           
                           
                           
                           
                           
                           975
                           
                           
                           
                           
                           
                           3,700
                           
                           
                           
                           
                           
                           1,725Net interest income after provision for loan losses
                           
                           
                           2,597
                           
                           
                           
                           
                           
                           3,944
                           
                           
                           
                           
                           
                           5,978
                           
                           
                           
                           
                           
                           7,655Noninterest incomeLoan fee income
                           
                           
                           106
                           
                           
                           
                           
                           
                           121
                           
                           
                           
                           
                           
                           226
                           
                           
                           
                           
                           
                           159Service fees on deposit accounts
                           
                           
                           142
                           
                           
                           
                           
                           
                           177
                           
                           
                           
                           
                           
                           288
                           
                           
                           
                           
                           
                           352Income from bank owned life insurance
                           
                           
                           147
                           
                           
                           
                           
                           
                           123
                           
                           
                           
                           
                           
                           299
                           
                           
                           
                           
                           
                           246Gain on sale of investment securities
                           
                           
                           1,088
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,104
                           
                           
                           
                           
                           
                           -Gain on sale of property and equipment
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Real estate owned activity
                           
                           
                           (19
                           )
                           
                           
                           
                           
                           3
                           
                           
                           
                           
                           
                           (3
                           )
                           
                           
                           
                           
                           (4
                           )Other income
                           
                           
                           121
                           
                           
                           
                           
                           
                           95
                           
                           
                           
                           
                           
                           223
                           
                           
                           
                           
                           
                           180Total noninterest income
                           
                           
                           1,585
                           
                           
                           
                           
                           
                           519
                           
                           
                           
                           
                           
                           2,155
                           
                           
                           
                           
                           
                           933Noninterest expensesCompensation and benefits
                           
                           
                           2,142
                           
                           
                           
                           
                           
                           1,963
                           
                           
                           
                           
                           
                           4,274
                           
                           
                           
                           
                           
                           3,888Professional fees
                           
                           
                           165
                           
                           
                           
                           
                           
                           155
                           
                           
                           
                           
                           
                           330
                           
                           
                           
                           
                           
                           291Marketing
                           
                           
                           185
                           
                           
                           
                           
                           
                           174
                           
                           
                           
                           
                           
                           396
                           
                           
                           
                           
                           
                           318Insurance
                           
                           
                           405
                           
                           
                           
                           
                           
                           639
                           
                           
                           
                           
                           
                           680
                           
                           
                           
                           
                           
                           792Occupancy
                           
                           
                           555
                           
                           
                           
                           
                           
                           440
                           
                           
                           
                           
                           
                           1,111
                           
                           
                           
                           
                           
                           857Data processing and related costs
                           
                           
                           402
                           
                           
                           
                           
                           
                           345
                           
                           
                           
                           
                           
                           787
                           
                           
                           
                           
                           
                           719Telephone
                           
                           
                           77
                           
                           
                           
                           
                           
                           59
                           
                           
                           
                           
                           
                           153
                           
                           
                           
                           
                           
                           110Other
                           
                           
                           180
                           
                           
                           
                           
                           
                           189
                           
                           
                           
                           
                           
                           388
                           
                           
                           
                           
                           
                           418Total noninterest expenses
                           
                           
                           4,111
                           
                           
                           
                           
                           
                           3,964
                           
                           
                           
                           
                           
                           8,119
                           
                           
                           
                           
                           
                           7,393Income before income tax expense (benefit)
                           
                           
                           71
                           
                           
                           
                           
                           
                           499
                           
                           
                           
                           
                           
                           14
                           
                           
                           
                           
                           
                           1,195Income tax expense (benefit)
                           
                           
                           (23
                           )
                           
                           
                           
                           
                           144
                           
                           
                           
                           
                           
                           (99
                           )
                           
                           
                           
                           
                           352Net income
                           
                           $
                           94
                           
                           
                           
                           
                           $
                           355
                           
                           
                           
                           
                           $
                           113
                           
                           
                           
                           
                           $
                           843Preferred stock dividend
                           
                           
                           216
                           
                           
                           
                           
                           
                           216
                           
                           
                           
                           
                           
                           433
                           
                           
                           
                           
                           
                           294Dividend accretion
                           
                           
                           116
                           
                           
                           
                           
                           
                           127
                           
                           
                           
                           
                           
                           240
                           
                           
                           
                           
                           
                           170Net income (loss) available to common shareholders
                           
                           $
                           (238
                           )
                           
                           
                           
                           $
                           12
                           
                           
                           
                           
                           $
                           (560
                           )
                           
                           
                           
                           $
                           379Earnings (loss) per common shareBasic
                           
                           $
                           (0.08
                           )
                           
                           
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.12Diluted
                           
                           $
                           (0.08
                           )
                           
                           
                           
                           $
                           0.00
                           
                           
                           
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.12Weighted average common shares outstandingBasic
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,044,863
                           
                           
                           
                           
                           
                           3,135,862
                           
                           
                           
                           
                           
                           3,044,863Diluted
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,045,741
                           
                           
                           
                           
                           
                           3,135,862
                           
                           
                           
                           
                           
                           3,049,837 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 3


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYAND COMPREHENSIVE INCOMEFOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009(Unaudited)(dollars in thousands, except share data) Common stock
                           
                           
                           Preferred
                           
                           
                           Nonvestedrestricted
                           
                           
                           Additionalpaid-in
                           
                           
                           Accumulatedothercomprehensive
                           
                           
                           Retained
                           
                           
                           Totalshare-holders'Shares
                           
                           
                           Amount
                           
                           
                           stock
                           
                           
                           stock
                           
                           
                           capital
                           
                           
                           income(loss)
                           
                           
                           Earnings
                           
                           
                           equityDecember 31, 2008
                           
                           
                           3,044,863
                           
                           $
                           30
                           
                           $
                           -
                           
                           $
                           (27
                           )
                           $
                           31,850
                           
                           $
                           (1,079
                           )
                           $
                           9,012
                           
                           $
                           39,786Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           843
                           
                           
                           843Comprehensive income, net of tax -Unrealized holding gain on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,539
                           
                           
                           -
                           
                           
                           1,539Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2,382Preferred stock transactions:Proceeds from issuance of 17,299 shares of preferred stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           15,856Proceeds from issuance of common stock warrants
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1,418Cash dividends on Series T preferred at annual dividend rate of 5%
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (187
                           )
                           
                           (187
                           )Dividend accretion
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (170
                           )
                           
                           -
                           
                           
                           170
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Amortization of deferred compensation on restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7Compensation expense related to stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           52
                           
                           
                           -
                           
                           
                           -
                           
                           
                           52June 30, 2009
                           
                           
                           3,044,863
                           
                           $
                           30
                           
                           $
                           15,686
                           
                           $
                           (20
                           )
                           $
                           33,490
                           
                           $
                           460
                           
                           $
                           9,668
                           
                           $
                           59,314December 31, 2009
                           
                           
                           3,094,481
                           
                           $
                           31
                           
                           $
                           15,432
                           
                           $
                           (14
                           )
                           $
                           34,097
                           
                           $
                           484
                           
                           $
                           9,811
                           
                           $
                           59,841Net income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           113
                           
                           
                           113Comprehensive income, net of tax -Unrealized holding gain on securities available for sale
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           713
                           
                           
                           -
                           
                           
                           713Reclassification adjustment included in net income, net of tax
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           (729
                           )
                           
                           
                           
                           
                           (729
                           )Total comprehensive income
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           97Preferred stock transactions:Cash dividends on Series T preferred at annual dividend rate of 5%
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (433
                           )
                           
                           (433
                           )Dividend accretion
                           
                           
                           -
                           
                           
                           -
                           
                           
                           (240
                           )
                           
                           -
                           
                           
                           240
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -Proceeds from exercise of stock warrants and options
                           
                           
                           48,700
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           295
                           
                           
                           -
                           
                           
                           -
                           
                           
                           295Amortization of deferred compensation on restricted stock
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           7Compensation expense related to stock options
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           112
                           
                           
                           -
                           
                           
                           -
                           
                           
                           112June 30, 2010
                           
                           
                           3,143,181
                           
                           $
                           31
                           
                           $
                           15,192
                           
                           $
                           (7
                           )
                           $
                           34,744
                           
                           $
                           468
                           
                           $
                           9,491
                           
                           $
                           59,919 See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 4


SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands) For the six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009(Unaudited)Operating activitiesNet income
                           
                           $
                           113
                           
                           
                           
                           
                           $
                           843Adjustments to reconcile net income to cashprovided by (used for) operating activities:Provision for loan losses
                           
                           
                           3,700
                           
                           
                           
                           
                           
                           1,725Depreciation and other amortization
                           
                           
                           442
                           
                           
                           
                           
                           
                           293Accretion and amortization of securities discounts and premium, net
                           
                           
                           337
                           
                           
                           
                           
                           
                           205Gain on sale of investment securities
                           
                           
                           (1,104
                           )
                           
                           
                           
                           
                           -Gain on sale of property and equipment
                           
                           
                           (18
                           )
                           
                           
                           
                           
                           -Loss (gain) on sale of real estate
                           
                           
                           -
                           
                           
                           
                           
                           
                           (6
                           )Write-down of real estate owned
                           
                           
                           10
                           
                           
                           
                           
                           
                           10Compensation expense related to stock options and grants
                           
                           
                           119
                           
                           
                           
                           
                           
                           59Increase in cash surrender value of bank owned life insurance
                           
                           
                           (300
                           )
                           
                           
                           
                           
                           (246
                           )Decrease (increase) in deferred tax asset
                           
                           
                           (99
                           )
                           
                           
                           
                           
                           (349
                           )Decrease in other assets, net
                           
                           
                           1,117
                           
                           
                           
                           
                           
                           162Increase in other liabilities, net
                           
                           
                           19
                           
                           
                           
                           
                           
                           134Net cash provided by operating activities
                           
                           
                           4,336
                           
                           
                           
                           
                           
                           2,830Investing activitiesIncrease (decrease) in cash realized from:Origination of loans, net
                           
                           
                           (11,492
                           )
                           
                           
                           
                           
                           (6,547
                           )Purchase of property and equipment
                           
                           
                           (158
                           )
                           
                           
                           
                           
                           (3,083
                           )Purchase of investment securities:Available for sale
                           
                           
                           (77,694
                           )
                           
                           
                           
                           
                           (24,649
                           )Other investments
                           
                           
                           -
                           
                           
                           
                           
                           
                           (894
                           )Payments and maturity of investment securities:Available for sale
                           
                           
                           10,746
                           
                           
                           
                           
                           
                           8,282Held to maturity
                           
                           
                           1,081
                           
                           
                           
                           
                           
                           2,045Other investments
                           
                           
                           11
                           
                           
                           
                           
                           
                           210Proceeds from sale of investment securities
                           
                           
                           66,709
                           
                           
                           
                           
                           
                           -Proceeds from sale of property and equipment
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Proceeds from sale of real estate acquired in settlement of loans
                           
                           
                           170
                           
                           
                           
                           
                           
                           387Net cash used for investing activities
                           
                           
                           (10,609
                           )
                           
                           
                           
                           
                           (24,249
                           )Financing activitiesIncrease (decrease) in cash realized from:Increase in deposits, net
                           
                           
                           42,247
                           
                           
                           
                           
                           
                           26,610Increase in short-term repurchase agreements
                           
                           
                           -
                           
                           
                           
                           
                           
                           13,821Decrease in note payable
                           
                           
                           (250
                           )
                           
                           
                           
                           
                           (10,000
                           )Decrease in Federal Home Loan Bank advances and related debt
                           
                           
                           (20,000
                           )
                           
                           
                           
                           
                           -Proceeds from the issuance of preferred stock
                           
                           
                           -
                           
                           
                           
                           
                           
                           15,856Proceeds from the issuance of stock warrant
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,418Cash dividend on preferred stock
                           
                           
                           (433
                           )
                           
                           
                           
                           
                           (187
                           )Proceeds from the exercise of stock options and warrants
                           
                           
                           295
                           
                           
                           
                           
                           
                           -Net cash provided by financing activities
                           
                           
                           21,859
                           
                           
                           
                           
                           
                           47,518Net increase in cash and cash equivalents
                           
                           
                           15,586
                           
                           
                           
                           
                           
                           26,099Cash and cash equivalents at beginning of the period
                           
                           
                           12,082
                           
                           
                           
                           
                           
                           13,160Cash and cash equivalents at end of the period
                           
                           $
                           27,668
                           
                           
                           
                           
                           $
                           39,259
 5


For the six months endedJune 30,2010
                        
                        
                        
                        
                        
                        2009(Unaudited)Supplemental informationCash paid forInterest
                        
                        $
                        7,412
                        
                        
                        
                        
                        $
                        8,618Income taxes
                        
                        $
                        -
                        
                        
                        
                        
                        $
                        545Schedule of non-cash transactionsForeclosure of real estate
                        
                        $
                        1,947
                        
                        
                        
                        
                        $
                        2,740Unrealized gain on securities, net of income taxes
                        
                        $
                        713
                        
                        
                        
                        
                        $
                        1,539  See notes to consolidated financial statements that are an integral
                     part of these consolidated statements.
 6


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


NOTE 2. Note Payable The Company had a $4.0 million term note with Silverton Bridge Bank,
                     N.A. ("Silverton") at June 30, 2010. This note matures on April 30,
                     2014 and bears interest at the prime rate plus 0.5% with a floor rate
                     of 4.0%. The Company has pledged all of the stock of the Bank as
                     collateral for this note. As of June 30, 2010, the Company did not
                     meet all of the debt covenant requirements of the loan agreement. On
                     August 10, 2010, the Company repaid the note payable. NOTE 3. Preferred Stock Issuance On February 27, 2009, as part of the Treasury Department's Capital
                     Purchase Program ("CPP"), the Company entered into a Letter Agreement
                     and a Securities Purchase Agreement (collectively, the "CPP Purchase
                     Agreement") with the Treasury Department, pursuant to which the
                     Company sold 17,299 shares of its Fixed Rate Cumulative Perpetual
                     Preferred Stock, Series T (the "Series T Preferred Stock") and a
                     warrant (the "CPP Warrant") to purchase 330,554 shares of the
                     Company's common stock for an aggregate purchase price of $17.3
                     million in cash. The Series T Preferred Stock qualifies as Tier 1
                     capital and is entitled to cumulative dividends at a rate of 5% per
                     annum for the first five years, and 9% per annum thereafter. The
                     Company must consult with the OCC before it may redeem the Series T
                     Preferred Stock but, contrary to the original restrictions in the
                     Emergency Economic Stabilization Act of 2008 (the "EESA"), will not
                     necessarily be required to raise additional equity capital in order
                     to redeem this stock. The CPP Warrant has a 10-year term and is
                     immediately exercisable upon its issuance, with an exercise price,
                     subject to anti-dilution adjustments equal to $7.85 per share of the
                     common stock. The fair value allocation of the $17.3 million between
                     the shares of Series T Preferred Stock and the CPP Warrant resulted
                     in $15.9 million allocated to the shares of Series T Preferred Stock
                     and $1.4 million allocated to the CPP Warrant. NOTE 4. Earnings per Common Share The following schedule reconciles the numerators and denominators of
                     the basic and diluted earnings per share computations for the three
                     and six month periods ended June 30, 2010 and 2009. Dilutive common
                     shares arise from the potentially dilutive effect of the Company's
                     stock options and warrants that are outstanding. The assumed
                     conversion of stock options and warrants can create a difference
                     between basic and dilutive net income per common share. At June 30, 2010 and 2009, 87,600 and 518,667 options, respectively,
                     were anti-dilutive in the calculation of earnings per share as their
                     exercise price exceeded the fair market value. Three months ended June 30,2010
                           
                           
                           
                           
                           
                           2009Numerator:Net income
                           
                           $
                           94
                           
                           
                           
                           
                           $
                           355Less:
                           
                           
                           Preferred stock dividend
                           
                           
                           216
                           
                           
                           
                           
                           
                           216Dividend accretion (1)
                           
                           
                           116
                           
                           
                           
                           
                           
                           127Net income (loss) available to common shareholders
                           
                           $
                           (238
                           )
                           
                           
                           
                           $
                           12Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,044,863Common stock equivalents
                           
                           
                           -
                           
                           
                           
                           
                           
                           878Weighted-average common shares outstanding - diluted
                           
                           
                           3,143,181
                           
                           
                           
                           
                           
                           3,045,741Earnings (loss) per common share:Basic
                           
                           $
                           (0.08
                           )
                           
                           
                           
                           $
                           0.00Diluted
                           
                           $
                           (0.08
                           )
                           
                           
                           
                           $
                           0.00
 8


Six months ended June 30,2010
                           
                           
                           
                           
                           
                           2009Numerator:Net income
                           
                           $
                           113
                           
                           
                           
                           
                           $
                           843Less:
                           
                           
                           Preferred stock dividend
                           
                           
                           433
                           
                           
                           
                           
                           
                           294Dividend accretion (1)
                           
                           
                           240
                           
                           
                           
                           
                           
                           170Net income (loss) available to common shareholders
                           
                           $
                           (560
                           )
                           
                           
                           
                           $
                           379Denominator:Weighted-average common shares outstanding - basic
                           
                           
                           3,135,862
                           
                           
                           
                           
                           
                           3,044,863Common stock equivalents
                           
                           
                           -
                           
                           
                           
                           
                           
                           4,974Weighted-average common shares outstanding - diluted
                           
                           
                           3,135,862
                           
                           
                           
                           
                           
                           3,049,837Earnings (loss) per common share:Basic
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.12Diluted
                           
                           $
                           (0.18
                           )
                           
                           
                           
                           $
                           0.12 (1) Preferred stock dividend required to be accreted over estimated
                     life of warrant issued in conjunction with preferred stock. NOTE 5. Stock Based Compensation The Company has a stock-based employee compensation plan. On January
                     1, 2006, the Company adopted the fair value recognition provisions of
                     FASB ASC 718, "Compensation - Stock Compensation," to account for
                     compensation costs under its stock option plan. In adopting FASB ASC 718, the Company elected to use the modified
                     prospective method to account for the transition from the intrinsic
                     value method to the fair value recognition method. Under the modified
                     prospective method, compensation cost is recognized from the adoption
                     date forward for all new stock options granted and for any
                     outstanding unvested awards as if the fair value method had been
                     applied to those awards as of the date of grant. The fair value of the option grant is estimated on the date of grant
                     using the Black-Scholes option-pricing model. The following
                     assumptions were used for grants: expected volatility of 26.76% for
                     2010 and 2009, risk-free interest rate of 3.25% for 2010 and 2.59%
                     for 2009, expected lives of the options were 10 years, and the
                     assumed dividend rate was zero. NOTE 6. Fair Value Accounting As of June 30, 2009, the Company adopted FASB ASC 820, "Fair Value
                     Measurement and Disclosures," "Determining Fair Value When the Volume
                     and Level of Activity for the Asset or Liability Have Significantly
                     Decreased and Identifying Transactions That Are Not Orderly." FASB
                     ASC 820 is intended to determine the fair value when there is no
                     active market or where the inputs being used represent distressed
                     sales. FASB ASC 820, "Fair Value Measurement and Disclosures," defines fair
                     value as the exchange price that would be received for an asset or
                     paid to transfer a liability (an exit price) in the principal or most
                     advantageous market for the asset or liability in an orderly
                     transaction between market participants on the measurement date. FASB
                     ASC 820 also establishes a fair value hierarchy which requires an
                     entity to maximize the use of observable inputs and minimize the use
                     of unobservable inputs when measuring fair value. The standard
                     describes three levels of inputs that may be used to measure
                     fair value:
 9


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


Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below presents the recorded amount of assets and
                     liabilities measured at fair value on a recurring basis (dollars in
                     thousands). Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of June 30, 2010:Securities available for sale:Government sponsored enterprises
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           4,498
                           
                           
                           
                           
                           $
                           -State and political subdivisions
                           
                           
                           -
                           
                           
                           
                           
                           
                           8,075
                           
                           
                           
                           
                           
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           66,551
                           
                           
                           
                           
                           
                           6,077Other investments
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           9,203Total
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           79,124
                           
                           
                           
                           
                           $
                           15,280 Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of December 31, 2009:Securities available for sale:Government sponsored enterprises
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           11,540
                           
                           
                           
                           
                           $
                           -State and political subdivisions
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,309
                           
                           
                           
                           
                           
                           -Mortgage-backed securities
                           
                           
                           -
                           
                           
                           
                           
                           
                           52,688
                           
                           
                           
                           
                           
                           6,658Other investments
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           9,213Total
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           69,537
                           
                           
                           
                           
                           $
                           15,871 The Company has no liabilities carried at fair value or measured at
                     fair value on a recurring or nonrecurring basis. The table below presents a reconciliation for the period of January
                     1, 2010 to June 30, 2010 for all Level 3 assets that are measured at
                     fair value on a recurring basis (dollars in thousands). Collateralizedmortgageobligations
                           
                           
                           
                           
                           
                           OtherinvestmentsBeginning balance
                           
                           
                           
                           
                           $
                           6,658
                           
                           
                           
                           
                           $
                           9,213Total realized and unrealized gains or losses:Included in earnings
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -Included in other comprehensive income
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -Purchases, sales and principal reductions
                           
                           
                           
                           
                           
                           (581
                           )
                           
                           
                           
                           
                           (10
                           )Transfers in and/or out of Level 3
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -Ending Balance
                           
                           
                           
                           
                           $
                           6,077
                           
                           
                           
                           
                           $
                           9,203 Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is predominantly an asset based lender with real estate
                     serving as collateral on approximately 79.3% of loans. Loans which
                     are deemed to be impaired and real estate acquired in settlement of
                     loans are valued on a nonrecurring basis at the lower of cost or
                     market value of the underlying real estate collateral. Such market
                     values are generally obtained using independent appraisals, which the
                     Company considers to be level 2 inputs. The table below presents the
                     recorded amount of assets and liabilities measured at fair value on a
                     nonrecurring basis (dollars in thousands). Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of June 30, 2010:Impaired loans
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           9,469
                           
                           
                           
                           
                           $
                           -Other Real Estate Owned
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,471
                           
                           
                           
                           
                           
                           -
 11


Quoted market pricein active markets(Level 1)
                           
                           
                           
                           
                           
                           Significant otherobservable inputs(Level 2)
                           
                           
                           
                           
                           
                           Significantunobservable inputs(Level 3)As of December 31, 2009:Impaired loans
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           9,823
                           
                           
                           
                           
                           $
                           -Other real estate owned
                           
                           
                           -
                           
                           
                           
                           
                           
                           3,704
                           
                           
                           
                           
                           
                           - Fair Value of Financial Instruments Financial instruments require disclosure of fair value information,
                     whether or not recognized in the consolidated balance sheets, when it
                     is practical to estimate the fair value. A financial instrument is
                     defined as cash, evidence of an ownership interest in an entity or
                     contractual obligations which require the exchange of cash. Certain
                     items are specifically excluded from the disclosure requirements,
                     including the Company's common stock, premises and equipment and
                     other assets and liabilities. Following is a description of valuation methodologies used to
                     estimate fair value for certain other financial instruments. Fair value approximates carrying value for the following financial
                     instruments due to the short-term nature of the instrument: cash and
                     due from banks, federal funds sold, federal funds purchased, and
                     securities sold under agreement to repurchase. Bank Owned Life InsuranceThe cash surrender value of bank owned life insurance policies held
                     by the Bank approximates fair values of the policies. Deposit Liabilities -Fair value for demand deposit accounts and interest-bearing accounts
                     with no fixed maturity date is equal to the carrying value. The fair
                     value of certificate of deposit accounts are estimated by discounting
                     cash flows from expected maturities using current interest rates on
                     similar instruments. FHLB Advances and Other Borrowings -Fair value for FHLB advances and other borrowings are estimated by
                     discounting cash flows from expected maturities using current
                     interest rates on similar instruments. The Company has used management's best estimate of fair value based
                     on the above assumptions. Thus, the fair values presented may not be
                     the amounts that could be realized in an immediate sale or settlement
                     of the instrument. In addition, any income taxes or other expenses,
                     which would be incurred in an actual sale or settlement, are not
                     taken into consideration in the fair value presented. The estimated fair values of the Company's financial instruments at
                     June 30, 2010 and December 31, 2009 are as follows (dollars in
                     thousands): June 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009CarryingAmount
                           
                           
                           
                           
                           
                           FairValue
                           
                           
                           
                           
                           
                           CarryingAmount
                           
                           
                           
                           
                           
                           FairValueFinancial Assets:Cash and cash equivalents
                           
                           $
                           27,668
                           
                           
                           
                           
                           $
                           27,668
                           
                           
                           
                           
                           $
                           12,082
                           
                           
                           
                           
                           $
                           12,082Investment securities available for sale
                           
                           
                           85,201
                           
                           
                           
                           
                           
                           85,201
                           
                           
                           
                           
                           
                           76,195
                           
                           
                           
                           
                           
                           76,195Investment securities held to maturity
                           
                           
                           120
                           
                           
                           
                           
                           
                           125
                           
                           
                           
                           
                           
                           9,225
                           
                           
                           
                           
                           
                           9,516Other investments
                           
                           
                           9,203
                           
                           
                           
                           
                           
                           9,203
                           
                           
                           
                           
                           
                           9,213
                           
                           
                           
                           
                           
                           9,213Loans, net
                           
                           
                           572,355
                           
                           
                           
                           
                           
                           582,415
                           
                           
                           
                           
                           
                           566,510
                           
                           
                           
                           
                           
                           575,396Bank owned life insurance
                           
                           
                           14,274
                           
                           
                           
                           
                           
                           14,274
                           
                           
                           
                           
                           
                           13,974
                           
                           
                           
                           
                           
                           13,974Financial Liabilities:Deposits
                           
                           
                           536,331
                           
                           
                           
                           
                           
                           503,255
                           
                           
                           
                           
                           
                           494,084
                           
                           
                           
                           
                           
                           461,744Federal Home Loan Bank advances and related debt
                           
                           
                           122,700
                           
                           
                           
                           
                           
                           141,516
                           
                           
                           
                           
                           
                           142,700
                           
                           
                           
                           
                           
                           163,818Note payable
                           
                           
                           4,000
                           
                           
                           
                           
                           
                           4,295
                           
                           
                           
                           
                           
                           4,250
                           
                           
                           
                           
                           
                           4,603Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           4,035
                           
                           
                           
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           4,139 Item 2. Management's Discussion and Analysis of Financial Condition
                        and Results of Operations. The following discussion reviews our results of operations for the
                        three and six month periods ended June 30, 2010 and assesses our
                        financial condition as of June 30, 2010. You should read the
                        following discussion and analysis in conjunction with the
                        accompanying consolidated financial statements and the related notes
                        and the consolidated financial statements and the
 12


related notes for the year ended December 31, 2009 included in our
                        Annual Report on Form 10-K for that period. Results for the three and
                        six month periods ended June 30, 2010 are not necessarily indicative
                        of the results for the year ending December 31, 2010 or any future
                        period. DISCUSSION OF FORWARD-LOOKING STATEMENTS This report, including information included or incorporated by reference in this
                     document, contains statements which constitute forward-looking
                     statements within the meaning of Section 27A of the Securities Act of
                     1933 and Section 21E of the Securities Exchange Act of 1934.
                     Forward-looking statements may relate to our financial condition,
                     results of operation, plans, objectives, or future performance. These
                     statements are based on many assumptions and estimates and are not
                     guarantees of future performance. Our actual results may differ
                     materially from those anticipated in any forward-looking statements,
                     as they will depend on many factors about which we are unsure,
                     including many factors which are beyond our control. The words "may,"
                     "would," "could," "should," "will," "expect," "anticipate,"
                     "predict," "project," "potential," "believe," "continue," "assume,"
                     "intend," "plan," and "estimate," as well as similar expressions, are
                     meant to identify such forward-looking statements. Potential risks
                     and uncertainties that could cause our actual results to differ from
                     those anticipated in any forward-looking statements include, but are
                     not limited to, those described below under Item 1A- Risk Factors and
                     the following: reduced earnings due to higher credit losses generally and
                                    specifically because losses in the sectors of our loan portfolio
                                    secured by real estate are greater than expected due to economic
                                    factors, including, but not
                                    limited to, declining real estate values, increasing interest rates,
                                    increasing unemployment, or changes in payment behavior or other
                                    factors;reduced earnings due to higher credit losses because our loans are
                                    concentrated by loan type, industry segment, borrower type, or
                                    location of the borrower or collateral;the high concentration of our real estate-based loans collateralized by real estate in a weak commercial real estate market;our ability to comply with our Formal Agreement and potential
                                    regulatory actions if we fail to comply;restrictions or conditions imposed by our regulators on our
                                    operations may make it more difficult for us to achieve our goals;significant increases in competitive pressure in the banking and
                                    financial services industries;changes in the interest rate environment which could reduce anticipated margins;changes in political conditions or the legislative or regulatory
                                    environment, including the effect of recent financial reform
                                    legislation on the banking industry;the effect of final rules amending Regulation E that prohibit
                                    financial institutions from charging consumer fees for paying
                                    overdrafts on ATM and one-time debit card transactions, unless the
                                    consumer consents or opts-in to the overdraft service for those types
                                    of transactions;general economic conditions, either nationally or regionally and
                                    especially in our primary service area,
                                    being less favorable than expected, resulting in, among other things,
                                    a deterioration in credit quality;changes occurring in business conditions and inflation;changes in deposit flows;changes in technology;changes in monetary and tax policies;adequacy of the level of our allowance for loan losses;the rate of delinquencies and amount of loans charged-off;the rate of loan growth;adverse changes in asset quality and resulting credit risk-related
                                    losses and expenses;loss of consumer confidence and economic disruptions resulting from
                                    terrorist activities;changes in the securities markets; andother risks and uncertainties detailed from time to time in our
                                    filings with the Securities and Exchange Commission (the "SEC"). All forward-looking statements in this report are based on
                     information available to us as of the date of this report. Although
                     we believe that the expectations reflected in our forward-looking
                     statements are reasonable, we cannot guarantee you that these
                     expectations will be achieved. We undertake no obligation to publicly
                     update or otherwise revise any forward-looking statements, whether as
                     a result of new information, future events, or otherwise. These risks are exacerbated by the recent developments in national
                     and international financial markets, and we are unable to predict
                     what effect these uncertain market conditions will have on our
                     Company. Beginning in 2008 and continuing through
 13


the first six months of 2010, the capital and credit markets
                     experienced unprecedented levels of volatility and disruption. There
                     can be no assurance that these unprecedented developments will not
                     materially and adversely affect our business, financial condition and
                     results of operations. Overview We were incorporated in March 1999 to organize and serve as the
                     holding company for Greenville First Bank, N.A. On July 2, 2007, we
                     changed the name of our company and bank to Southern First
                     Bancshares, Inc. and Southern First Bank, N.A., respectively. Since
                     we opened our bank in January 2000, we have experienced growth in
                     total assets, loans, deposits, and shareholders' equity. Like most community banks, we derive the majority of our income from
                     interest received on our loans and investments. Our primary source of
                     funds for making these loans and investments is our deposits, on
                     which we pay interest. Consequently, one of the key measures of our
                     success is our amount of net interest income, or the difference
                     between the income on our interest-earning assets, such as loans and
                     investments, and the expense on our interest-bearing liabilities,
                     such as deposits and borrowings. Another key measure is the spread
                     between the yield we earn on these interest-earning assets and the
                     rate we pay on our interest-bearing liabilities, which is called our
                     net interest spread. There are risks inherent in all loans, so we maintain an allowance
                     for loan losses to absorb probable losses on existing loans that may
                     become uncollectible. We maintain this allowance by charging a
                     provision for loan losses against our operating earnings for each
                     period. We have included a detailed discussion of this process, as
                     well as several tables describing our allowance for loan losses. In addition to earning interest on our loans and investments, we earn
                     income through fees and other charges to our customers. We have also
                     included a discussion of the various components of this noninterest
                     income, as well as of our noninterest expense. Economic conditions, competition, and the monetary and fiscal
                     policies of the Federal government significantly affect most
                     financial institutions, including the Bank. Lending and deposit
                     activities and fee income generation are influenced by levels of
                     business spending and investment, consumer income, consumer spending
                     and savings, capital market activities, and competition among
                     financial institutions, as well as customer preferences, interest
                     rate conditions and prevailing market rates on competing products in
                     our market areas. Our business model continues to be client-focused, utilizing
                     relationship teams to provide our clients with a specific banker
                     contact and support team responsible for all of their banking needs.
                     The purpose of this structure is to provide a consistent and superior
                     level of professional service, and we believe it provides us with a
                     distinct competitive advantage. We consider exceptional client
                     service to be a critical part of our culture, which we refer to as
                     "ClientFIRST." The following discussion and analysis also identifies significant
                     factors that have affected our financial position and operating
                     results during the periods included in the accompanying financial
                     statements. We encourage you to read this discussion and analysis in
                     conjunction with our financial statements and the other statistical
                     information included in our filings with the Securities and Exchange
                     Commission. Recent Regulatory Developments On June 8, 2010, the Bank entered into a formal agreement (the
                     "Formal Agreement") with its primary regulator, the Office of the
                     Comptroller of the Currency (the "OCC"). The Formal Agreement is
                     based on the findings of the OCC during their on-site examination of
                     the Bank as of March 31, 2009.  The Formal Agreement seeks to enhance
                     the Bank's existing practices and procedures in the areas of credit
                     risk management, credit underwriting, liquidity, and funds
                     management. Specifically, under the terms of the Formal Agreement,
                     the Bank is required to (i) protect its interest in assets criticized
                     by the OCC; (ii) develop, implement, and adhere to a written program
                     to reduce the high level of credit risk; (iii) obtain credit
                     information on all loans lacking such information and ensure proper
                     collateral documentation is in place; (iv) engage the services of an
                     independent appraiser to provide updated appraisals for certain loans
                     where the most recent appraisal is more than 12 months old; (v)
                     update and implement written policies/programs addressing loan
                     policy, allowance for loan and lease losses, and other real estate
                     owned; (vi) continue to improve its liquidity position and maintain
                     adequate sources of funding; (vii) obtain prior written determination
                     of no supervisory objection from the OCC before accepting, renewing,
                     or rolling over brokered deposits in excess of 25% of total deposits;
                     (viii) update and adhere to its profit plan designed to improve the
                     condition of the Bank; and (ix) submit periodic reports to the OCC
                     regarding various aspects of the foregoing actions.
 14


The Formal Agreement with the OCC requires the establishment of
                     certain plans and programs within various time periods.   After
                     having completed the following, management believes that the Bank is
                     in compliance with all of the conditions established in the Formal
                     Agreement. In addition, the Formal Agreement requires that various
                     reports be submitted to the OCC on a quarterly basis until the Formal
                     Agreement is terminated. The Bank has established a compliance committee of its Board of
                        Directors to oversee management's response to all sections of the
                        Formal Agreement.   The committee consists of all 11 members of the
                        Bank's Board of Directors and meets at least monthly to receive
                        written progress reports from management on the results and status of
                        actions needed to achieve full compliance with each article of the
                        Formal Agreement.
                     Policies and procedures were revised or established and approved
                        related to the following issues: (1) Loan policies and procedures. (2) Criticized asset policy, procedures and specific program. (3) Policies related to managing OREO. (4) Procedures for maintaining an adequate allowance
                     for loan losses. (5) Appraisal policy to ensure appraisal conform to
                     appraisal standards and regulations. Current and satisfactory credit information was obtained on all loans
                        lacking such information to ensure proper collateral documentation is
                        in place;
                     We received and evaluated current independent appraisals or updated
                        appraisals on loans secured by certain properties;
                     The Bank's liquidity position was enhanced. We reduced our level of
                        broker deposits to comply with the OCC agreed upon levels.
                     A profit plan was updated to improve the financial condition of the Bank. If the Bank does not satisfy and maintain adherence with each of the
                     requirements listed above, the Bank will not be in compliance with
                     the Formal Agreement.  Failure to comply with the Formal Agreement
                     could result in regulators taking additional enforcement actions
                     against the Bank.  The Bank's ability to meet the goals set forth in
                     the Formal Agreement is contingent in part upon the stabilization of
                     the local real estate markets and on its financial performance. In addition, due to
our current financial condition, the OCC has established Individual Minimum Capital Ratio levels of Tier 1 and total capital for the
Bank that are higher than the minimum and well capitalized ratios applicable to all banks.  Specifically, we must maintain
total risk-based capital of at least 12%, Tier 1 capital of at least 10%, and a leverage ratio of at least 9%.  As of June 30,
2010, our capital ratios exceed the Individual Minimum Capital Ratio levels established by the OCC and we remain "well
capitalized."  See "Management's Discussion and Analysis – Results of Operations – Capital
Resources" for more discussion of the Minimum Capital Ratio levels established by the OCC and our capital ratios as of June
30, 2010. Critical Accounting Policies We have adopted various accounting policies that govern the
                     application of accounting principles generally accepted in the United
                     States and with general practices within the banking industry in the
                     preparation of our financial statements. Our significant accounting
                     policies are described in the footnotes to our audited consolidated
                     financial statements as of December 31, 2009, as filed in our Annual
                     Report on Form 10-K. Certain accounting policies involve significant judgments and
                     assumptions by us that have a material impact on the carrying value
                     of certain assets and liabilities. We consider these accounting
                     policies to be critical accounting policies. The judgment and
                     assumptions we use are based on historical experience and other
                     factors, which we believe to be reasonable under the circumstances.
                     Because of the nature of the judgment and assumptions we make, actual
                     results could differ from these judgments and estimates that could
                     have a material impact on the carrying values of our assets and
                     liabilities and our results of operations. Allowance for Loan Losses We believe the allowance for loan losses is the critical accounting
                     policy that requires the most significant judgment and estimates used
                     in preparation of our consolidated financial statements. Some of the
                     more critical judgments supporting the amount of our allowance for
                     loan losses include judgments about the credit worthiness of
                     borrowers, the estimated value of the underlying collateral,
                     assumptions about cash flow, determination of loss factors for
                     estimating credit losses, and the impact
 15


of current events,
                     conditions, and other factors impacting the level of probable
                     inherent losses. Under different conditions, the actual amount of
                     credit losses incurred by us may be different from management's
                     estimates provided in our consolidated financial statements. Refer to
                     the portion of this discussion that addresses our allowance for loan
                     losses for a more complete discussion of our processes and
                     methodology for determining our allowance for loan losses. Real Estate Acquired in Settlement of Loans Real estate acquired through foreclosure is initially recorded at the
                     lower of cost or estimated fair value. Subsequent to the date of
                     acquisition, it is carried at the lower of cost or fair value,
                     adjusted for net selling costs. Fair values of real estate owned are
                     reviewed regularly and writedowns are recorded when it is determined
                     that the carrying value of real estate exceeds the fair value less
                     estimated costs to sell. Costs relating to the development and
                     improvement of such property are capitalized, whereas those costs
                     relating to holding the property are expensed. Income Taxes The financial statements have been prepared on the accrual basis.
                     When income and expenses are recognized in different periods for
                     financial reporting purposes versus for the purposes of computing
                     income taxes currently payable, deferred taxes are provided on such
                     temporary differences. Under ASC 740, "Income Taxes," deferred tax
                     assets and liabilities are recognized for the expected future tax
                     consequences of events that have been recognized in the consolidated
                     financial statements or tax returns. Deferred tax assets and
                     liabilities are measured using the enacted tax rates expected to
                     apply to taxable income in the years in which those temporary
                     differences are expected to be realized or settled. The Company
                     believes that the income tax filing positions taken or expected to be
                     taken in its tax returns will more likely than not be sustained upon
                     audit by the taxing authorities and does not anticipate any
                     adjustments that would result in a material adverse impact on the
                     Company's financial condition, results of operations, or cash flow.
                     Therefore, no reserves for uncertain income tax positions have been
                     recorded pursuant to ASC 740. Effect of Economic Trends The first six months of 2010 continue to reflect the tumultuous
                     economic conditions which have negatively impacted liquidity and
                     credit quality. Concerns regarding increased credit losses from the
                     weakening economy have negatively affected capital and earnings of
                     most financial institutions. Financial institutions have experienced
                     significant declines in the value of collateral for real estate loans
                     and heightened credit losses, which have resulted in record levels of
                     non-performing assets, charge-offs and foreclosures. Liquidity in the debt markets remains low in spite of efforts by the
                     U.S. Department of the Treasury ("Treasury") and the Federal Reserve
                     Bank ("Federal Reserve") to inject capital into financial
                     institutions. The federal funds rate set by the Federal Reserve has
                     remained at 0.25% since December 2008, following a decline from 4.25%
                     to 0.25% during 2008 through a series of seven rate reductions. Treasury, the FDIC and other governmental agencies continue to enact
                     rules and regulations to implement the Emergency Economic
                     Stabilization Act of 2008 ("EESA"), the Troubled Asset Relief Program
                     ("TARP"), the Financial Stability Plan, the American Recovery and
                     Reinvestment Act ("ARRA") and related economic recovery programs,
                     many of which contain limitations on the ability of financial
                     institutions to take certain actions or to engage in certain
                     activities if the financial institution is a participant in the
                     Troubled Asset Relief Program ("TARP") Capital Purchase Program
                     ("CPP") or related programs. Future regulations, or enforcement of
                     the terms of programs already in place, may require financial
                     institutions to raise additional capital and result in the conversion
                     of preferred equity issued under TARP or other programs to common
                     equity. There can be no assurance as to the actual impact of the
                     EESA, the FDIC programs or any other governmental program on the
                     financial markets. The weak economic conditions are expected to continue through the
                     remainder of 2010. Financial institutions likely will continue to
                     experience heightened credit losses and higher levels of
                     non-performing assets, charge-offs and foreclosures. In light of
                     these conditions, financial institutions also face heightened levels
                     of scrutiny from federal and state regulators. These factors
                     negatively influenced, and likely will continue to negatively
                     influence, earning asset yields at a time when the market for
                     deposits is intensely competitive. As a result, financial
                     institutions experienced, and are expected to continue to experience,
                     pressure on credit costs, loan yields, deposit and other borrowing
                     costs, liquidity, and capital.
 16


Recent Legislative and Regulatory Initiatives to Address Financial
                     and Economic Crises Markets in the United States and elsewhere have experienced extreme
                     volatility and disruption for more than 18 months. These
                     circumstances have exerted significant downward pressure on prices of
                     equity securities and virtually all other asset classes, and have
                     resulted in substantially increased market volatility, severely
                     constrained credit and capital markets, particularly for financial
                     institutions, and an overall loss of investor confidence. Loan
                     portfolio performances have deteriorated at many institutions
                     resulting from, among other factors, a weak economy and a decline in
                     the value of the collateral supporting their loans. Dramatic
                     slowdowns in the housing industry, due in part to falling home prices
                     and increasing foreclosures and unemployment, have created strains on
                     financial institutions. Many borrowers are now unable to repay their
                     loans, and the collateral securing these loans has, in some cases,
                     declined below the loan balance. In response to the challenges facing
                     the financial services sector,
                     several regulatory and governmental actions have recently been
                     announced including: In October 2008, the EESA was enacted. The EESA authorizes the
                                    Treasury to purchase from financial institutions and their holding
                                    companies up to $700 billion in mortgage loans, mortgage-related
                                    securities and certain other financial instruments, including debt
                                    and equity securities issued by financial institutions and their
                                    holding companies in TARP.  The purpose of TARP is to restore
                                    confidence and stability to the U.S. banking system and to encourage
                                    financial institutions to increase their lending to customers and to
                                    each other.  The Treasury has allocated $250 billion towards the TARP
                                    CPP.  Under the CPP, the Treasury purchased debt or equity securities
                                    from participating institutions.  TARP also includes direct purchases
                                    or guarantees of troubled assets of financial
                                    institutions. Participants in the CPP are subject to executive
                                    compensation limits and are encouraged to expand their lending and
                                    mortgage loan modifications.On February 27, 2009, as part of the CPP, we entered into a Letter
                                    Agreement and Securities Purchase Agreement (collectively, the "CPP
                                    Purchase Agreement") with the Treasury, pursuant to which we sold (i)
                                    17,299 shares of our Fixed Rate Cumulative Perpetual Preferred Stock,
                                    Series T (the "Series T Preferred Stock") and (ii) a warrant (the
                                    "CPP Warrant") to purchase 330,554 shares of our common stock for an
                                    aggregate purchase price of $17.3 million in cash. The Series T
                                    Preferred Stock qualifies as Tier 1 capital and is entitled to
                                    cumulative dividends at a rate of 5% per annum for the first five
                                    years, and 9% per annum thereafter. We must consult with the OCC
                                    before we may redeem the Series T Preferred Stock but, contrary to
                                    the original restrictions in the EESA, will not necessarily be
                                    required to raise additional equity capital in order to redeem
                                    this stock. The Warrant has a 10-year term and is immediately
                                    exercisable upon its issuance, with an exercise price, subject to
                                    anti-dilution adjustments, equal to $7.85 per share of the common
                                    stock.EESA also increased FDIC deposit insurance on most accounts from
                                    $100,000 to $250,000.  This increase is in place until the end of
                                    2013 and is not covered by deposit insurance premiums paid by the
                                    banking industry.On October 14, 2008, the FDIC established the Temporary Liquidity
                                    Guarantee Program ("TLGP").  TLGP includes the Transaction Account
                                    Guarantee Program ("TAGP"), which provides unlimited deposit
                                    insurance coverage through December 31, 2010 for noninterest-bearing
                                    transaction accounts (typically business checking accounts) and
                                    certain funds swept into noninterest-bearing savings
                                    accounts.  Institutions participating in TLGP pay a 15 to 25 basis
                                    points fee (annualized), according to the institution's risk category
                                    on the balance of each covered account in excess of $250,000, while
                                    the extra deposit insurance is in place.  TLGP also includes the Debt
                                    Guarantee Program ("DGP"), under which the FDIC guarantees certain
                                    newly-issued senior unsecured debt.  The guarantee would apply to new
                                    debt issued on or before October 31, 2009 and would provide
                                    protection until December 31, 2012. Participants in DGP would pay a
                                    75 basis point fee for the guarantee.  TAGP and DGP are in effect for
                                    all eligible entities, unless the entity opted out on or before
                                    December 5, 2008.  We are participating in the TAGP and have opted
                                    out of the DGP.
 17


On February 10, 2009, the Treasury announced the Financial Stability
                                    Plan, which earmarked $350
                                    billion of the TARP funds authorized under EESA. Among other things,
                                    the Financial Stability Plan includes:A capital assistance program that invested in mandatory convertible
                                    preferred stock of
                                    certain qualifying institutions determined on a basis and through a
                                    process similar to the
                                     Capital Purchase Program;A consumer and business lending initiative to fund new consumer
                                    loans, small business loans and commercial mortgage asset-backed
                                    securities issuances;A public-private investment fund program that is intended to leverage
                                    public and private capital with public financing to purchase up to
                                    $500 billion to $1 trillion of legacy "toxic assets" from financial
                                    institutions; andAssistance for homeowners by providing up to $75 billion to reduce
                                    mortgage payments and interest rates and establishing loan
                                    modification guidelines for government and private programs.On February 17, 2009, the ARRA was signed into law in an effort to,
                                    among other things, create jobs and stimulate growth in the United
                                    States economy. The ARRA specifies appropriations of approximately
                                    $787 billion for a wide range of Federal programs and will increase
                                    or extend certain benefits payable under the Medicaid, unemployment
                                    compensation, and nutrition assistance programs. The ARRA also
                                    reduces individual and corporate income tax collections and makes a
                                    variety of other changes to tax laws. The ARRA also imposes certain
                                    limitations on compensation paid by participants in TARP.On March 23, 2009, the Treasury, in conjunction with the FDIC and the
                                    Federal Reserve, announced the Public-Private Partnership Investment
                                    Program for Legacy Assets which consists of two separate plans,
                                    addressing two distinct asset groups:The first plan is the Legacy Loan Program, which has a primary
                                    purpose to facilitate the sale of troubled mortgage loans by eligible
                                    institutions, including FDIC-insured federal or state banks and
                                    savings associations. Eligible assets are not strictly limited to
                                    loans; however, what constitutes an eligible asset will be determined
                                    by participating banks, their primary regulators, the FDIC and the
                                    Treasury.The second plan is the Securities Program, which is administered by
                                    the Treasury and involves the creation of public-private investment
                                    funds to target investments in eligible residential mortgage-backed
                                    securities and commercial mortgage-backed securities issued before
                                    2009 that originally were rated AAA or the equivalent by two or more
                                    nationally recognized statistical rating organizations, without
                                    regard to rating enhancements (collectively, "Legacy Securities").
                                    Legacy Securities must be directly secured by actual mortgage loans,
                                    leases or other assets, and may be purchased only from financial
                                    institutions that meet TARP eligibility requirements. Treasury
                                    received over 100 unique applications to participate in the Legacy
                                    Securities PPIP and in July 2009 selected nine public-private
                                    investment fund managers. As of December 31, 2009, public-private
                                    investment funds have completed initial and subsequent closings on
                                    approximately $6.2 billion of private sector equity capital, which
                                    was matched 100% by Treasury, representing $12.4 billion of total
                                    equity capital. Treasury has also provided $12.4 billion of debt
                                    capital, representing $24.8 billion of total purchasing power. As of
                                    December 31, 2009, public-private investment funds have drawn-down
                                    approximately $4.3 billion of total capital which has been invested
                                    in certain non-agency residential mortgage backed securities and
                                    commercial mortgage backed securities and cash equivalents pending
                                    investment.On May 22, 2009, the FDIC levied a one-time special assessment on all
                                    banks due on September 30, 2009.On November 12, 2009, the FDIC issued a final rule to require banks
                                    to prepay their estimated quarterly risk-based assessments for the
                                    fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to
                                    increase assessment rates effective on January 1, 2011.
 18


On February 2, 2010, the U.S. President called on the U.S. Congress
                                 to create a new Small Business Lending Fund. Under this proposal, $30
                                 billion in TARP funds would be transferred to a new program outside
                                 of TARP to support small business lending. As proposed, only small-
                                 and medium-sized banks would qualify to participate in the program;
                                 andOn July 21, 2010, the U.S. President signed into a law the Dodd-Frank
                                 Wall Street Reform and Consumer Protection Act of 2010, a
                                 comprehensive regulatory framework that will affect every financial
                                 institution in the U.S. U.S. financial regulators will begin the
                                 rulemaking process over the next 6 to 18 months which will set the
                                 parameters of the new regulatory framework and provide a clearer
                                 understanding of the legislation's effect on banks. In response to the above regulatory initiatives, we entered into the
                     CPP Purchase Agreement described above. We have chosen to participate
                     in the TAGP and have opted out of the DGP. On April 13, 2010, the
                     FDIC approved an interim rule that extends the TAGP to December 31,
                     2010. We have elected to continue our voluntary participation in the
                     program. Coverage under the program is in addition to and separate
                     from the basic coverage available under the FDIC's general deposit
                     insurance rules. We believe participation in the program is enhancing
                     our ability to retain customer deposits. As a result of the
                     enhancements to deposit insurance protection and the expectation that
                     there will be demands on the FDIC's deposit insurance fund, our
                     deposit insurance costs increased significantly. RESULTS OF OPERATIONS Income Statement Review Summary Three months ended June 30, 2010 and 2009 Our net income was $94,000 and $355,000 for the three months ended
                     June 30, 2010 and 2009, respectively, a decrease of $261,000, or
                     73.5%. The decrease in net income resulted primarily from a $1.3
                     million increase in the provision for loan losses, partially offset
                     by a $1.1 million gain on sale of investment securities. In addition,
                     net interest income decreased by $22,000; noninterest income,
                     excluding the gain on sale of investment securities, decreased by
                     $22,000; noninterest expenses increased by $147,000 and our income
                     tax expense decreased by $167,000. After our dividend payment to the
                     US Treasury as preferred shareholder, the net loss to common
                     shareholders for the second quarter of 2010 was $238,000. Our
                     efficiency ratio, excluding the gain on sale of investments and real
                     estate owned activity, was 76.0% for the three months ended June 30,
                     2010 compared to 72.9% for the same period in 2009. The deterioration
                     in the efficiency ratio relates primarily to the additional
                     administrative costs associated with our new regional headquarters in
                     Columbia, South Carolina. Six months ended June 30, 2010 and 2009 Our net income was $113,000 and $843,000 for the six months ended
                     June 30, 2010 and 2009, respectively, a decrease of $730,000, or
                     86.6%. The decrease in net income resulted primarily from a $2.0
                     million increase in the provision for loan losses, partially offset
                     by a $1.1 million gain on sale of investment securities. In addition,
                     net interest income increased by $298,000 and noninterest income,
                     excluding the gain on sale of investment securities, increased by
                     $118,000 while income tax expense decreased by $451,000. Offsetting
                     these increases in income, was a $726,000 increase in noninterest
                     expenses. After our dividend payment to the US Treasury as preferred
                     shareholder, the net loss to common shareholders for the first six
                     months was $560,000. Our efficiency ratio, excluding the gain on sale
                     of investments and real estate owned activity, was 75.7% for the six
                     months ended June 30, 2010 compared to 71.7% for the same period in
                     2009. The higher efficiency ratio relates primarily to the additional
                     administrative costs associated with our new regional headquarters in
                     Columbia, South Carolina.
 19


Net Interest Income Our level of net interest income is determined by the level of
                     earning assets and the management of our net interest margin. For
                     each of the three month periods ended June 30, 2010 and 2009 our net
                     interest income was $4.9 million. Our average earning assets
                     increased $25.8 million during the three months ended June 30, 2010
                     compared to the average for the three months ended June 30, 2009,
                     while our interest bearing liabilities increased only $18.7 million.
                     The increase in average earning assets is primarily related to a
                     $13.9 million increase in our average loans and a $10.0 million
                     increase in federal funds sold, while the increase in average
                     interest-bearing liabilities is related to a $42.6 million increase
                     in interest bearing deposits, partially offset by a $23.9 million
                     decrease in notes payable and other borrowings. Our net interest income was $9.7 million and $9.4 million for the six
                     month periods ended June 30, 2010 and 2009, respectively. During the
                     six months ended June 30, 2010, our average earning assets increased
                     $23.8 million and our average interest bearing liabilities increased
                     $14.1 million compared to the six months ended June 30, 2009. The
                     increase in average earning assets is primarily related to a $13.5
                     million increase in our average loans and a $9.9 million increase in
                     federal funds sold, while the increase in average interest-bearing
                     liabilities is related to a $34.9 million increase in interest
                     bearing deposits, partially offset by a $20.8 million decrease in
                     notes payable and other borrowings. We have included a number of tables to assist in our description of
                     various measures of our financial performance. For example, the
                     "Average Balances, Income and Expenses, Yields and Rates" table shows
                     the average balance of each category of our assets and liabilities as
                     well as the yield we earned or the rate we paid with respect to each
                     category during the three and six month periods ended June 30, 2010
                     and 2009. A review of this table shows that our loans typically
                     provide higher interest yields than do other types of
                     interest-earning assets, which is why we direct a substantial
                     percentage of our earning assets into our loan portfolio. Similarly,
                     the "Rate/Volume Analysis" table demonstrates the effect of changing
                     interest rates and changing volume of assets and liabilities on our
                     financial condition during the periods shown. We also track the
                     sensitivity of our various categories of assets and liabilities to
                     changes in interest rates, and we have included tables to illustrate
                     our interest 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.
 20


The following tables set forth information related to our average
                     balance sheets, average yields on assets, and average costs of
                     liabilities (dollars in thousands). We derived these yields by
                     dividing income or expense by the average balance of the
                     corresponding assets or liabilities. We derived average balances from
                     the daily balances throughout the periods indicated. During the three
                     and six month periods ended June 30, 2010 and 2009, we had only
                     $100,000 in interest-bearing deposits at another bank and had no
                     securities purchased with agreements to resell. All investments owned
                     have an original maturity of over one year. Nonaccrual loans are
                     included in the following tables. Loan yields have been reduced to
                     reflect the negative impact on our earnings of loans on nonaccrual
                     status. The net of capitalized loan costs and fees are amortized into
                     interest income on loans. Average Balances, Income and Expenses, Yields and RatesFor the Three Months Ended June 30,2010
                           
                           
                           2009AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)
                           
                           
                           AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)EarningsFederal funds sold
                           
                           $
                           21,309
                           
                           $
                           11
                           
                           
                           0.21
                           %
                           $
                           11,321
                           
                           $
                           3
                           
                           
                           0.11
                           %Investment securities, taxable
                           
                           
                           99,788
                           
                           
                           803
                           
                           
                           3.23
                           %
                           
                           99,808
                           
                           
                           1,131
                           
                           
                           4.55
                           %Investment securities, nontaxable (2)
                           
                           
                           5,627
                           
                           
                           82
                           
                           
                           5.86
                           %
                           
                           3,775
                           
                           
                           58
                           
                           
                           6.17
                           %Loans
                           
                           
                           580,961
                           
                           
                           8,077
                           
                           
                           5.58
                           %
                           
                           567,023
                           
                           
                           7,911
                           
                           
                           5.60
                           %Total interest-earning assets
                           
                           
                           707,685
                           
                           
                           8,973
                           
                           
                           5.09
                           %
                           
                           681,927
                           
                           
                           9,103
                           
                           
                           5.35
                           %Noninterest-earning assets
                           
                           
                           43,839
                           
                           
                           
                           
                           
                           
                           
                           
                           37,390Total assets
                           
                           $
                           751,524
                           
                           
                           
                           
                           
                           
                           
                           $
                           719,317Interest-bearing liabilitiesNOW accounts
                           
                           $
                           89,176
                           
                           
                           274
                           
                           
                           1.23
                           %
                           $
                           43,045
                           
                           
                           72
                           
                           
                           0.67
                           %Savings & money market
                           
                           
                           93,974
                           
                           
                           242
                           
                           
                           1.03
                           %
                           
                           82,164
                           
                           
                           225
                           
                           
                           1.10
                           %Time deposits
                           
                           
                           307,849
                           
                           
                           1,971
                           
                           
                           2.57
                           %
                           
                           323,173
                           
                           
                           2,149
                           
                           
                           2.67
                           %Total interest-bearing deposits
                           
                           
                           490,999
                           
                           
                           2,487
                           
                           
                           2.03
                           %
                           
                           448,382
                           
                           
                           2,446
                           
                           
                           2.19
                           %Note payable and other borrowings
                           
                           
                           134,423
                           
                           
                           1,471
                           
                           
                           4.39
                           %
                           
                           158,316
                           
                           
                           1,600
                           
                           
                           4.05
                           %Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           87
                           
                           
                           2.60
                           %
                           
                           13,403
                           
                           
                           116
                           
                           
                           3.47
                           %Total interest-bearing liabilities
                           
                           
                           638,825
                           
                           
                           4,045
                           
                           
                           2.54
                           %
                           
                           620,101
                           
                           
                           4,162
                           
                           
                           2.69
                           %Noninterest-bearing liabilities
                           
                           
                           51,876
                           
                           
                           
                           
                           
                           
                           
                           
                           40,368Shareholders' equity
                           
                           
                           60,823
                           
                           
                           
                           
                           
                           
                           
                           
                           58,848Total liabilities and shareholders' equity
                           
                           $
                           751,524
                           
                           
                           
                           
                           
                           
                           
                           $
                           719,317Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.55
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.66
                           %Net interest income (tax equivalent) / margin
                           
                           
                           
                           
                           $
                           4,928
                           
                           
                           2.79
                           %
                           
                           
                           
                           $
                           4,941
                           
                           
                           2.91
                           %Less: tax-equivalent adjustment (2)
                           
                           
                           
                           
                           
                           31
                           
                           
                           
                           
                           
                           
                           
                           
                           22Net interest income
                           
                           
                           
                           
                           $
                           4,897
                           
                           
                           
                           
                           
                           
                           
                           $
                           4,919 (1) Annualized for the three month period. (2) The tax-equivalent adjustment to net interest income adjusts the
                     yield for assets earning tax-exempt income to a comparable yield on a
                     taxable basis.
 21


Our net interest margin is calculated as net interest income, on an
                     annualized basis, divided by average interest-earning assets. Our net
                     interest margin, on a tax-equivalent basis, for the three months
                     ended June 30, 2010 was 2.79% compared to 2.91% for the three months
                     ended June 30, 2009. Our net interest spread was 2.55% for the three
                     months ended June 30, 2010 compared to 2.66% for the three months
                     ended June 30, 2009. The net interest spread is the difference
                     between the yield we earn on our interest-earning assets and the rate
                     we pay on our interest-bearing liabilities. The decline in net interest margin resulted primarily from the 11
                     basis point decrease in our net interest spread. The decrease in the
                     net interest spread is primarily due to the fact that more of our
                     rate-sensitive assets repriced downward than our rate-sensitive
                     liabilities during the twelve months ended June 30, 2010. While our
                     loan yield decreased only 2 basis points for the three months ended
                     June 30, 2010 compared to the three months ended June 30, 2009, our
                     investment yield decreased 124 basis points during the same period.
                     Partially offsetting the decrease in our loan and investment yields
                     was a 15 basis point decrease in the yield on our interest bearing
                     liabilities. During the second quarter of 2010 the cost of our
                     interest-bearing deposits decreased by 16 basis points compared to
                     the same period in 2009 while the cost of our borrowings increased by
                     24 basis points due to the maturing of several lower costing
                     instruments. As of June 30, 2010, all of our FHLB advances were at
                     fixed rates, while all of our other borrowings, including notes
                     payable and junior subordinated debt, had variable rates. The $6.5 million increase in noninterest-earning assets during the
                     three months ended June 30, 2010 compared to the same period in 2009
                     is due to a $2.5 million increase in property and equipment related
                     to the construction of our new regional headquarters facility in
                     Columbia, South Carolina as well as increases of $2.7 million in
                     prepaid FDIC insurance and $2.9 million in real estate owned. In due
                     to increased noninterest bearing deposits.
 22


Average Balances, Income and Expenses, Yields and RatesFor the Six Months Ended June 30,2010
                           
                           
                           2009AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)
                           
                           
                           AverageBalance
                           
                           
                           Income/Expense
                           
                           
                           Yield/Rate(1)EarningsFederal funds sold
                           
                           $
                           19,782
                           
                           $
                           21
                           
                           
                           0.21
                           %
                           $
                           9,909
                           
                           $
                           8
                           
                           
                           0.16
                           %Investment securities, taxable
                           
                           
                           93,362
                           
                           
                           1,640
                           
                           
                           3.54
                           %
                           
                           94,655
                           
                           
                           2,188
                           
                           
                           4.67
                           %Investment securities, nontaxable (2)
                           
                           
                           5,468
                           
                           
                           163
                           
                           
                           6.01
                           %
                           
                           3,791
                           
                           
                           116
                           
                           
                           6.19
                           %Loans
                           
                           
                           580,269
                           
                           
                           16,037
                           
                           
                           5.57
                           %
                           
                           566,741
                           
                           
                           15,709
                           
                           
                           5.60
                           %Total interest earning assets
                           
                           
                           698,881
                           
                           
                           17,861
                           
                           
                           5.15
                           %
                           
                           675,096
                           
                           
                           18,021
                           
                           
                           5.40
                           %Non-interest earning assets
                           
                           
                           43,426
                           
                           
                           
                           
                           
                           
                           
                           
                           37,449Total assets
                           
                           $
                           742,307
                           
                           
                           
                           
                           
                           
                           
                           $
                           712,545Interest bearing liabilitiesNOW accounts
                           
                           $
                           72,528
                           
                           
                           389
                           
                           
                           1.08
                           %
                           $
                           42,513
                           
                           
                           143
                           
                           
                           0.68
                           %Savings & money market
                           
                           
                           93,930
                           
                           
                           491
                           
                           
                           1.05
                           %
                           
                           85,363
                           
                           
                           482
                           
                           
                           1.14
                           %Time deposits
                           
                           
                           314,073
                           
                           
                           4,005
                           
                           
                           2.57
                           %
                           
                           317,750
                           
                           
                           4,610
                           
                           
                           2.93
                           %Total interest-bearing deposits
                           
                           
                           480,531
                           
                           
                           4,885
                           
                           
                           2.05
                           %
                           
                           445,626
                           
                           
                           5,235
                           
                           
                           2.38
                           %Note payable and other borrowings
                           
                           
                           140,789
                           
                           
                           3,065
                           
                           
                           4.39
                           %
                           
                           161,559
                           
                           
                           3,122
                           
                           
                           3.91
                           %Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           171
                           
                           
                           2.57
                           %
                           
                           13,403
                           
                           
                           240
                           
                           
                           3.62
                           %Total interest bearing liabilities
                           
                           
                           634,723
                           
                           
                           8,121
                           
                           
                           2.58
                           %
                           
                           620,588
                           
                           
                           8,597
                           
                           
                           2.80
                           %Non-interest bearing liabilities
                           
                           
                           46,881
                           
                           
                           
                           
                           
                           
                           
                           
                           39,465Shareholders' equity
                           
                           
                           60,703
                           
                           
                           
                           
                           
                           
                           
                           
                           52,492Total liabilities and shareholders' equity
                           
                           $
                           742,307
                           
                           
                           
                           
                           
                           
                           
                           $
                           712,545Net interest spread
                           
                           
                           
                           
                           
                           
                           
                           
                           2.57
                           %
                           
                           
                           
                           
                           
                           
                           
                           2.60
                           %Net interest income (tax equivalent) / margin
                           
                           
                           
                           
                           $
                           9,740
                           
                           
                           2.81
                           %
                           
                           
                           
                           $
                           9,424
                           
                           
                           2.82
                           %Less: tax-equivalent adjustment (2)
                           
                           
                           
                           
                           
                           62
                           
                           
                           
                           
                           
                           
                           
                           
                           44Net interest income / margin
                           
                           
                           
                           
                           $
                           9,678
                           
                           
                           
                           
                           
                           
                           
                           $
                           9,380 (1) Annualized for the six month period. (2) The tax-equivalent adjustment to net interest income adjusts the
                     yield for assets earning tax-exempt income to a comparable yield on a
                     taxable basis. Our net interest margin, on a tax-equivalent basis, for the six
                     months ended June 30, 2010 was 2.81% compared to 2.82% for the six
                     months ended June 30, 2009. During the first six months of 2010,
                     interest-earning assets averaged $698.9 million compared to $675.1
                     million during the same period of 2009. Our net interest spread was
                     2.57% for the six months ended June 30, 2010 compared to 2.60% for
                     the six months ended June 30, 2009. The decrease in the net interest spread is primarily due to the fact
                     that more of our rate-sensitive assets repriced downward than our
                     rate-sensitive liabilities during the twelve months ended June 30,
                     2010. While our loan yield decreased only 3 basis points for the six
                     months ended June 30, 2010 compared to the same period in 2009, our
                     investment yield decreased 105 basis points during the same period.
                     Partially offsetting the decrease in our loan yield was a 22 basis
                     point decrease in the cost of our interest-bearing liabilities.
                     During the first six months of 2010 the cost of our interest bearing
                     deposits decreased by 33 basis points compared to the first six
                     months of 2009, while the cost of our borrowings increased by 34
                     basis points due to the maturing of several lower costing borrowing
                     instruments. As of June 30, 2010, all of our FHLB advances were at
                     fixed rates, while all of our other borrowings, including notes
                     payable and junior subordinated debt, had variable rates. The $6.0 million increase in average noninterest-earning assets
                     during the six months ended June 30, 2010 compared to the same period
                     in 2009 is due to a $3.2 million increase in property and equipment
                     related to the construction of our new regional headquarters facility
                     in Columbia, South Carolina as well as increases of $2.9 million in
                     both prepaid FDIC insurance and other real estate owned. In addition,
                     the $8.2 million increase in shareholders' equity during the 2010
                     period is primarily related to the $17.3 million received in February
                     2009 for the issuance of preferred stock under the Treasury's CPP.
 23


Rate/Volume Analysis Net interest income can be analyzed in terms of the impact of
                     changing interest rates and changing volume. The following tables set
                     forth the effect which the varying levels of interest-earning assets
                     and interest-bearing liabilities and the applicable rates have had on
                     changes in net interest income for the periods presented (dollars in
                     thousands). Three Months EndedJune 30, 2010 vs. 2009
                           
                           
                           
                           
                           
                           June 30, 2009 vs. 2008Increase (Decrease) Due to
                           
                           
                           
                           
                           
                           Increase (Decrease) Due toVolume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           Total
                           
                           
                           
                           
                           
                           Volume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           195
                           
                           
                           
                           
                           $
                           (28
                           )
                           
                           
                           
                           $
                           (1
                           )
                           
                           
                           
                           $
                           166
                           
                           
                           
                           
                           $
                           264
                           
                           
                           
                           
                           $
                           (1,217
                           )
                           
                           
                           
                           $
                           (37
                           )
                           
                           
                           
                           $
                           (990
                           )Investment securities
                           
                           
                           21
                           
                           
                           
                           
                           
                           (328
                           )
                           
                           
                           
                           
                           (6
                           )
                           
                           
                           
                           
                           (313
                           )
                           
                           
                           
                           
                           57
                           
                           
                           
                           
                           
                           (188
                           )
                           
                           
                           
                           
                           (8
                           )
                           
                           
                           
                           
                           (139
                           )Federal funds sold
                           
                           
                           3
                           
                           
                           
                           
                           
                           3
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           8
                           
                           
                           
                           
                           
                           (41
                           )
                           
                           
                           
                           
                           (92
                           )
                           
                           
                           
                           
                           39
                           
                           
                           
                           
                           
                           (94
                           )Total interest income
                           
                           
                           219
                           
                           
                           
                           
                           
                           (353
                           )
                           
                           
                           
                           
                           (5
                           )
                           
                           
                           
                           
                           (139
                           )
                           
                           
                           
                           
                           280
                           
                           
                           
                           
                           
                           (1,497
                           )
                           
                           
                           
                           
                           (6
                           )
                           
                           
                           
                           
                           (1,223
                           )Interest expenseDeposits
                           
                           
                           269
                           
                           
                           
                           
                           
                           (205
                           )
                           
                           
                           
                           
                           (23
                           )
                           
                           
                           
                           
                           41
                           
                           
                           
                           
                           
                           50
                           
                           
                           
                           
                           
                           (1,451
                           )
                           
                           
                           
                           
                           (19
                           )
                           
                           
                           
                           
                           (1,420
                           )Note payable and other
                           
                           
                           (246
                           )
                           
                           
                           
                           
                           137
                           
                           
                           
                           
                           
                           (20
                           )
                           
                           
                           
                           
                           (129
                           )
                           
                           
                           
                           
                           5
                           
                           
                           
                           
                           
                           100
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           105Junior subordinated debt
                           
                           
                           -
                           
                           
                           
                           
                           
                           (29
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (29
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (48
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (48
                           )Total interest expense
                           
                           
                           23
                           
                           
                           
                           
                           
                           (97
                           )
                           
                           
                           
                           
                           (43
                           )
                           
                           
                           
                           
                           (117
                           )
                           
                           
                           
                           
                           55
                           
                           
                           
                           
                           
                           (1,399
                           )
                           
                           
                           
                           
                           (19
                           )
                           
                           
                           
                           
                           (1,363
                           )Net interest income
                           
                           $
                           196
                           
                           
                           
                           
                           $
                           (256
                           )
                           
                           
                           
                           $
                           38
                           
                           
                           
                           
                           $
                           (22
                           )
                           
                           
                           
                           $
                           225
                           
                           
                           
                           
                           $
                           (98
                           )
                           
                           
                           
                           $
                           13
                           
                           
                           
                           
                           $
                           140  Six Months EndedJune 30, 2010 vs. 2009
                           
                           
                           
                           
                           
                           June 30, 2009 vs. 2008Increase (Decrease) Due to
                           
                           
                           
                           
                           
                           Increase (Decrease) Due toVolume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           Total
                           
                           
                           
                           
                           
                           Volume
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Rate/Volume
                           
                           
                           
                           
                           
                           TotalInterest incomeLoans
                           
                           $
                           387
                           
                           
                           
                           
                           $
                           (58
                           )
                           
                           
                           
                           $
                           (1
                           )
                           
                           
                           
                           $
                           328
                           
                           
                           
                           
                           $
                           963
                           
                           
                           
                           
                           $
                           (3,002
                           )
                           
                           
                           
                           $
                           (162
                           )
                           
                           
                           
                           $
                           (2,201
                           )Investment securities
                           
                           
                           9
                           
                           
                           
                           
                           
                           (526
                           )
                           
                           
                           
                           
                           (2
                           )
                           
                           
                           
                           
                           (519
                           )
                           
                           
                           
                           
                           (38
                           )
                           
                           
                           
                           
                           (261
                           )
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           (295
                           )Federal funds sold
                           
                           
                           9
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           13
                           
                           
                           
                           
                           
                           (60
                           )
                           
                           
                           
                           
                           (169
                           )
                           
                           
                           
                           
                           56
                           
                           
                           
                           
                           
                           (173
                           )Total interest income
                           
                           
                           405
                           
                           
                           
                           
                           
                           (582
                           )
                           
                           
                           
                           
                           (1
                           )
                           
                           
                           
                           
                           (178
                           )
                           
                           
                           
                           
                           865
                           
                           
                           
                           
                           
                           (3,432
                           )
                           
                           
                           
                           
                           (102
                           )
                           
                           
                           
                           
                           (2,669
                           )Interest expenseDeposits
                           
                           
                           477
                           
                           
                           
                           
                           
                           (760
                           )
                           
                           
                           
                           
                           (67
                           )
                           
                           
                           
                           
                           (350
                           )
                           
                           
                           
                           
                           392
                           
                           
                           
                           
                           
                           (2,974
                           )
                           
                           
                           
                           
                           (147
                           )
                           
                           
                           
                           
                           (2,729
                           )Note payable and other
                           
                           
                           (388
                           )
                           
                           
                           
                           
                           380
                           
                           
                           
                           
                           
                           (49
                           )
                           
                           
                           
                           
                           (57
                           )
                           
                           
                           
                           
                           88
                           
                           
                           
                           
                           
                           (77
                           )
                           
                           
                           
                           
                           (2
                           )
                           
                           
                           
                           
                           9Junior subordinated debt
                           
                           
                           -
                           
                           
                           
                           
                           
                           (69
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (69
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (157
                           )
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           (157
                           )Total interest expense
                           
                           
                           89
                           
                           
                           
                           
                           
                           (449
                           )
                           
                           
                           
                           
                           (116
                           )
                           
                           
                           
                           
                           (476
                           )
                           
                           
                           
                           
                           480
                           
                           
                           
                           
                           
                           (3,208
                           )
                           
                           
                           
                           
                           (149
                           )
                           
                           
                           
                           
                           (2,877
                           )Net interest income
                           
                           $
                           316
                           
                           
                           
                           
                           $
                           (133
                           )
                           
                           
                           
                           $
                           115
                           
                           
                           
                           
                           $
                           298
                           
                           
                           
                           
                           $
                           385
                           
                           
                           
                           
                           $
                           (224
                           )
                           
                           
                           
                           $
                           47
                           
                           
                           
                           
                           $
                           208 Net interest income, the largest component of our income, was $4.9
                     million for both the three month periods ended June 30, 2010 and
                     2009. Average interest-earning assets were $25.8 million higher
                     during the three months ended June 30, 2010 compared to the same
                     period in 2009 while average interest-bearing liabilities increased
                     $18.7 million. The higher average balances resulted in $196,000 of
                     additional net interest income for the three months ended June 30,
                     2010; however, lower rates on the average balances reduced net
                     interest income by $256,000.
 24


In addition, net interest income was $9.7 million and $9.4 million
                     for the six months ended June 30, 2010 and 2009, respectively. The
                     increase in the 2010 period related primarily to the net effect of
                     higher levels of both average interest-earning assets and
                     interest-bearing liabilities. Average interest-earning assets were
                     $23.8 million higher during the six months ended June 30, 2010
                     compared to the same period in 2009, while average interest-bearing
                     liabilities increased $14.1 million. The higher average balances
                     resulted in $317,000 of additional net interest income for the six
                     months ended June 30, 2010, while lower rates on the average balances
                     reduced net interest income by $135,000. Three months ended June 30, 2010 and 2009 Interest income for the three months ended June 30, 2010 was $8.9
                     million, consisting of $8.1 million on loans, $854,000 on
                     investments, and $11,000 on federal funds sold. Interest income for
                     the three months ended June 30, 2009 was $9.1 million, consisting of
                     $7.9 million on loans, $1.2 million on investments, and $3,000 on
                     federal funds sold. Interest on loans for the three months ended June
                     30, 2010 and 2009 represented 90.3% and 87.1%, respectively, of total
                     interest income, while income from investments and federal funds sold
                     represented only 9.7% and 12.9%, respectively, of total interest
                     income. The high percentage of interest income from loans relates to
                     our strategy to maintain a significant portion of our assets in
                     higher earning loans compared to lower yielding investments. Average
                     loans represented 82.1% and 83.2% of average interest-earning assets
                     for the three months ended June 30, 2010 and 2009, respectively.
                     Included in interest income on loans for the three months ended June
                     30, 2010 and 2009 was $116,000 and $149,000, respectively, related to
                     the net amortization of loan fees and capitalized loan origination
                     costs. Interest expense for the three months ended June 30, 2010 was $4.1
                     million, consisting of $2.5 million related to deposits and $1.6
                     million related to other borrowings. Interest expense for the three
                     months ended June 30, 2009 was $4.2 million, consisting of $2.5
                     million related to deposits and $1.7 million related to other
                     borrowings. Interest expense on deposits for the three months ended
                     June 30, 2010 and 2009 represented 61.5% and 58.8%, respectively, of
                     total interest expense, while interest expense on other borrowings
                     represented 38.5% and 41.2%, respectively, of total interest expense
                     for the same three month periods. During the three months ended June
                     30, 2010, average interest-bearing deposits increased by $42.6
                     million over the same period in 2009, while our notes payable and
                     other borrowings decreased $23.9 million during the three months
                     ended June 30, 2010 over the same period in 2009. Six months ended June 30, 2010 and 2009 Interest income for the six months ended June 30, 2010 was $17.8
                     million, consisting of $16.0 million on loans, $1.7 million on
                     investments, and $21,000 on federal funds sold. Interest income for
                     the six months ended June 30, 2009 was $18.0 million, consisting of
                     $15.7 million on loans, $2.3 million on investments, and $8,000 on
                     federal funds sold. Interest income on loans for the six months ended
                     June 30, 2010 and 2009 represented 90.1% and 87.4%, respectively, of
                     total interest income, while income from investments and federal
                     funds sold represented only 9.9% and 12.6%, respectively, of total
                     interest income. The high percentage of interest income from loans
                     relates to our strategy to maintain a significant portion of our
                     assets in higher earning loans compared to lower yielding
                     investments. Average loans represented 83.0% and 84.0% of average
                     interest-earning assets for the six months ended June 30, 2010 and
                     2009, respectively. Included in interest income on loans for the six
                     months ended June 30, 2010 and 2009 was $232,000 and $317,000,
                     respectively, related to the net amortization of loan fees and
                     capitalized loan origination costs. Interest expense for the six months ended June 30, 2010 was $8.1
                     million, consisting of $4.9 million related to deposits and $3.2
                     million related to borrowings. Interest expense for the six months
                     ended June 30, 2009 was $8.6 million, consisting of $5.2 million
                     related to deposits and $3.4 million related to borrowings. Interest
                     expense on deposits for the six months ended June 30, 2010 and 2009
                     represented 60.2% and 60.9%, respectively, of total interest expense,
                     while interest expense on other borrowings represented 39.8% and
                     39.1%, respectively, of total interest expense for the same six month
                     periods. During the six months ended June 30, 2010, average
                     interest-bearing deposits increased by $34.9 million over the same
                     period in 2009, while our notes payable and other borrowings
                     decreased $20.8 million during the six months ended June 30, 2010
                     over the same period in 2009. 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.
 25


Three and six months ended June 30, 2010 and 2009 For the three months ended June 30, 2010 and 2009, we incurred a
                     noncash expense related to the provision for loan losses of $2.3
                     million and $975,000, respectively, bringing the allowance for loan
                     losses to $8.4 million and $7.7 million, respectively. The allowance
                     represented 1.44% of gross loans at June 30, 2010 and 1.36% of gross
                     loans at June 30, 2009. During the three months ended June 30, 2010,
                     we charged-off $2.0 million of loans and recorded $121,000 of
                     recoveries on loans previously charged-off. During the three months
                     ended June 30, 2009, we charged-off $668,000 of loans and recorded
                     $3,000 of recoveries on loans previously charged-off. The $1.9
                     million and $665,000 net charge-offs during the second quarters of
                     2010 and 2009, respectively, represented 0.65% and 0.47% of the
                     average outstanding loan portfolio for the three months ended June
                     30, 2010 and 2009, respectively. For the six months ended June 30, 2010, we incurred a noncash expense
                     related to the provision for loan losses of $3.7 million, bringing
                     the allowance for loan losses to $8.4 million, or 1.44% of gross
                     loans, as of June 30, 2010. The $3.7 million provision for the six
                     months ended June 30, 2010 related to the $3.2 million of loans
                     charged-off, partially offset by $121,000 of recoveries on loans
                     previously charged-off. In contrast, for the six months ended June
                     30, 2009, we added $1.7 million to the provision for loan losses,
                     resulting in an allowance of $7.7 million at June 30, 2009. We
                     charged-off $1.0 million of loans and recorded $4,000 of recoveries
                     on loans previously charged-off during the six months ended June 30,
                     2009. The $3.1 million and $991,000 net charge-offs during the first
                     six months of 2010 and 2009, respectively, represented 1.08% and
                     0.35% of the average outstanding loan portfolio for the six months
                     ended June 30, 2010 and 2009, respectively. At June 30, 2010 and 2009, the allowance for loan losses represented
                     less than one time the amount of non-performing loans. A significant
                     portion, or 83.3%, of nonperforming loans at June 30, 2010 is secured
                     by real estate. Our nonperforming loans have been written down to
                     approximately 68% of their original nonperforming balance. We have
                     evaluated the underlying collateral on these loans and believe that
                     the collateral on these loans is sufficient to minimize future
                     losses. As a result of this level of coverage on non-performing
                     loans, we believe the provision of $3.7 million for the six months
                     ended June 30, 2010 to be adequate. Noninterest Income The following table sets forth information related to our noninterest
                     income (dollars in thousands). Three months endedJune 30,
                           
                           
                           
                           
                           
                           Six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Loan fee income
                           
                           $
                           106
                           
                           
                           
                           
                           $
                           121
                           
                           
                           
                           
                           $
                           226
                           
                           
                           
                           
                           $
                           159Service fees on deposit accounts
                           
                           
                           142
                           
                           
                           
                           
                           
                           177
                           
                           
                           
                           
                           
                           288
                           
                           
                           
                           
                           
                           352Income from bank owned life insurance
                           
                           
                           147
                           
                           
                           
                           
                           
                           123
                           
                           
                           
                           
                           
                           299
                           
                           
                           
                           
                           
                           246Gain on sale investment securities
                           
                           
                           1,088
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,104
                           
                           
                           
                           
                           
                           -Gain on sale of property and equipment
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           18
                           
                           
                           
                           
                           
                           -Real estate owned activity
                           
                           
                           (19
                           )
                           
                           
                           
                           
                           3
                           
                           
                           
                           
                           
                           (3
                           )
                           
                           
                           
                           
                           (4
                           )Other income
                           
                           
                           121
                           
                           
                           
                           
                           
                           95
                           
                           
                           
                           
                           
                           223
                           
                           
                           
                           
                           
                           180Total noninterest income
                           
                           $
                           1,585
                           
                           
                           
                           
                           $
                           519
                           
                           
                           
                           
                           $
                           2,155
                           
                           
                           
                           
                           $
                           933 Three months ended June 30, 2010 and 2009 Noninterest income for the three month period ended June 30, 2010 was
                     $1.6 million, an increase of 205.4% over noninterest income of
                     $519,000 for the same period of 2009. The $1.1 million increase
                     during the 2010 period is related primarily to a $1.1 million gain on
                     sale of investment securities. In addition, noninterest income also
                     increased by $24,000 from bank owned life insurance and $26,000 from
                     other income. These increases were partially offset by decreases of
                     $15,000 in loan fee income, $35,000 in service fees on deposit
                     accounts, and $22,000 in income from real estate owned activity. Loan fee income was $106,000 and $121,000 for the three months ended
                     June 30, 2010 and 2009, respectively, consisting primarily of late
                     charge fees, fees from issuance of lines and letters of credit, and
                     mortgage origination fees we receive on residential loans funded and
                     closed by a third party. The $15,000 decrease in loan fee income for
                     the three months ended June 30, 2010 compared to the same period in
                     2009 related primarily to the decrease in mortgage origination fees.
                     Mortgage origination fees were $71,000 for the three months ended
                     June 30, 2010 compared to $86,000 for the same period in 2009. Income
                     related to fees received from the issuance of lines and letters of
                     credit was $12,000 for both of the second quarters of 2010 and 2009,
                     respectively, while late charge fees were $23,000 for each of the
                     three month periods ended June 30, 2010 and 2009.
 26


Service fees on deposit accounts consist primarily of service charges
                     on our checking, money market, and savings accounts and the fee
                     income received from client non-sufficient funds ("NSF")
                     transactions. Deposit fees were $142,000 and $177,000 for the three
                     months ended June 30, 2010 and 2009, respectively. The $35,000
                     decrease is primarily related to a $40,000 decrease in NSF fees and a
                     $3,000 decrease in overdraft and returned item fees, partially offset
                     by an $8,000 increase in deposit related fees such as service
                     charges. Service charge fees were $66,000 and $58,000 for the three
                     months ended June 30, 2010 and 2009, respectively, while other fees
                     such as overdraft and returned item fees were $8,000 and $11,000 for
                     the same periods in 2010 and 2009, respectively. NSF fee income was
                     $68,000 and $108,000 for the second quarters of 2010 and 2009,
                     respectively, representing 47.9% of total service fees on deposits in
                     the 2010 period compared to 61.0% of total service fees on deposits
                     in the 2009 period. Income derived from life insurance was $147,000 and $123,000 for the
                     three months ended June 30, 2010 and 2009, respectively. We recorded a $1.1 million gain on sale of investment securities
                     during the three months ended June 30, 2010. We sold $59.2 million of
                     securities and purchased $58.2 million of securities, allowing us to
                     reposition our investment portfolio to better match our anticipated
                     future cash needs. The gain on sale also assisted us in meeting our
                     higher regulatory capital requirements. Real estate owned activity includes income and expenses from property
                     held for sale and other real estate we own, including real estate
                     acquired in settlement of loans. For the three months ended June 30,
                     2010, our expenses related to the properties we owned exceeded income
                     received on the real estate by $19,000. Rental income was $39,000 for
                     the second quarter of 2010 and expenses such as maintenance, legal
                     and property taxes were $58,000. For the second quarter of 2009,
                     rental income was $25,000 and expenses related to owning the real
                     estate were $22,000 for a net profit of $3,000. Other income consists primarily of fees received on debit card
                     transactions, sale of customer checks, and wire transfers. Other
                     income was $121,000 and $95,000 for the three months ended June 30,
                     2010 and 2009, respectively. The $26,000 increase related primarily
                     to a $20,000 increase in debit card transaction fees and a $6,000
                     increase in other client service related fees. Debit card transaction
                     fees were $89,000 and $69,000 for the three months ended June 30,
                     2010 and 2009, respectively, and represented 73.6% and 72.6% of total
                     other income for the second quarters of 2010 and 2009, respectively.
                     The corresponding transaction costs associated with debit card
                     transactions are included in noninterest data processing and related
                     costs. The debit card transaction costs were $32,000 and $26,000 for
                     the three months ended June 30, 2010 and 2009, respectively. The net
                     impact of the fees received and the related cost of the debit card
                     transactions on earnings for the three months ended June 30, 2010 and
                     2009 was $57,000 and $43,000, respectively. Wire transfer and other
                     deposit related fees were $32,000 and $26,000 for the second quarters
                     ended June 30, 2010 and 2009, respectively. Six months ended June 30, 2010 and 2009 Noninterest income in the six month period ended June 30, 2010 was
                     $2.2 million, an increase of 131.0% over noninterest income of
                     $933,000 in the same period of 2009. The $1.2 million increase in
                     noninterest income is related primarily to a $1.1 million gain on
                     sale of investment securities. In addition, noninterest income also
                     increased by $67,000 from loan fee income, $53,000 from income from
                     bank owned life insurance, $18,000 from gain on sale of property and
                     equipment, and $43,000 from other income; however, these increases
                     were partially offset by a $64,000 decrease in service fees on
                     deposit accounts. Loan fee income was $226,000 and $159,000 for the six months ended
                     June 30, 2010 and 2009, respectively, consisting primarily of late
                     charge fees, fees from issuance of lines and letters of credit, and
                     mortgage origination fees we receive on residential loans funded and
                     closed by a third party. The $67,000 increase for the six months
                     ended June 30, 2010 compared to the same period in 2009 related
                     primarily to increases of $68,000 in mortgage origination fees and
                     $5,000 in late charge fees, partially offset by a decrease of $6,000
                     in fees from issuance of lines and letters of credit. Mortgage
                     origination fees were $157,000 and $89,000 for the six months ended
                     June 30, 2010 and 2009, respectively. Late charge fees were $52,000
                     and $47,000 for the six months ended June 30, 2010 and 2009,
                     respectively, while income related to issuance of lines and letters
                     of credit was $17,000 and $23,000 for the same periods in 2010 and
                     2009, respectively. Service fees on deposit accounts consist primarily of service charges
                     on our checking, money market, and savings accounts and the fee
                     income received from client NSF transactions. Deposit fees were
                     $288,000 and $352,000 for the six months ended June 30, 2010 and
                     2009, respectively. The $64,000 decrease is primarily related to an
                     $80,000 decrease in NSF fees, partially offset by a $19,000 increase
                     in deposit related fees. NSF income decreased $80,000 to $131,000 for
                     the six months ended June 30, 2010 from $211,000 for the same period
                     in 2009, representing 45.5% of total service fees on deposits in the
                     2010 period compared to 59.9% of total service fees on deposits in
                     the 2009 period. Service charge fees were $134,000 and $115,000 for
                     the six months ended June 30, 2010 and 2009, respectively, while
                     other fees such as overdraft and returned item fees were $23,000 and
                     $26,000, respectively.
 27


Income derived from life insurance was $299,000 and $246,000 for the
                     six months ended June 30, 2010 and 2009, respectively. We recorded a $1.1 million gain on sale of investment securities
                     during the six months ended June 30, 2010. We sold $59.2 million of
                     securities and purchased $58.2 million of securities, allowing us to
                     reposition our investment portfolio to better match our anticipated
                     future cash needs. The gain on sale also assisted us in meeting our
                     higher regulatory capital requirements. Real estate owned activity includes income and expenses from property
                     held for sale and other real estate we own, including real estate
                     acquired in settlement of loans. For the six months ended June 30,
                     2010 and 2009, our expenses related to owning the real estate
                     exceeded income received on the properties by $3,000 and $4,000
                     respectively. Rental income was $75,000 for the six months of 2010
                     and expenses such as maintenance, legal and property taxes were
                     $78,000. For the first six months of 2009, rental income was $50,000
                     and expenses related to owning the real estate were $54,000 for a net
                     loss of $4,000. Other income consists primarily of fees received on debit card
                     transactions, sale of customer checks, and wire transfers. Other
                     income was $223,000 and $180,000 for the six months ended June 30,
                     2010 and 2009, respectively. The $43,000 increase relates primarily
                     to a $34,000 increase in debit card transaction fees and a $9,000
                     increase in other client service related fees. Debit card transaction
                     fees were $161,000 and $127,000 for the six months ended June 30,
                     2010 and 2009, respectively and represented 72.2% and 70.6% of total
                     other income for the first six months of 2010 and 2009, respectively.
                     The corresponding transaction costs associated with debit card
                     transactions are included in noninterest data processing and related
                     costs. The debit card transaction costs were $59,000 and $48,000 for
                     the six months ended June 30, 2010 and 2009, respectively. The net
                     impact of the fees received and the related cost of the debit card
                     transactions on earnings for the six months ended June 30, 2010 and
                     2009 was $102,000 and $79,000, respectively. Noninterest expenses The following table sets forth information related to our noninterest
                     expenses (dollars in thousands). Three months endedJune 30,
                           
                           
                           
                           
                           
                           Six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Compensation and benefits
                           
                           $
                           2,142
                           
                           
                           
                           
                           
                           1,963
                           
                           
                           
                           
                           $
                           4,274
                           
                           
                           
                           
                           $
                           3,888Professional fees
                           
                           
                           165
                           
                           
                           
                           
                           
                           155
                           
                           
                           
                           
                           
                           330
                           
                           
                           
                           
                           
                           291Marketing
                           
                           
                           185
                           
                           
                           
                           
                           
                           174
                           
                           
                           
                           
                           
                           396
                           
                           
                           
                           
                           
                           318Insurance
                           
                           
                           405
                           
                           
                           
                           
                           
                           639
                           
                           
                           
                           
                           
                           680
                           
                           
                           
                           
                           
                           792Occupancy
                           
                           
                           555
                           
                           
                           
                           
                           
                           440
                           
                           
                           
                           
                           
                           1,111
                           
                           
                           
                           
                           
                           857Data processing and related costs
                           
                           
                           402
                           
                           
                           
                           
                           
                           345
                           
                           
                           
                           
                           
                           787
                           
                           
                           
                           
                           
                           719Telephone
                           
                           
                           77
                           
                           
                           
                           
                           
                           59
                           
                           
                           
                           
                           
                           153
                           
                           
                           
                           
                           
                           110Other
                           
                           
                           180
                           
                           
                           
                           
                           
                           189
                           
                           
                           
                           
                           
                           388
                           
                           
                           
                           
                           
                           418Total noninterest expenses
                           
                           $
                           4,111
                           
                           
                           
                           
                           
                           3,964
                           
                           
                           
                           
                           $
                           8,119
                           
                           
                           
                           
                           $
                           7,393 Three months ended June 30, 2010 and 2009 We incurred noninterest expenses of $4.1 million for the three months
                     ended June 30, 2010 compared to $4.0 million for the three months
                     ended June 30, 2009, an increase of $147,000 or 3.7%. Noninterest expense as a percentage of noninterest income and net
                     interest income, or the efficiency ratio, was 76.0% for the three
                     months ended June 30, 2010 compared to 72.9% for the same period in
                     2009, excluding the gain on sale of investments and real estate owned
                     activity. The primary reason for the higher efficiency ratio in the
                     2010 period is due to the new regional headquarters and its related
                     expenses. The initial operating costs for our new regional
                     headquarters initially exceed the benefits from obtaining additional
                     low cost deposits. As the new office increases its retail deposits,
                     we anticipate that our efficiency ratio will begin to improve;
                     however, no assurance can be given that the levels of deposits will
                     cover the additional expenses or that other costs will not increase. For the three months ended June 30, 2010, compensation and benefits,
                     occupancy, and data processing and related costs represented 75.4% of
                     the total noninterest expense compared to 69.3% for the same period
                     in 2009. Six months ended June 30, 2010 and 2009 We incurred noninterest expenses of $8.1 million for the six months
                     ended June 30, 2010 compared to $7.4 million for the six months ended
                     June 30, 2009, an increase of $726,000, or 9.8%
 28


The efficiency ratio, or noninterest expense as a percentage of
                     noninterest income and net interest income, was 75.7% for the six
                     months ended June 30, 2010 compared to 71.7% for the same period in
                     2009. Increased expenses related to the new regional headquarters
                     contributed to the higher efficiency ratio for the 2010 period. The
                     initial operating costs for our new regional headquarters initially
                     exceed the benefits from obtaining additional low cost deposits. As
                     these new office increases its retail deposits, we anticipate that
                     our efficiency ratio will begin to improve; however, no assurance can
                     be given that the levels of deposits will cover the additional
                     expenses or that other costs will not increase. For the six months ended June 30, 2010, compensation and benefits,
                     occupancy, and data processing and related costs represented 76.0% of
                     the total noninterest expense compared to 73.9% for the same period
                     in 2009. The following table sets forth information related to our
                     compensation and benefits (dollars in thousands). Three months endedJune 30,
                           
                           
                           
                           
                           
                           Six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Base compensation
                           
                           $
                           1,583
                           
                           
                           
                           
                           $
                           1,411
                           
                           
                           
                           
                           $
                           3,155
                           
                           
                           
                           
                           
                           2,748Incentive compensation
                           
                           
                           180
                           
                           
                           
                           
                           
                           233
                           
                           
                           
                           
                           
                           307
                           
                           
                           
                           
                           
                           442Total compensation
                           
                           
                           1,763
                           
                           
                           
                           
                           
                           1,644
                           
                           
                           
                           
                           
                           3,462
                           
                           
                           
                           
                           
                           3,190Benefits
                           
                           
                           414
                           
                           
                           
                           
                           
                           352
                           
                           
                           
                           
                           
                           880
                           
                           
                           
                           
                           
                           767Capitalized loan origination costs
                           
                           
                           (35
                           )
                           
                           
                           
                           
                           (33
                           )
                           
                           
                           
                           
                           (68
                           )
                           
                           
                           
                           
                           (69
                           )Total compensation and benefits
                           
                           $
                           2,142
                           
                           
                           
                           
                           $
                           1,963
                           
                           
                           
                           
                           $
                           4,274
                           
                           
                           
                           
                           
                           3,888 Three months ended June 30, 2010 and 2009 Total compensation and benefits expense was $2.1 million and $2.0
                     million for the three months ended June 30, 2010 and 2009,
                     respectively. Compensation and benefits represented 52.1% and 49.5%
                     of our total noninterest expense for the three months ended June 30,
                     2010 and 2009, respectively. The $179,000 increase in compensation
                     and benefits in the second quarter of 2010 compared to the same
                     period in 2009 resulted from increases of $172,000 in base
                     compensation and $62,000 in benefits expense, partially offset by a
                     reduction of $53,000 in incentive compensation expense. In addition,
                     loan origination compensation expense, which is required to be
                     capitalized and amortized over the life of the loan as a reduction of
                     loan interest income, increased by $2,000. The $172,000 increase in base compensation expense related to the
                     cost of 11 additional employees. We hired six additional employees
                     during the third quarter of 2009 related to the opening of our new
                     regional headquarters in Columbia, South Carolina. In addition, we
                     have added positions in client services, deposit operations and
                     information technology and support. Incentive compensation
                     represented 8.4% and 11.9% of total compensation and benefits for the
                     three months ended June 30, 2010 and 2009, respectively. The
                     incentive compensation expense recorded for the second quarters of
                     2010 and 2009 represented an accrual of the estimated incentive
                     compensation earned during the second quarter of the respective year.
                     Benefits expense increased $62,000 in the second quarter of 2010
                     compared to the same period in 2009. Benefits expense represented
                     23.5% and 21.4% of the total compensation for the three months ended
                     June 30, 2010 and 2009, respectively. Six months ended June 30, 2010 and 2009 Total compensation and benefits expense was $4.3 million and $3.9
                     million for the six months ended June 30, 2010 and 2009,
                     respectively. Compensation and benefits represented 52.6% of our
                     total noninterest expense for each of the six months ended June 30,
                     2010 and 2009, respectively. The $386,000 increase in compensation
                     and benefits in the first six months of 2010 compared to the same
                     period in 2009 resulted from increases of $407,000 in base
                     compensation and $113,000 in benefits expense, partially offset by a
                     reduction of $135,000 in incentive compensation. In addition, loan
                     origination compensation expense, which is required to be capitalized
                     and amortized over the life of the loan as a reduction of loan
                     interest income, decreased by $1,000. The $407,000 increase in base compensation expense related to the
                     cost of 11 additional employees, six of which were hired to staff our
                     new regional headquarters in Columbia, South Carolina. We have also
                     added positions in client services, deposit operations, and
                     information technology and support. Incentive compensation
                     represented 7.2% and 11.4% of total compensation and benefits for the
                     six months ended June 30, 2010 and 2009, respectively. The incentive
                     compensation expense recorded for the first six months of 2010 and
                     2009 represented an accrual of the estimated incentive compensation
                     earned during the first six months of the respective year. Benefits
                     expense increased $113,000 in the first six months of 2010 compared
                     to the same period in 2009. Benefits expense represented 25.4% and
                     24.0% of the total compensation for the six months ended June 30,
                     2010 and 2009, respectively.
 29


The following tables set forth information related to our data
                     processing and related costs (dollars in thousands). Three months endedJune 30,
                           
                           
                           
                           
                           
                           Six months endedJune 30,2010
                           
                           
                           
                           
                           
                           2009
                           
                           
                           
                           
                           
                           2010
                           
                           
                           
                           
                           
                           2009Data processing costs
                           
                           $
                           302
                           
                           
                           
                           
                           $
                           257
                           
                           
                           
                           
                           $
                           591
                           
                           
                           
                           
                           $
                           551Debit card transaction expense
                           
                           
                           32
                           
                           
                           
                           
                           
                           26
                           
                           
                           
                           
                           
                           59
                           
                           
                           
                           
                           
                           48Courier expense
                           
                           
                           28
                           
                           
                           
                           
                           
                           27
                           
                           
                           
                           
                           
                           53
                           
                           
                           
                           
                           
                           54Other expenses
                           
                           
                           40
                           
                           
                           
                           
                           
                           35
                           
                           
                           
                           
                           
                           84
                           
                           
                           
                           
                           
                           66Total data processing and related costs
                           
                           $
                           402
                           
                           
                           
                           
                           $
                           345
                           
                           
                           
                           
                           $
                           787
                           
                           
                           
                           
                           $
                           719 Three and six months ended June 30, 2010 and 2009 Total data processing and related costs were $402,000 and $345,000,
                     an increase of $57,000, or 16.5%, for the three months ended June 30,
                     2010 and 2009, respectively. During the first six months of 2010 and
                     the same period of 2009, our data processing and related costs were
                     $787,000 and $719,000, respectively, an increase of $68,000, or 9.5%. We have contracted with an outside computer service company to
                     provide our core data processing services. Our core data processing
                     costs increased $45,000, or 17.5%, from $257,000 to $302,000 for the
                     three months ended June 30, 2010 compared to the same period in 2009.
                     A significant portion of the fee charged by the third party processor
                     is directly related to the number of loan and deposit accounts and
                     the related number of transactions. Our electronic banking and credit
                     bureau fees, specifically, have increased as we have grown our client
                     base during the six months ended June 30, 2010. During the six months
                     ended June 30, 2010 and 2009, data processing costs for our core
                     processing system were $591,000 and $551,000, respectively, an
                     increase of $40,000, or 7.3%. 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 $32,000 and $26,000 for the three months
                     ended June 30, 2010 and 2009, respectively, and $59,000 and $48,000
                     for the six months ended June 30, 2010 and 2009, respectively. Occupancy expense represented 13.5% and 11.1% of total noninterest
                     expense for the three months ended June 30, 2010 and 2009,
                     respectively. Occupancy expense increased by $115,000 for the three
                     months ended June 30, 2010 and 2009 from $440,000 to $555,000,
                     respectively. The increase is primarily due to the costs associated
                     with our new regional headquarters building in Columbia, South
                     Carolina such as depreciation and maintenance. The new regional
                     headquarters office opened in August 2009. For the six months ended
                     June 30, 2010, occupancy expense increased $254,000 to $1.1 million
                     from $857,000 for the same period ended June 30, 2009. Occupancy
                     expense represented 13.7% and 11.6% of total noninterest expense for
                     the first six months of 2010 and 2009, respectively. The remaining noninterest expenses represent a $204,000 decrease for
                     the three month period ended June 30, 2010 compared to the same
                     period in 2009 resulting primarily from a $234,000 decrease in
                     insurance expense and $9,000 decrease in other noninterest expenses.
                     Partially offsetting these decreased expenses were increases of
                     $10,000 in professional fees, $11,000 in marketing expenses, and
                     $18,000 in telephone expenses. The decrease in insurance expense is
                     primarily related to the special one-time assessment of approximately
                     $300,000 charged by the FDIC during the second quarter of 2009. The
                     increase in professional fees relates primarily to increased legal
                     and accounting fees, while the increases in marketing and telephone
                     expenses are due to increased community support and additional
                     marketing efforts and basic communication costs. In addition, the
                     $9,000 decrease in other expense is primarily due to additional
                     office supplies expenses incurred with the opening of our new
                     regional headquarters in 2009. For the six month period ended June 30, 2010, remaining noninterest
                     expenses increased $18,000 from the same period in 2009. During this
                     period, professional fees increased by $39,000, marketing expenses by
                     $78,000, and telephone expenses by $43,000; however, these increases
                     were partially offset by an $112,000 decrease in insurance expenses
                     and $30,000 in other noninterest expenses. The significant decrease
                     in insurance expense is primarily related to the special assessment
                     of approximately $300,000 charged by the FDIC during the second
                     quarter of 2009. The increase in professional fees relates primarily
                     to increased legal and accounting fees, while the increases in
                     marketing and telephone expenses are due to increased community
                     support and additional marketing efforts and basic communication
                     costs. In addition, the $30,000 decrease in other expenses is
                     primarily due to decreases of $25,000 in office supplies and $45,000
                     in collection expenses, partially offset by a $36,000 increase in
                     deposit account losses.
 30


We incurred an income tax benefit of $23,000 for the three months
                     ended June 30, 2010 compared to income tax expense of $144,000 during
                     the same period in 2009. For the six months ended June 30, 2010, our
                     income tax benefit was $99,000 compared to income tax expense of
                     $352,000 for the same period in 2009. The lower net income during the
                     first and second quarters of 2010 increased the impact that our
                     tax-exempt income had in lowering our effective tax rate from the
                     same periods in the prior year. Balance Sheet Review General At June 30, 2010, we had total assets of $741.4 million, consisting
                     principally of $572.4 million in net loans, $94.5 million in
                     investments, $22.6 million in federal funds sold, $14.3 million in
                     bank owned life insurance, and $16.1 million in property and
                     equipment. Our liabilities at June 30, 2010 totaled $681.5 million,
                     which consisted principally of $536.3 million in deposits, $122.7
                     million in notes payable and other borrowings, and $13.4 million in
                     junior subordinated debentures. At June 30, 2010, our shareholders'
                     equity was $59.9 million. At December 31, 2009, we had total assets of $719.3 million,
                     consisting principally of $566.5 million in net loans, $94.6 million
                     in investments, $6.5 million in federal funds sold, $14.0 million in
                     bank owned life insurance, and $16.4 million in property and
                     equipment. Our liabilities at December 31, 2009 totaled $659.5
                     million, consisting principally of $494.1 million in deposits, $147.0
                     million in notes payable and other borrowings, and $13.4 million of
                     junior subordinated debentures. At December 31, 2009, our
                     shareholders' equity was $59.8 million. Federal Funds Sold At June 30, 2010, our federal funds sold were $22.6 million, or 3.0%
                     of total assets. At December 31, 2009, our $6.5 million in short-term
                     investments in federal funds sold on an overnight basis comprised
                     0.9% of total assets. Investments At June 30, 2010, the $94.5 million in our investment securities
                     portfolio represented approximately 12.8% of our total assets. We
                     held Government sponsored enterprise securities, municipal
                     securities, and mortgage-backed securities with a fair value of $85.3
                     million and an amortized cost of $84.6 million for an unrealized gain
                     of $714,000. The amortized costs and fair value of investment securities available
                     for sale and held to maturity are as follows (dollars in thousands): June 30, 2010Amortized
                           
                           
                           
                           
                           
                           Gross Unrealized
                           
                           
                           
                           
                           
                           FairCost
                           
                           
                           
                           
                           
                           Gains
                           
                           
                           
                           
                           
                           Losses
                           
                           
                           
                           
                           
                           ValueAvailable for saleGovernment sponsored enterprises
                           
                           $
                           4,500
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           2
                           
                           
                           
                           
                           $
                           4,498State and political subdivisions
                           
                           
                           7,992
                           
                           
                           
                           
                           
                           93
                           
                           
                           
                           
                           
                           10
                           
                           
                           
                           
                           
                           8,07512,492
                           
                           
                           
                           
                           
                           93
                           
                           
                           
                           
                           
                           12
                           
                           
                           
                           
                           
                           12,573Mortgage-backed securitiesFHLMC
                           
                           
                           24,660
                           
                           
                           
                           
                           
                           289
                           
                           
                           
                           
                           
                           45
                           
                           
                           
                           
                           
                           24,904FNMA
                           
                           
                           39,730
                           
                           
                           
                           
                           
                           644
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           40,374GNMA
                           
                           
                           1,183
                           
                           
                           
                           
                           
                           90
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           1,273Collateralized mortgage obligations
                           
                           
                           6,427
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           350
                           
                           
                           
                           
                           
                           6,07772,000
                           
                           
                           
                           
                           
                           1,023
                           
                           
                           
                           
                           
                           395
                           
                           
                           
                           
                           
                           72,628Total
                           
                           $
                           84,492
                           
                           
                           
                           
                           $
                           1,116
                           
                           
                           
                           
                           $
                           407
                           
                           
                           
                           
                           $
                           85,201Held to maturityMortgage-backed securitiesFNMA
                           
                           $
                           120
                           
                           
                           
                           
                           $
                           5
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           125
 31


December 31, 2009Amortized
                           
                           
                           
                           
                           
                           Gross Unrealized
                           
                           
                           
                           
                           
                           FairCost
                           
                           
                           
                           
                           
                           Gains
                           
                           
                           
                           
                           
                           Losses
                           
                           
                           
                           
                           
                           ValueAvailable for saleGovernment sponsored enterprises
                           
                           $
                           11,615
                           
                           
                           
                           
                           $
                           1
                           
                           
                           
                           
                           $
                           76
                           
                           
                           
                           
                           $
                           11,540State and political subdivisions
                           
                           
                           5,267
                           
                           
                           
                           
                           
                           46
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           5,30916,882
                           
                           
                           
                           
                           
                           47
                           
                           
                           
                           
                           
                           80
                           
                           
                           
                           
                           
                           16,849Mortgage-backed securitiesFHLMC
                           
                           
                           13,540
                           
                           
                           
                           
                           
                           362
                           
                           
                           
                           
                           
                           15
                           
                           
                           
                           
                           
                           13,887FNMA
                           
                           
                           32,910
                           
                           
                           
                           
                           
                           807
                           
                           
                           
                           
                           
                           150
                           
                           
                           
                           
                           
                           33,567GNMA
                           
                           
                           5,122
                           
                           
                           
                           
                           
                           112
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           5,234Collateralized mortgage obligations
                           
                           
                           7,008
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           350
                           
                           
                           
                           
                           
                           6,65858,580
                           
                           
                           
                           
                           
                           1,281
                           
                           
                           
                           
                           
                           515
                           
                           
                           
                           
                           
                           59,346Total
                           
                           $
                           75,462
                           
                           
                           
                           
                           $
                           1,328
                           
                           
                           
                           
                           $
                           595
                           
                           
                           
                           
                           $
                           76,195Held to maturityMortgage-backed securitiesFHLMC
                           
                           $
                           1,830
                           
                           
                           
                           
                           $
                           76
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           1,906FNMA
                           
                           
                           7,395
                           
                           
                           
                           
                           
                           215
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           7,610$
                           9,225
                           
                           
                           
                           
                           $
                           291
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           9,516 Contractual maturities and yields on our investments that are
                     available for sale and are held to maturity at June 30, 2010 are
                     shown in the following table (dollars in thousands). Expected
                     maturities may differ from contractual maturities because issuers may
                     have the right to call or prepay obligations with or without call or
                     prepayment penalties. We had no securities with maturities less than
                     one year at June 30, 2010. One to Five Years
                           
                           
                           Five to Ten Years
                           
                           
                           Over Ten Years
                           
                           
                           TotalAmount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           Yield
                           
                           
                           Amount
                           
                           
                           YieldAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           4,498
                           
                           
                           2.30
                           %
                           $
                           -
                           
                           
                           -
                           
                           $
                           4,498
                           
                           
                           2.30
                           %State and political subdivisions
                           
                           
                           -
                           
                           
                           -
                           
                           
                           6,148
                           
                           
                           3.31
                           %
                           
                           1,927
                           
                           
                           3.87
                           %
                           
                           8,075
                           
                           
                           3.44
                           %Mortgage-backed securities
                           
                           
                           188
                           
                           
                           4.72
                           %
                           
                           1,772
                           
                           
                           2.55
                           %
                           
                           70,668
                           
                           
                           3.04
                           %
                           
                           72,628
                           
                           
                           3.03
                           %Total
                           
                           $
                           188
                           
                           
                           4.72
                           %
                           $
                           12,418
                           
                           
                           2.83
                           %
                           $
                           72,595
                           
                           
                           3.06
                           %
                           $
                           85,201
                           
                           
                           3.03
                           %Held to MaturityMortgage-backed securities
                           
                           $
                           -
                           
                           
                           -
                           
                           $
                           120
                           
                           
                           3.91
                           %
                           $
                           -
                           
                           
                           -
                           
                           $
                           120
                           
                           
                           3.91
                           % The tables below summarize gross unrealized losses on investment
                     securities and the fair market value of the related securities,
                     aggregated by investment category and length of time that individual
                     securities have been in a continuous unrealized loss position, at
                     June 30, 2010 and December 31, 2009. Less than 12 months
                           
                           
                           12 months or longer
                           
                           
                           Total#
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           Unrealizedlosses
                           
                           
                           #
                           
                           
                           Fairvalue
                           
                           
                           UnrealizedlossesAs of June 30, 2010Available for saleGovernment sponsored enterprises
                           
                           
                           1
                           
                           $
                           4,498
                           
                           $
                           2
                           
                           
                           -
                           
                           $
                           -
                           
                           $
                           -
                           
                           
                           1
                           
                           $
                           4,498
                           
                           $
                           2State and political subdivision
                           
                           
                           3
                           
                           
                           2,111
                           
                           
                           10
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           3
                           
                           
                           2,111
                           
                           
                           10Mortgage-backedFHLMC
                           
                           
                           2
                           
                           
                           4,477
                           
                           
                           45
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           2
                           
                           
                           4,477
                           
                           
                           45Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           -
                           
                           
                           -
                           
                           
                           1
                           
                           
                           2,890
                           
                           
                           350
                           
                           
                           1
                           
                           
                           2,890
                           
                           
                           3506
                           
                           $
                           11,086
                           
                           $
                           57
                           
                           
                           1
                           
                           $
                           2,890
                           
                           $
                           350
                           
                           
                           7
                           
                           $
                           13,976
                           
                           $
                           407
 32


Less than 12 months
                           
                           
                           
                           
                           
                           12 months or longer
                           
                           
                           
                           
                           
                           Total#
                           
                           
                           
                           
                           
                           Fairvalue
                           
                           
                           
                           
                           
                           Unrealizedlosses
                           
                           
                           
                           
                           
                           #
                           
                           
                           
                           
                           
                           Fairvalue
                           
                           
                           
                           
                           
                           Unrealizedlosses
                           
                           
                           
                           
                           
                           #
                           
                           
                           
                           
                           
                           Fairvalue
                           
                           
                           
                           
                           
                           UnrealizedlossesAs of December 31, 2009Available for saleGovernment sponsored enterprises
                           
                           
                           2
                           
                           
                           
                           
                           $
                           8,908
                           
                           
                           
                           
                           $
                           76
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           $
                           8,908
                           
                           
                           
                           
                           $
                           76State and political subdivisions
                           
                           
                           2
                           
                           
                           
                           
                           
                           855
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2
                           
                           
                           
                           
                           
                           855
                           
                           
                           
                           
                           
                           4Mortgage-backedFHLMC
                           
                           
                           1
                           
                           
                           
                           
                           
                           2,028
                           
                           
                           
                           
                           
                           15
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           1
                           
                           
                           
                           
                           
                           2,028
                           
                           
                           
                           
                           
                           15FNMA
                           
                           
                           4
                           
                           
                           
                           
                           
                           17,467
                           
                           
                           
                           
                           
                           150
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           17,467
                           
                           
                           
                           
                           
                           150Collateral mortgage obligations
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           1
                           
                           
                           
                           
                           
                           3,095
                           
                           
                           
                           
                           
                           350
                           
                           
                           
                           
                           
                           1
                           
                           
                           
                           
                           
                           3,095
                           
                           
                           
                           
                           
                           3509
                           
                           
                           
                           
                           $
                           29,258
                           
                           
                           
                           
                           $
                           245
                           
                           
                           
                           
                           
                           1
                           
                           
                           
                           
                           $
                           3,095
                           
                           
                           
                           
                           $
                           350
                           
                           
                           
                           
                           
                           10
                           
                           
                           
                           
                           $
                           32,353
                           
                           
                           
                           
                           $
                           595 At June 30, 2010, the Company had six individual investments that
                     were in an unrealized loss position. The unrealized losses were
                     primarily attributable to changes in interest rates, rather than
                     deterioration in credit quality. The majority of these securities are
                     government or agency securities and, therefore, pose minimal credit
                     risk. The Company considers the length of time and extent to which
                     the fair value of AFS debt securities have been less than cost to
                     conclude that such securities were not other-than-temporarily
                     impaired. We also consider other factors such as the financial
                     condition of the issuer including credit ratings and specific events
                     affecting the operations of the issuer, volatility of the security,
                     underlying assets that collateralize the debt security, and other
                     industry and macroeconomic conditions. As the company has no intent
                     to sell securities with unrealized losses and it is not
                     more-likely-than-not that we will be required to sell these
                     securities before recovery of amortized cost, we have concluded that
                     the securities are not impaired on an other-than-temporary basis. At June 30, 2010, we held two private label collateralized mortgage
                     obligations ("CMOs") with a book value of $6.4 million. Due to the
                     illiquid nature of these two securities, the Company has recorded a
                     liquidity discount in the form of an unrealized loss of $350,000. The
                     Company evaluates these securities quarterly based on the methodology
                     outlined below and based on this evaluation, believes that it will
                     receive all of the principal and interest in accordance with the
                     original contractual terms of the securities. Also, since the Company
                     has no intent to sell these securities and it is not
                     more-likely-than-not that we will be required to sell these
                     securities before recovery of amortized cost, we have concluded that
                     the securities are not impaired on an other-than-temporary basis. We utilized the Bloomberg Default model to evaluate our two
                     non-agency CMOs for other-than-temporary impairment. The Bloomberg
                     default model is comprised of five sub-models: Prepayment models
                     Foreclosure models
                     Liquidity models
                     Loss severity models
                     60+ Delinquency rate models Credit risk is prominent for collateralized non-agency mortgage
                     obligations, such as our private-label CMOs, because credit risk is
                     not assumed by any government sponsored agency. Credit risk, arising
                     from borrower default, is especially difficult to quantify given the
                     market's lack of clarity on future home prices as well as the impact
                     of loan attributes. The primary cause of borrower delinquency and
                     default is attributable to the loss of household income due to
                     unemployment. Therefore, the change in unemployment rates is a
                     predictor of the likelihood of mortgage loan delinquency and
                     foreclosures. Prime mortgage borrowers, with secure or steady
                     employment are more likely to stay current on their mortgages, even
                     if home prices drop significantly, as in a period of severe home
                     price depreciation. Subprime borrowers, on the other hand, who only
                     marginally sustained their initial home purchase, are more likely to
                     become delinquent when home prices drop precipitously. Higher
                     unemployment rates and home price depreciation have a positive
                     correlation with higher foreclosure rates. Other factors such as low FICO scores which measure a borrower's
                     credit worthiness, limited or reduced documentation at the time a
                     loan is originated, geographic location, and occupancy types such as
                     non-owner occupied, are also strong indicators of future loan
                     performance and higher mortgage delinquency and foreclosure rates. The prepayment and foreclosure models consider loan level inputs
                     including loan to value, loan size, FICO score, loan purpose, loan
                     type, property type, loan documentation, state of origin, and
                     weighted average coupon. In addition, the model
 33


includes macro-economic inputs such as interest rate, mortgage rates,
                     home price appreciation and unemployment rates based on the various
                     metropolitan areas. Regression analysis including logistical and
                     survival analysis are used for model development. The liquidation
                     model projections are derived from net foreclosure rates and the
                     transition matrices. The liquidation rates are calculated separately
                     according to judicial and non-judicial states. The loss severity models are calculated based on each loan
                     characteristics and other macro-economic inputs such as: Original loan to value
                     Cumulative home price appreciation
                     Liquidation markdown
                     Back interest owed
                     Property tax owed
                     Broker and lawyer fees Although, the individual loan level data was utilized as of June 30,
                     2010, the home price appreciation assumptions and the future
                     unemployment rate assumptions were as of December 1, 2009. The
                     current home price appreciation assumptions are as follows: Continue to decline at an annual rate of 10% till December of 2009
                     Stays at 0% for two years
                     Increases at an annual rate of 5% for two years
                     Increases at an annual rate of 3% for the remaining periods The unemployment rate assumptions are as follows: Continues to rise to 10.5% till January of 2010
                     Stay at 10.5% for 3 months
                     Declines to 5.8% over the next 5 years
                     Continue at 5.8% for the remaining periods Based on the independent calculations and assumptions, management
                     currently anticipates receiving all of the outstanding principal and
                     the related interest for each security. Management has reviewed the
                     independent assumptions utilized by the model, compared them to
                     actual results and believes that they are reasonable. However, there
                     is no precise method to predict if credit losses in the future
                     periods will exceed our current predictions. If actual results
                     significantly vary from the assumptions noted above, we may be
                     required to recognize losses that are later deemed to not be only
                     temporary in nature. The valuation change has been recorded as a
                     change in the unrealized gain/loss recognized in other comprehensive
                     income. Listed below is various historical data related to our two private label CMOs. CMO- A
                           
                           
                           
                           
                           
                           CMO-BBook value on 6-30-2010 (in thousands)
                           
                           
                           $3,187
                           
                           
                           
                           
                           
                           $3,240Year of origination
                           
                           
                           2006
                           
                           
                           
                           
                           
                           2006Original credit rating
                           
                           
                           Aaa,AAA
                           
                           
                           
                           
                           
                           Aaa,AAACurrent credit rating
                           
                           
                           Ba1,BBB-
                           
                           
                           
                           
                           
                           Caa1,CCOriginal credit support
                           
                           
                           15.62
                           
                           
                           
                           
                           
                           13.48Current credit support
                           
                           
                           13.88
                           
                           
                           
                           
                           
                           7.48Current coverage ratio
                           
                           
                           1.8
                           
                           
                           
                           
                           
                           .6Percentage of loans 60+ delinquent
                           
                           
                           22.8%
                           
                           
                           
                           
                           
                           38.3%Severity loss rate - 12 months
                           
                           
                           53%
                           
                           
                           
                           
                           
                           48%Constant prepayment rate:3 months
                           
                           
                           14.7%
                           
                           
                           
                           
                           
                           21.5%6 months
                           
                           
                           13.4
                           
                           
                           
                           
                           
                           15.512 months
                           
                           
                           14.1
                           
                           
                           
                           
                           
                           14.8
 34


CMO- A
                        
                        
                        
                        
                        
                        CMO-BWeighted average:Coupon
                        
                        
                        6.24%
                        
                        
                        
                        
                        
                        6.14%Months remaining
                        
                        
                        309
                        
                        
                        
                        
                        
                        307Loan size
                        
                        
                        $301,000
                        
                        
                        
                        
                        
                        $510,000Current loan to value
                        
                        
                        79%
                        
                        
                        
                        
                        
                        72%FICO scores:Original
                        
                        
                        736
                        
                        
                        
                        
                        
                        716Current
                        
                        
                        734
                        
                        
                        
                        
                        
                        713Current percentage of limited documents
                        
                        
                        38%
                        
                        
                        
                        
                        
                        63%Current percentage - owner occupied
                        
                        
                        89%
                        
                        
                        
                        
                        
                        81%Geographic concentration:Highest percentage
                        
                        
                        GA 77.9%
                        
                        
                        
                        
                        
                        CA 45.6%Second highest percentage
                        
                        
                        FL 15.8%
                        
                        
                        
                        
                        
                        NY 17.3% Other investments at June 30, 2010, consisted of FHLB stock with a
                     cost of $7.1 million, Federal Reserve Bank stock with a cost of $1.5
                     million, and investments in Greenville First Statutory Trust I and II
                     of $186,000 and $217,000, respectively. At June 30, 2010, our
                     investments included securities issued by Federal Home Loan Mortgage
                     Corporation, Federal National Mortgage Association, and Government
                     National Mortgage Association with carrying values of $24.9 million,
                     $40.5 million, and $1.3 million, respectively. At December 31, 2009, the $94.6 million in our investment securities
                     portfolio represented approximately 13.2% of our total assets. We
                     held Government sponsored enterprise securities, municipal
                     securities, and mortgage-backed securities with a fair value of $85.7
                     million and an amortized cost of $84.7 million for an unrealized gain
                     of $1.0 million. Contractual maturities and yields on our investments at December 31,
                     2009 are shown in the following table (dollars in thousands).
                     Expected maturities may differ from contractual maturities because
                     issuers may have the right to call or prepay obligations with or
                     without call or prepayment penalties. At December 31, 2009, we had no
                     securities with a maturity of less than one year. One to Five Years
                           
                           
                           
                           
                           
                           Five to Ten Years
                           
                           
                           
                           
                           
                           Over Ten Years
                           
                           
                           
                           
                           
                           TotalAmount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           Yield
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           YieldAvailable for SaleGovernment sponsored enterprises
                           
                           $
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           $
                           4,127
                           
                           
                           
                           
                           
                           3.81
                           %
                           
                           
                           
                           $
                           7,413
                           
                           
                           
                           
                           
                           5.06
                           %
                           
                           
                           
                           $
                           11,540
                           
                           
                           
                           
                           
                           4.62
                           %State and political subdivisions
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2,974
                           
                           
                           
                           
                           
                           3.79
                           %
                           
                           
                           
                           
                           2,335
                           
                           
                           
                           
                           
                           3.86
                           %
                           
                           
                           
                           
                           5,309
                           
                           
                           
                           
                           
                           3.81
                           %Mortgage-backed securities
                           
                           
                           251
                           
                           
                           
                           
                           
                           4.69
                           %
                           
                           
                           
                           
                           2,934
                           
                           
                           
                           
                           
                           3.72
                           %
                           
                           
                           
                           
                           56,161
                           
                           
                           
                           
                           
                           4.72
                           %
                           
                           
                           
                           
                           59,346
                           
                           
                           
                           
                           
                           4.65
                           %Total
                           
                           $
                           251
                           
                           
                           
                           
                           
                           4.69
                           %
                           
                           
                           
                           $
                           10,035
                           
                           
                           
                           
                           
                           3.65
                           %
                           
                           
                           
                           $
                           65,909
                           
                           
                           
                           
                           
                           4.73
                           %
                           
                           
                           
                           $
                           76,195
                           
                           
                           
                           
                           
                           4.59
                           %Held to MaturityMortgage-backed securities
                           
                           $
                           155
                           
                           
                           
                           
                           
                           3.97
                           %
                           
                           
                           
                           $
                           1,830
                           
                           
                           
                           
                           
                           4.35
                           %
                           
                           
                           
                           $
                           7,240
                           
                           
                           
                           
                           
                           4.65
                           %
                           
                           
                           
                           $
                           9,225
                           
                           
                           
                           
                           
                           4.58
                           % Other investments at December 31, 2009 consisted of FHLB stock with a
                     cost of $7.1 million, Federal Reserve Bank stock with a cost of $1.5
                     million, and investments in Greenville First Statutory Trust I and II
                     of $186,000 and $217,000, respectively. Loans Since loans typically provide higher interest yields than other types
                     of interest earning assets, a substantial percentage of our earning
                     assets are invested in our loan portfolio. For the three months ended
                     June 30, 2010 and 2009, average loans were $581.0 million and $567.0
                     million, respectively. Before the allowance for loan losses, total
                     loans outstanding at June 30, 2010 were $580.7 million. Average loans
                     for the year ended December 31, 2009 were $568.6 million. Before the
                     allowance for loan losses, total loans outstanding at December 31,
                     2009 were $574.3 million. The principal component of our loan portfolio is loans secured by
                     real estate mortgages. Most of our real estate loans are secured by
                     residential or commercial property. We do not generally originate
                     traditional long term residential mortgages, but we do issue
                     traditional second mortgage residential real estate loans and home
                     equity lines of credit. We obtain a security interest in real estate
                     whenever possible, in addition to any other available collateral.
                     This collateral is taken to increase the likelihood of the ultimate
                     repayment of the loan. Generally, we limit the loan-to-value ratio on
                     loans we make to 80%. Due to the short
 35


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 June 30, 2010 and December 31, 2009 (dollars in thousands). June 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Amount
                           
                           
                           
                           
                           
                           % of Total
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           % of TotalReal estate:Commercial:Owner occupied
                           
                           $
                           129,447
                           
                           
                           
                           
                           
                           22.3
                           %
                           
                           
                           
                           $
                           132,569
                           
                           
                           
                           
                           
                           23.1
                           %Non-owner occupied
                           
                           
                           165,865
                           
                           
                           
                           
                           
                           28.6
                           %
                           
                           
                           
                           
                           160,460
                           
                           
                           
                           
                           
                           27.9
                           %Construction
                           
                           
                           20,632
                           
                           
                           
                           
                           
                           3.5
                           %
                           
                           
                           
                           
                           22,741
                           
                           
                           
                           
                           
                           4.0
                           %Total commercial real estate
                           
                           
                           315,944
                           
                           
                           
                           
                           
                           54.4
                           %
                           
                           
                           
                           
                           315,770
                           
                           
                           
                           
                           
                           55.0
                           %Consumer:Residential
                           
                           
                           56,490
                           
                           
                           
                           
                           
                           9.7
                           %
                           
                           
                           
                           
                           55,377
                           
                           
                           
                           
                           
                           9.6
                           %Home equity
                           
                           
                           80,543
                           
                           
                           
                           
                           
                           13.9
                           %
                           
                           
                           
                           
                           74,348
                           
                           
                           
                           
                           
                           13.0
                           %Construction
                           
                           
                           7,490
                           
                           
                           
                           
                           
                           1.3
                           %
                           
                           
                           
                           
                           7,940
                           
                           
                           
                           
                           
                           1.4
                           %Total consumer real estate
                           
                           
                           144,523
                           
                           
                           
                           
                           
                           24.9
                           %
                           
                           
                           
                           
                           137,665
                           
                           
                           
                           
                           
                           24.0
                           %Total real estate
                           
                           
                           460,467
                           
                           
                           
                           
                           
                           79.3
                           %
                           
                           
                           
                           
                           453,435
                           
                           
                           
                           
                           
                           79.0
                           %Commercial business
                           
                           
                           111,258
                           
                           
                           
                           
                           
                           19.2
                           %
                           
                           
                           
                           
                           110,539
                           
                           
                           
                           
                           
                           19.3
                           %Consumer-other
                           
                           
                           9,638
                           
                           
                           
                           
                           
                           1.6
                           %
                           
                           
                           
                           
                           11,021
                           
                           
                           
                           
                           
                           1.9
                           %Deferred origination fees, net
                           
                           
                           (656
                           )
                           
                           
                           
                           
                           (0.1
                           )%
                           
                           
                           
                           
                           (725
                           )
                           
                           
                           
                           
                           (0.2
                           )%Total gross loans, net of deferred fees
                           
                           
                           580,707
                           
                           
                           
                           
                           
                           100.0
                           %
                           
                           
                           
                           
                           574,270
                           
                           
                           
                           
                           
                           100.0
                           %Lessallowance for loan losses
                           
                           
                           (8,352
                           )
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           (7,760
                           )Total loans, net
                           
                           $
                           572,355
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           566,510 Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables is based on the contractual
                     maturities of individual loans, including loans which may be subject
                     to renewal at their contractual maturity. Renewal of such loans is
                     subject to review and credit approval, as well as modification of
                     terms upon maturity. Actual repayments of loans may differ from the
                     maturities reflected below because borrowers have the right to prepay
                     obligations with or without prepayment penalties. The following table summarizes the loan maturity distribution by type
                     and related interest rate characteristics at June 30, 2010 (dollars
                     in thousands). One yearor less
                           
                           
                           
                           
                           
                           After onebut withinfive years
                           
                           
                           
                           
                           
                           After fiveyears
                           
                           
                           
                           
                           
                           TotalReal estate - mortgage
                           
                           $
                           95,382
                           
                           
                           
                           
                           $
                           261,134
                           
                           
                           
                           
                           $
                           75,829
                           
                           
                           
                           
                           $
                           432,345Real estate - construction
                           
                           
                           13,009
                           
                           
                           
                           
                           
                           14,056
                           
                           
                           
                           
                           
                           1,057
                           
                           
                           
                           
                           
                           28,122Total real estate
                           
                           
                           108,391
                           
                           
                           
                           
                           
                           275,190
                           
                           
                           
                           
                           
                           76,886
                           
                           
                           
                           
                           
                           460,467Commercial business
                           
                           
                           62,739
                           
                           
                           
                           
                           
                           46,248
                           
                           
                           
                           
                           
                           2,271
                           
                           
                           
                           
                           
                           111,258Consumer-other
                           
                           
                           5,460
                           
                           
                           
                           
                           
                           3,632
                           
                           
                           
                           
                           
                           546
                           
                           
                           
                           
                           
                           9,638Deferred origination fees, net
                           
                           
                           (185
                           )
                           
                           
                           
                           
                           (375
                           )
                           
                           
                           
                           
                           (96
                           )
                           
                           
                           
                           
                           (656
                           )Total gross loans, net of deferred fees
                           
                           $
                           176,405
                           
                           
                           
                           
                           $
                           324,695
                           
                           
                           
                           
                           $
                           79,607
                           
                           
                           
                           
                           $
                           580,707Loans maturing after one year with:Fixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           199,644Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           204,658
 36


The following table summarizes the loan maturity distribution by type
                     and related interest rate characteristics at December 31, 2009
                     (dollars in thousands). One yearor less
                           
                           
                           
                           
                           
                           After onebut withinfive years
                           
                           
                           
                           
                           
                           After fiveyears
                           
                           
                           
                           
                           
                           TotalReal estate- mortgage
                           
                           $
                           79,399
                           
                           
                           
                           
                           $
                           258,009
                           
                           
                           
                           
                           $
                           85,346
                           
                           
                           
                           
                           $
                           422,754Real estate- construction
                           
                           
                           14,405
                           
                           
                           
                           
                           
                           13,071
                           
                           
                           
                           
                           
                           3,205
                           
                           
                           
                           
                           
                           30,681Total real estate
                           
                           
                           93,804
                           
                           
                           
                           
                           
                           271,080
                           
                           
                           
                           
                           
                           88,551
                           
                           
                           
                           
                           
                           453,435Commercial
                           
                           
                           61,282
                           
                           
                           
                           
                           
                           47,322
                           
                           
                           
                           
                           
                           1,935
                           
                           
                           
                           
                           
                           110,539Consumer- other
                           
                           
                           6,984
                           
                           
                           
                           
                           
                           3,496
                           
                           
                           
                           
                           
                           541
                           
                           
                           
                           
                           
                           11,021Deferred origination fees, net
                           
                           
                           (198
                           )
                           
                           
                           
                           
                           (407
                           )
                           
                           
                           
                           
                           (120
                           )
                           
                           
                           
                           
                           (725
                           )Total gross loan, net of deferred fees
                           
                           $
                           161,872
                           
                           
                           
                           
                           $
                           321,491
                           
                           
                           
                           
                           $
                           90,907
                           
                           
                           
                           
                           $
                           574,270Loans maturing after one year with:Fixed interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           208,302Floating interest rates
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           $
                           204,096 Provision and Allowance for Loan Losses We have established an allowance for loan losses through a provision
                     for loan losses charged as an expense. Loan losses are charged
                     against the allowance when management believes the uncollectibility
                     of a loan balance, either in whole or in part, is confirmed.
                     Subsequent recoveries, if any, are credited to the allowance. In conjunction with the changes in the current economic environment
                     and as required by our Formal Agreement with the OCC, we have revised
                     and updated our allowance for losses policy. Management regularly
                     evaluates the allowance for loan losses and periodically reviews the
                     collectibility of the loans in light of historical experience, the
                     nature and volume of the loan portfolio, adverse situations that may
                     affect the borrower's ability to repay, estimated value of any
                     underlying collateral and prevailing economic conditions. This
                     evaluation is inherently subjective as it requires estimates that are
                     susceptible to significant revision as more information becomes
                     available. Periodically, we adjust the amount of the allowance based
                     on changing circumstances. We maintain an unallocated component of the allowance in order to
                     reflect the margin of imprecision inherent in the underlying
                     assumptions used in the methodologies for estimating specific and
                     general losses in the portfolio. Uncertainties and subjective issues
                     such as changes in the lending policies and procedures, changes in
                     the local/national economy, changes in volume or type of credits,
                     changes in volume/severity or problem loans, quality of loan review
                     and board of director oversight, concentrations of credit, and peer
                     group comparisons are factors considered in determining the
                     unallocated portion. For loans that are also classified as impaired, an allowance is
                     established when the discounted cash flows (or collateral value or
                     observable market price) of the impaired loan are lower than the
                     carrying value of that loan. A loan is considered impaired when,
                     based on current information and events, it is probable that the
                     Company will be unable to collect the scheduled payments of principal
                     or interest when due according to the contractual terms of the loan
                     agreement. Factors considered by management in determining impairment
                     include payment status, collateral value, and the probability of
                     collecting scheduled principal and interest payments when due. Loans
                     that experience insignificant payment delays and payment shortfalls
                     generally are not classified as impaired. Management determines the
                     significance of payment delays and payment shortfalls on a
                     case-by-case basis, taking into consideration all of the
                     circumstances surrounding the loan and the borrower, including the
                     length of the delay, the reasons for the delay, the borrower's prior
                     payment record, and the amount of the shortfall in relation to the
                     principal and interest owed. Impairment is measured on a loan by loan
                     basis for commercial and construction loans by either the present
                     value of expected future cash flows discounted at the loan's
                     effective interest rate, the loan's obtainable market price, or the
                     fair value of the collateral if the loan is collateral dependent.
                     Large groups of smaller balance homogeneous loans are collectively
                     evaluated for impairment. Accordingly, the Company does not
                     separately identify individual consumer and residential loans for
                     impairment disclosures, unless such loans are the subject of a
                     restructuring agreement. A significant portion of the loans in our loan portfolio have been
                     originated in the past five years. In general, loans do not begin to
                     show signs of credit deterioration or default until they have been
                     outstanding for some period of time, a process known as seasoning.
                     The benefit of having time for loans to "season," is that it allows a
                     company to evaluate how loans perform during different economic
                     cycles. We believe that the recent prolonged recession has allowed us
                     to evaluate the performance of our loan portfolio during "stressful"
                     times. If delinquencies and defaults increase, we may be required to
                     increase our provision for loan losses, which would adversely affect
                     our results of operations and financial condition.
 37


We do not allocate the allowance for loan losses to specific
                     categories of loans. Instead, we evaluate the adequacy of the
                     allowance for loan losses on an overall portfolio basis utilizing our
                     credit grading system which we apply to each loan. We have retained
                     an independent consultant to review the loan files on a test basis to
                     assess the grading of each loan. The allowance for loan losses was $8.4 million and $7.7 million at
                     June 30, 2010 and 2009, respectively, or 1.44% and 1.36% of
                     outstanding loans, respectively. At December 31, 2009, our allowance
                     for loan losses was $7.8 million, or 1.35% of outstanding loans, and
                     we had net charged-off loans of $3.6 million for the year ended
                     December 31, 2009. During the six months ended June 30, 2010 and 2009
                     we had net charge-offs of $3.1 million and $1.0 million,
                     respectively. The increase in the allowance for loan losses is a
                     result, in large part, of the general conditions of the current
                     economic climate, including, among other things, a rise in
                     unemployment, which affects borrowers' ability to repay loans, and a
                     decrease in values in the real estate market, which affects the value
                     of collateral securing certain loans with the Bank. The following table summarizes the activity related to our allowance
                     for loan losses for the six months ended June 30, 2010 and 2009
                     (dollars in thousands): June 30,2010
                           
                           
                           2009Balance at beginning of period
                           
                           $
                           7,760
                           
                           $
                           7,005Charge-offs:Commercial
                           
                           
                           (2,182
                           )
                           
                           (253
                           )Real estate-construction
                           
                           
                           (342
                           )
                           
                           (560
                           )Real estate-mortgage
                           
                           
                           (660
                           )
                           
                           (114
                           )Consumer
                           
                           
                           (45
                           )
                           
                           (68
                           )Total charge-offs
                           
                           
                           (3,229
                           )
                           
                           (995
                           )Recoveries:Commercial
                           
                           
                           119
                           
                           
                           3Real estate-construction
                           
                           
                           1
                           
                           
                           -Real estate-mortgage
                           
                           
                           1
                           
                           
                           -Consumer
                           
                           
                           -
                           
                           
                           1Total recoveries
                           
                           
                           121
                           
                           
                           4Net loans charged-off
                           
                           $
                           (3,108
                           )
                           $
                           (991
                           )Provision for loan losses
                           
                           
                           3,700
                           
                           
                           1,725Balance at end of period
                           
                           $
                           8,352
                           
                           $
                           7,739Allowance for loan losses to gross loans
                           
                           
                           1.44
                           %
                           
                           1.36
                           %Net charge-offs to average loans
                           
                           
                           1.08
                           %
                           
                           0.35
                           % We do not allocate the allowance for loan losses to specific
                     categories of loans. Instead, we evaluate the adequacy of the
                     allowance for loan losses on an overall portfolio basis utilizing our
                     credit grading system which we apply to each loan. We have retained
                     independent consultants to review the loan files on a test basis to
                     confirm the grading of our loans.
 38


Nonperforming Assets The following table shows the nonperforming assets and the related
                     percentage of nonperforming assets to total assets and gross loans as
                     of June 30, 2010 and December 31, 2009 (dollars in thousands).
                     Generally, a loan is placed on nonaccrual status when it becomes 90
                     days past due as to principal or interest, or when we believe, after
                     considering economic and business conditions and collection efforts,
                     that the borrower's financial condition is such that collection of
                     the loan is doubtful. A payment of interest on a loan that is
                     classified as nonaccrual is recognized as a reduction in principal
                     when received. June 30,2010
                           
                           
                           
                           
                           
                           December 31,2009Loans on nonaccrual:Mortgage
                           
                           
                           
                           
                           $
                           10,291
                           
                           
                           
                           
                           $
                           7,964Commercial
                           
                           
                           
                           
                           
                           2,057
                           
                           
                           
                           
                           
                           3,702Consumer
                           
                           
                           
                           
                           
                           4
                           
                           
                           
                           
                           
                           75Total nonaccrual loans
                           
                           
                           
                           
                           
                           12,352
                           
                           
                           
                           
                           
                           11,741Real estate acquired in settlement of loans
                           
                           
                           
                           
                           
                           5,471
                           
                           
                           
                           
                           
                           3,704Total nonperforming assets
                           
                           
                           
                           
                           $
                           17,823
                           
                           
                           
                           
                           $
                           15,445Loans over 90 days past due (1)
                           
                           
                           
                           
                           $
                           9,883
                           
                           
                           
                           
                           $
                           4,686Nonperforming assets as a percentage of:Total assets
                           
                           
                           
                           
                           
                           2.40
                           %
                           
                           
                           
                           
                           2.15
                           %Gross loans
                           
                           
                           
                           
                           
                           3.07
                           %
                           
                           
                           
                           
                           2.69
                           % (1) Loans over 90 days are included in nonaccrual loans At June 30, 2010 nonperforming assets were $17.8 million, or 2.40% of
                     total assets and 3.07% of gross loans. Comparatively, nonperforming
                     assets were $15.5 million, or 2.15% of total assets and 2.69% of
                     gross loans at December 31, 2009. Nonaccrual loans increased $611,000
                     to $12.4 million at June 30, 2010 from $11.7 million at December 31,
                     2009. This increase is primarily related to 12 commercial and
                     residential real estate properties. The amount of foregone interest
                     income on the nonaccrual loans in the first six months of 2010 was
                     approximately $347,000. The amount of interest income recorded in the
                     first six months of 2010 for loans that were on nonaccrual at June
                     30, 2010 was approximately $26,000. Other nonperforming assets include real estate acquired in settlement
                     of loans which increased by $1.8 million from December 31, 2009.
                     During the first six months of 2010 we added three new properties
                     totaling $2.0 million and sold one property and five lots of another
                     residential property which is under development for a total of
                     $170,000. In addition, we incurred a write-down of $10,000 on one of
                     our properties. The balance at June 30, 2010 includes nine commercial
                     properties totaling $4.0 million and two residential properties for
                     $1.5 million all of which are located in Upstate South Carolina. We
                     believe that these properties are appropriately valued at the lower
                     of cost or market as of June 30, 2010. In conjunction with the
                     changes in the current economic environment and as required by our
                     Formal Agreement with the OCC, we have revised and updated our credit
                     risk policy which addresses treatment of other real estate owned. As a general practice, most of our loans are originated with
                     relatively short maturities of five years or less. As a result, when
                     a loan reaches its maturity we frequently renew the loan and thus
                     extend its maturity using the same credit standards as those used
                     when the loan was first originated. Due to these loan practices, we
                     may, at times, renew loans which are classified as nonperforming
                     after evaluating the loan's collateral value and financial strength
                     of its guarantors. Nonperforming loans are renewed at terms generally
                     consistent with the ultimate source of repayment and rarely at
                     reduced rates. In these cases the Bank will seek additional credit
                     enhancements, such as additional collateral or additional guarantees
                     to further protect the loan. When a loan is no longer performing in
                     accordance with its stated terms, the Bank will typically seek
                     performance under the guarantee. In addition, approximately 80% of our loans are collateralized by
                     real estate and over 95% of our impaired loans are secured by real
                     estate. The Bank utilizes third party appraisers to determine the
                     fair value of collateral dependent loans. Our current loan and
                     appraisal policies require the Bank to obtain updated appraisals on
                     an annual basis, either through a new external appraisal or an
                     appraisal evaluation. Impaired loans are individually reviewed on a
                     quarterly basis to determine the level of impairment. As of June 30,
                     2010, we do not have any impaired loans carried at a value in excess
                     of the appraised value. We typically charge-off a portion or create a
                     specific reserve for impaired loans when we do not expect repayment
                     to occur as agreed upon under the original terms of the loan
                     agreement.
 39


At June 30, 2010 and 2009, impaired loans amounted to approximately
                     $11.2 million and $8.7 million, respectively. Specific reserves
                     allocated to these impaired loans totaled $1.7 million and $1.4
                     million at June 30, 2010 and 2009, respectively. At June 30, 2010,
                     there were approximately $3.9 million of impaired loans with specific
                     reserves and approximately $7.2 million in impaired loans for which
                     no specific reserve had been recognized. The average recorded
                     investment in impaired loans for the quarters ended June 30, 2010 and
                     2009 was $10.7 million and $9.2 million, respectively. The Company's loan approval process includes review of modifications
                     on all criticized loans greater than $100,000.  A loan is considered
                     to be a troubled debt restructuring ("TDR") when the debtor was
                     experiencing financial difficulties and the Company provided
                     concessions such that we will not collect all principal and interest
                     in accordance with the original terms of the loan agreement.  As of
                     June 30, 2010 and December 31, 2009 we determined that we had two
                     loans totaling $474,000 and $482,000, respectively, which we
                     considered troubled debt restructurings. These loans are included in
                     the nonaccrual loan amounts in the above table. Deposits and Other Interest-Bearing Liabilities Our primary source of funds for loans and investments is our
                     deposits, advances from the FHLB, and structured repurchase
                     agreements. National and local market trends over the past several
                     years suggest that consumers have moved an increasing percentage of
                     discretionary savings funds into investments such as annuities,
                     stocks, and fixed income mutual funds. Accordingly, it has become
                     more difficult to attract deposits. We have chosen to obtain a
                     portion of our certificates of deposits from areas outside of our
                     market. The deposits obtained outside of our market area generally
                     have lower rates than rates being offered for certificates of
                     deposits in our local market. We also utilize out-of-market deposits
                     in certain instances to obtain longer term deposits than are readily
                     available in our local market. We generally obtain out-of-market time
                     deposits of $100,000 or more through brokers with whom we maintain
                     ongoing relationships. In accordance with our Formal Agreement, we
                     have adopted guidelines regarding our use of brokered CDs that limit
                     our brokered CDs to 25% of total deposits and dictate that our
                     current interest rate risk profile determines the terms. In addition,
                     we do not obtain time deposits of $100,000 or more through the
                     Internet. These guidelines allow us to take advantage of the
                     attractive terms that wholesale funding can offer while mitigating
                     the inherent related risk. The amount of out-of-market deposits was $105.6 million at June 30,
                     2010 and $147.9 million at December 31, 2009.
                     As our wholesale deposits have matured during the past 12 months, we
                     have successfully replaced them with local deposits. While wholesale
                     deposits decreased $42.2 million during the first six months of 2010,
                     our retail deposits have increased $84.5 million. We anticipate being
                     able to continue to either renew or replace these out-of-market
                     deposits when they mature, although we may not be able to replace
                     them with deposits with the same terms or rates. Our loan-to-deposit
                     ratio was 108% and 116% at June 30, 2010 and
                     December 31, 2009, respectively The following table shows the average balance amounts and the average
                     rates paid on deposits held by us for the six months ended June 30,
                     2010 and 2009 (dollars in thousands). 2010
                           
                           
                           
                           
                           
                           2009Amount
                           
                           
                           
                           
                           
                           Rate
                           
                           
                           
                           
                           
                           Amount
                           
                           
                           
                           
                           
                           RateNoninterest bearing demand deposits
                           
                           $
                           42,033
                           
                           
                           
                           
                           
                           -
                           %
                           
                           
                           
                           $
                           34,536
                           
                           
                           
                           
                           
                           -
                           %Interest bearing demand deposits
                           
                           
                           72,528
                           
                           
                           
                           
                           
                           1.08
                           %
                           
                           
                           
                           
                           42,513
                           
                           
                           
                           
                           
                           0.68
                           %Money market accounts
                           
                           
                           91,340
                           
                           
                           
                           
                           
                           1.08
                           %
                           
                           
                           
                           
                           83,271
                           
                           
                           
                           
                           
                           1.17
                           %Savings accounts
                           
                           
                           2,590
                           
                           
                           
                           
                           
                           0.13
                           %
                           
                           
                           
                           
                           2,092
                           
                           
                           
                           
                           
                           0.18
                           %Time deposits less than $100,000
                           
                           
                           81,587
                           
                           
                           
                           
                           
                           2.29
                           %
                           
                           
                           
                           
                           44,291
                           
                           
                           
                           
                           
                           3.20
                           %Time deposits greater than $100,000
                           
                           
                           232,486
                           
                           
                           
                           
                           
                           2.67
                           %
                           
                           
                           
                           
                           274,459
                           
                           
                           
                           
                           
                           2.88
                           %Total deposits
                           
                           $
                           522,564
                           
                           
                           
                           
                           
                           1.89
                           %
                           
                           
                           
                           $
                           481,162
                           
                           
                           
                           
                           
                           2.20
                           % The $37.3 million increase in time deposits less than $100,000 for
                     the six months ended June 30, 2010 compared to the 2009 period and
                     the $42.0 million decrease in time deposits of $100,000 or more is a
                     result of our intense focus to replace our out-of-market deposits
                     with local deposits.
 40


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
                     $322.1 million and $246.8 million at June 30, 2010 and December 31,
                     2009, respectively. All of our time deposits are certificates of deposits. The maturity
                     distribution of our time deposits of $100,000 or more at June 30,
                     2010 was as follows (dollars in thousands): Three months or less
                           
                           $
                           48,042Over three through six months
                           
                           
                           42,756Over six through twelve months
                           
                           
                           58,190Over twelve months
                           
                           
                           64,975Total
                           
                           $
                           213,963 Capital Resources Total shareholders' equity at June 30, 2010 was $59.9 million. At
                     December 31, 2009, total shareholders' equity was $59.8 million. On February 27, 2009, as part of the CPP, the Company entered into
                     the CPP Purchase Agreement with the Treasury, pursuant to which we
                     sold 17,299 shares of our Series T Preferred Stock and the CPP
                     Warrant to purchase 330,554 shares of our common stock for an
                     aggregate purchase price of $17.3 million in cash. The Series T
                     Preferred Stock is entitled to cumulative dividends at a rate of 5%
                     per annum for the first five years, and 9% per annum thereafter. The
                     CPP Warrant has a 10-year term and is immediately exercisable upon
                     its issuance, with an exercise price, subject to anti-dilution
                     adjustments equal to $7.85 per share of the common stock. Under the CPP, we received $17.3 million through issuance of Series T
                     Preferred Stock and the CPP Warrant for common stock to the Treasury
                     Department. The Series T Preferred Stock issuance and the related CPP
                     Warrant both qualify for Tier 1 capital and added approximately 300
                     basis points to that measure. The fair value allocation of the $17.3
                     million between the shares of Series T Preferred Stock and the CPP
                     Warrant resulted in $15.9 million allocated to the shares of Series T
                     Preferred Stock and $1.4 million allocated to the CPP Warrant. See
                     discussion of shareholders' equity above for additional details. The following table shows the return on average assets (net income
                     divided by average total assets), return on average equity (net
                     income divided by average equity), and equity to assets ratio (total
                     equity divided by total assets) annualized for the six months ended
                     June 30, 2010 and the year ended December 31, 2009. Since our
                     inception, we have not paid cash dividends. June 30, 2010
                           
                           
                           
                           
                           
                           December 31, 2009Return on average assets
                           
                           
                           0.03
                           %
                           
                           
                           
                           
                           0.20
                           %Return on average equity
                           
                           
                           0.37
                           %
                           
                           
                           
                           
                           2.51
                           %Return on average common equity
                           
                           
                           (2.49
                           %)
                           
                           
                           
                           
                           0.64
                           %Equity to assets ratio
                           
                           
                           8.08
                           %
                           
                           
                           
                           
                           8.32
                           %Common equity to assets ratio
                           
                           
                           6.03
                           %
                           
                           
                           
                           
                           6.17
                           % Our return on average assets was 0.03% for the six months ended June
                     30, 2010 compared to 0.20% for the year ended December 31, 2009. In
                     addition, our return on average equity decreased to 0.37% from 2.51%
                     for the six months ended June 30, 2010 and the year ended December
                     31, 2009, respectively. Our equity to assets ratio at June 30, 2010
                     was 8.08% compared to 8.32% at December 31, 2009. In addition, our
                     return on average common equity was (2.49%) and our common equity to
                     total assets ratio was 6.03% for the six months ended June 30, 2010. Under the capital adequacy guidelines, regulatory capital is
                     classified into two tiers. These guidelines require an institution to
                     maintain a certain level of Tier 1 and Tier 2 capital to
                     risk-weighted assets. Tier 1 capital consists of common shareholders'
                     equity, excluding the unrealized gain or loss on securities available
                     for sale, minus certain intangible assets. In determining the amount
                     of risk-weighted assets, all assets, including certain off-balance
                     sheet assets, are multiplied by a risk-weight factor of 0% to 100%
                     based on the risks believed to be inherent in the type of asset. Tier
                     2 capital consists of Tier 1 capital plus the general reserve for
                     loan losses, subject to certain limitations. We are also required to
                     maintain capital at a minimum level based on total average assets,
                     which is known as the Tier 1 leverage ratio. At both the holding company and bank level, we are subject to various
                     regulatory capital requirements administered by the federal banking
                     agencies. To be considered "well-capitalized," we must maintain total
                     risk-based capital of at least 10%, Tier 1 capital of at least 6%,
                     and a leverage ratio of at least 5%. To be considered "adequately
                     capitalized" under these capital
 41


guidelines, we must maintain a minimum total risk-based capital of
                     8%, with at least 4% being Tier 1 capital. In addition, we must
                     maintain a minimum Tier 1 leverage ratio of at least 4%. In addition, due to
our current financial condition, the OCC has established Individual Minimum Capital Ratio levels of Tier 1 and total capital
for the Bank that are higher than the minimum and "well capitalized" ratios applicable to all banks. Specifically,
we must maintain total risk-based capital of at least 12%, Tier 1 capital of at least 10%, and a leverage ratio of at least
9%. As of June 30, 2010, our capital ratios exceed the Individual Minimum Capital Ratio levels established by the OCC and we
remain "well capitalized."  However, if we fail to maintain these required capital levels, then the OCC may deem
noncompliance to be an unsafe and unsound banking practice which may make the Bank subject to a capital directive, a consent order,
or such other administrative actions or sanctions as the OCC considers necessary. It is uncertain what actions, if any, the
OCC would take with respect to noncompliance with these ratios, what action steps the OCC might require the Bank to take to remedy
this situation, and whether such actions would be successful. The following table summarizes the capital amounts and ratios of the
                     Bank and the regulatory minimum requirements at June 30, 2010. Actual
                           
                           
                           Individual MinimumCapital RatioMinimum
                           
                           
                           For capitaladequacy purposesMinimum
                           
                           
                           To be well capitalizedunder promptcorrectiveaction provisionsMinimumAmount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           Ratio
                           
                           
                           Amount
                           
                           
                           RatioAs of June 30, 2010Total Capital (to risk weighted assets)
                           
                           
                           77,823
                           
                           
                           12.79
                           %
                           
                           72,991
                           
                           
                           12.0
                           %
                           
                           48,660
                           
                           
                           8.0
                           %
                           
                           60,826
                           
                           
                           10.0
                           %Tier 1 Capital (to risk weighted assets)
                           
                           
                           70,211
                           
                           
                           11.54
                           %
                           
                           60,826
                           
                           
                           10.0
                           %
                           
                           24,330
                           
                           
                           4.0
                           %
                           
                           36,495
                           
                           
                           6.0
                           %Tier 1 Capital (to average assets)
                           
                           
                           70,211
                           
                           
                           9.36
                           %
                           
                           67,542
                           
                           
                           9.0
                           %
                           
                           30,019
                           
                           
                           4.0
                           %
                           
                           37,523
                           
                           
                           5.0
                           % The ability of the Company to pay cash dividends is dependent upon
                     receiving cash in the form of dividends from the Bank. The dividends
                     that may be paid by the Bank to the Company are subject to legal
                     limitations and regulatory capital requirements. The approval of the
                     OCC is required if the total of all dividends declared by a national
                     bank in any calendar year exceeds the total of its net profits for
                     that year combined with its retained net profits for the preceding
                     two years, less any required transfers to surplus. Further, the
                     Company cannot pay cash dividends on its common stock during any
                     calendar quarter unless full dividends on the Series T preferred
                     stock for the dividend period ending during the calendar quarter have
                     been declared and the Company has not failed to pay a dividend in the
                     full amount of the Series T preferred stock with respect to the
                     period in which such dividend payment in respect of its common stock
                     would occur. In addition, the Company must currently obtain
                     preapproval of the Federal Reserve Board before paying dividends. Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation
                     has not been taken into account in our consolidated financial
                     statements. Rather, our financial statements have been prepared on an
                     historical cost basis in accordance with generally accepted
                     accounting principles. Unlike most industrial companies, our assets and liabilities are
                     primarily monetary in nature. Therefore, the effect of changes in
                     interest rates will have a more significant impact on our performance
                     than will the effect of changing prices and inflation in general. In
                     addition, interest rates may generally increase as the rate of
                     inflation increases, although not necessarily in the same magnitude.
                     As discussed previously, we seek to manage the relationships between
                     interest sensitive assets and liabilities in order to protect against
                     wide rate fluctuations, including those resulting from inflation. Off-Balance Sheet Risk Commitments to extend credit are agreements to lend money to a client
                     as long as the client has not violated any material condition
                     established in the contract. Commitments generally have fixed
                     expiration dates or other termination clauses and may require the
                     payment of a fee. At June 30, 2010, unfunded commitments to extend
                     credit were $86.5 million, of which $13.2 million was at fixed rates
                     and $73.3 million was at variable rates. At December 31, 2009,
                     unfunded commitments to extend credit were $90.5 million, of which
                     approximately $10.6 million was at fixed rates and $79.9 million was
                     at variable rates. A significant portion of the unfunded commitments
                     related to consumer equity lines of credit. Based on historical
                     experience, we
 42


anticipate that a significant portion of these lines
                     of credit will not be funded. We evaluate each client's credit
                     worthiness on a case-by-case basis. The amount of collateral
                     obtained, if deemed necessary by us upon extension of credit, is
                     based on our credit evaluation of the borrower. The type of
                     collateral varies but may include accounts receivable, inventory,
                     property, plant and equipment, and commercial and residential
                     real estate. At June 30, 2010 there was a $4.7 million commitment under letters of
                     credit. At December 31, 2009 there was a $5.5 million commitment
                     under letters of credit. The credit risk and collateral involved in
                     issuing letters of credit is essentially the same as that involved in
                     extending loan facilities to customers. Since most of the letters of
                     credit are expected to expire without being drawn upon, they do not
                     necessarily represent future cash requirements. Except as disclosed in this document, we are not involved in
                     off-balance sheet contractual relationships, unconsolidated related
                     entities that have off-balance sheet arrangements or transactions
                     that could result in liquidity needs or other commitments that
                     significantly impact earnings. Market Risk and Interest Rate Sensitivity Market risk is the risk of loss from adverse changes in market prices
                     and rates, which principally arises from interest rate risk inherent
                     in our lending, investing, deposit gathering, and borrowing
                     activities. Other types of market risks, such as foreign currency
                     exchange rate risk and commodity price risk, do not generally arise
                     in the normal course of our business. We actively monitor and manage our interest rate risk exposure in
                     order to control the mix and maturities of our assets and liabilities
                     utilizing a process we call asset/liability management. The essential
                     purposes of asset/liability management are to ensure adequate
                     liquidity and to maintain an appropriate balance between interest
                     sensitive assets and liabilities in order to minimize potentially
                     adverse impacts on earnings from changes in market interest rates.
                     Our asset/liability management committee ("ALCO") monitors and
                     considers methods of managing exposure to interest rate risk. We have
                     both an internal ALCO consisting of senior management that meets at
                     various times during each month and a board ALCO that meets monthly.
                     The ALCOs are responsible for maintaining the level of interest rate
                     sensitivity of our interest sensitive assets and liabilities within
                     board-approved limits. Our interest rate risk exposure is managed by measuring our interest
                     sensitivity "gap," which is the positive or negative dollar
                     difference between assets and liabilities that are subject to
                     interest rate repricing within a given period of time. Interest rate
                     sensitivity can be managed by repricing assets or liabilities,
                     selling securities available for sale, replacing an asset or
                     liability at maturity, or adjusting the interest rate during the life
                     of an asset or liability. Managing the amount of assets and
                     liabilities repricing in this same time interval helps to hedge the
                     risk and minimize the impact on net interest income of rising or
                     falling interest rates. We generally would benefit from increasing
                     market rates of interest when we have an asset-sensitive gap position
                     and generally would benefit from decreasing market rates of interest
                     when we are liability-sensitive.
 43


The following table sets forth information regarding our rate
                     sensitivity as of June 30, 2010 for each of the time intervals
                     indicated (dollars in thousands). Withinthreemonths
                           
                           
                           
                           
                           
                           After three butwithin twelvemonths
                           
                           
                           
                           
                           
                           After one butwithin fiveYears
                           
                           
                           
                           
                           
                           Afterfiveyears
                           
                           
                           
                           
                           
                           TotalInterest-earning assets:Federal funds sold
                           
                           $
                           22,567
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           22,567Investment securities
                           
                           
                           4,841
                           
                           
                           
                           
                           
                           12,733
                           
                           
                           
                           
                           
                           43,892
                           
                           
                           
                           
                           
                           23,855
                           
                           
                           
                           
                           
                           85,321Loans
                           
                           
                           307,208
                           
                           
                           
                           
                           
                           38,671
                           
                           
                           
                           
                           
                           185,361
                           
                           
                           
                           
                           
                           37,585
                           
                           
                           
                           
                           
                           568,825Total earning assets
                           
                           $
                           334,616
                           
                           
                           
                           
                           $
                           51,404
                           
                           
                           
                           
                           $
                           229,253
                           
                           
                           
                           
                           $
                           61,440
                           
                           
                           
                           
                           $
                           676,713Interest-bearing liabilities:Money market and NOW
                           
                           $
                           188,772
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           188,772Regular savings
                           
                           
                           2,831
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2,831Time deposits
                           
                           
                           69,349
                           
                           
                           
                           
                           
                           153,829
                           
                           
                           
                           
                           
                           73,550
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           296,728Note payable and other borrowings
                           
                           
                           86,100
                           
                           
                           
                           
                           
                           5,600
                           
                           
                           
                           
                           
                           20,000
                           
                           
                           
                           
                           
                           15,000
                           
                           
                           
                           
                           
                           126,700Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           360,455
                           
                           
                           
                           
                           $
                           159,429
                           
                           
                           
                           
                           $
                           93,550
                           
                           
                           
                           
                           $
                           15,000
                           
                           
                           
                           
                           $
                           628,434Period gap
                           
                           $
                           (25,839
                           )
                           
                           
                           
                           $
                           (108,025
                           )
                           
                           
                           
                           $
                           135,703
                           
                           
                           
                           
                           $
                           46,440Cumulative gap
                           
                           
                           (25,839
                           )
                           
                           
                           
                           
                           (133,864
                           )
                           
                           
                           
                           
                           1,839
                           
                           
                           
                           
                           
                           48,279Ratio of cumulative gap to total earning assets
                           
                           
                           (3.8
                           )%
                           
                           
                           
                           
                           (19.8
                           %)
                           
                           
                           
                           
                           0.3
                           %
                           
                           
                           
                           
                           7.1
                           % The following table sets forth information regarding our rate
                     sensitivity, as of December 31, 2009 at each of the time intervals
                     (dollars in thousands). Withinthreemonths
                           
                           
                           
                           
                           
                           After three butwithin twelvemonths
                           
                           
                           
                           
                           
                           After one butwithin fiveyears
                           
                           
                           
                           
                           
                           Afterfiveyears
                           
                           
                           
                           
                           
                           TotalInterest-earning assets:Federal funds sold
                           
                           $
                           6,462
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           6,462Investment securities
                           
                           
                           4,308
                           
                           
                           
                           
                           
                           11,466
                           
                           
                           
                           
                           
                           34,164
                           
                           
                           
                           
                           
                           35,482
                           
                           
                           
                           
                           
                           85,420Loans
                           
                           
                           297,982
                           
                           
                           
                           
                           
                           36,595
                           
                           
                           
                           
                           
                           175,521
                           
                           
                           
                           
                           
                           52,622
                           
                           
                           
                           
                           
                           562,720Total earning assets
                           
                           $
                           308,752
                           
                           
                           
                           
                           $
                           48,061
                           
                           
                           
                           
                           $
                           209,685
                           
                           
                           
                           
                           $
                           88,104
                           
                           
                           
                           
                           $
                           654,602Interest-bearing liabilities:Money market and NOW
                           
                           $
                           136,776
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           -
                           
                           
                           
                           
                           $
                           136,776Regular savings
                           
                           
                           2,375
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           2,375Time deposits
                           
                           
                           65,093
                           
                           
                           
                           
                           
                           154,740
                           
                           
                           
                           
                           
                           98,923
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           318,756FHLB advances and related debt
                           
                           
                           79,350
                           
                           
                           
                           
                           
                           22,000
                           
                           
                           
                           
                           
                           30,600
                           
                           
                           
                           
                           
                           15,000
                           
                           
                           
                           
                           
                           146,950Junior subordinated debentures
                           
                           
                           13,403
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           -
                           
                           
                           
                           
                           
                           13,403Total interest-bearing liabilities
                           
                           $
                           296,997
                           
                           
                           
                           
                           $
                           176,740
                           
                           
                           
                           
                           $
                           129,523
                           
                           
                           
                           
                           $
                           15,000
                           
                           
                           
                           
                           $
                           618,260Period gap
                           
                           $
                           11,755
                           
                           
                           
                           
                           $
                           (128,679
                           )
                           
                           
                           
                           $
                           80,162
                           
                           
                           
                           
                           $
                           73,104Cumulative Gap
                           
                           
                           11,755
                           
                           
                           
                           
                           
                           (116,924
                           )
                           
                           
                           
                           
                           (36,762
                           )
                           
                           
                           
                           
                           36,342Ratio of cumulative gap to total earning assets
                           
                           
                           1.8
                           %
                           
                           
                           
                           
                           (17.9
                           %)
                           
                           
                           
                           
                           (5.6
                           %)
                           
                           
                           
                           
                           5.6
                           % As measured over the one-year time intervals, we were liability
                     sensitive at both June 30, 2010 and December 31, 2009.  Our variable
                     rate loans and a majority of our deposits reprice over a 12-month
                     period. Approximately 51% of our loans were variable rate loans at
                     June 30, 2010 and December 31, 2009, respectively. The ratio of
                     cumulative gap to total earning assets
 44


after 12 months is (19.8%) because $133.9 million more liabilities
                     will reprice in a 12 month period than assets. However, our gap
                     analysis is not a precise indicator of our interest sensitivity
                     position. The analysis presents only a static view of the timing of
                     maturities and repricing opportunities, without taking into
                     consideration that changes in interest rates do not affect all assets
                     and liabilities equally. For example, rates paid on a substantial
                     portion of core deposits may change contractually within a relatively
                     short time frame, but those rates are viewed by us as significantly
                     less interest-sensitive than market-based rates such as those paid on
                     noncore deposits. Net interest income may be affected by other
                     significant factors in a given interest rate environment, including
                     changes in the volume and mix of interest-earning assets and
                     interest-bearing liabilities. At June 30, 2010, 82.7% of our interest-bearing liabilities were
                     either variable rate or had a maturity of less than one year. Of the
                     $360.5 million of interest-bearing liabilities set to reprice within
                     three months, 53.2% are transaction, money market or savings accounts
                     which are already at or near their lowest rates and provide little
                     opportunity for benefit should market rates continue to decline or
                     stay constant. However, certificates of deposit that are currently
                     maturing or renewing are repricing at lower rates. We expect to
                     benefit as these deposits reprice, even if market rates increase
                     slightly. At June 30, 2010, we had $133.9 million more liabilities
                     than assets that reprice within the next twelve months. Included in
                     our other borrowings are a number of FHLB advances and structured
                     repurchase agreements with callable features as of June 30, 2010. We
                     believe that the optionality on many of these borrowings will not be
                     exercised until interest rates increase significantly. In addition,
                     we believe that the interest rates that we pay on the majority of our
                     interest-bearing transaction accounts, would only be impacted by a
                     portion of any change in market rates. This key assumption is
                     utilized in our overall evaluation of our level of interest
                     sensitivity. Liquidity Risk Liquidity represents the ability of a company to convert assets into
                     cash or cash equivalents without significant loss, and the ability to
                     raise additional funds by increasing liabilities. Liquidity
                     management involves monitoring our sources and uses of funds in order
                     to meet our day-to-day cash flow requirements while maximizing
                     profits. Liquidity management is made more complicated because
                     different balance sheet components are subject to varying degrees of
                     management control. For example, the timing of maturities of our
                     investment portfolio is fairly predictable and subject to a high
                     degree of control at the time investment decisions are made. However,
                     net deposit inflows and outflows are far less predictable and are not
                     subject to the same degree of control. At June 30, 2010 and December 31, 2009, our liquid assets, consisting
                     of cash and due from banks and federal funds sold, amounted to $27.7
                     million and $12.1 million, or 3.7% and 1.7% of total assets,
                     respectively. Our investment securities at June 30, 2010 and December
                     31, 2009 amounted to $94.5 million and $94.6 million, or 12.8% and
                     13.2% of total assets, respectively. Investment securities
                     traditionally provide a secondary source of liquidity since they can
                     be converted into cash in a timely manner. However, a substantial
                     portion of these securities are pledged against outstanding debt.
                     Therefore, the related debt would need to be repaid prior to the
                     securities being sold in order for these securities to be converted
                     to cash. Our ability to maintain and expand our deposit base and borrowing
                     capabilities serves as our primary source of liquidity. We plan to
                     meet our future cash needs through the liquidation of temporary
                     investments, the generation of deposits, and from additional
                     borrowings. In addition, we will receive cash upon the maturity and
                     sale of loans and the maturity of investment securities. We maintain
                     three federal funds purchased lines of credit with correspondent
                     banks totaling $30.5 million for which there were no borrowings
                     against the lines at June 30, 2010. We are also a member of the Federal Home Loan Bank of Atlanta, from
                     which applications for borrowings can be made. The FHLB requires that
                     securities, qualifying mortgage loans, and stock of the FHLB owned by
                     the bank be pledged to secure any advances from the FHLB. The unused
                     borrowing capacity currently available from the FHLB at June 30, 2010
                     was $7.8 million, based on the bank's $7.1 million investment in FHLB
                     stock, as well as qualifying mortgages available to secure any future
                     borrowings. However, we are able to pledge additional securities to
                     the FHLB in order to increase our available borrowing capacity. We have a lease on our main office building with a remaining term of
                     eight years. The lease provides for annual lease rate escalations
                     based on cost of living adjustments. We believe that our existing stable base of core deposits, borrowings
                     from the FHLB, and short-term repurchase agreements will enable us to
                     successfully meet our long-term liquidity needs. As a result of the Treasury's CPP, we received $17.3 million of
                     capital on February 27, 2009 in exchange for 17,299 shares of
                     preferred stock. This additional capital should allow us to remain
                     well-capitalized and provide additional liquidity on our balance
                     sheet.
 45


Accounting, Reporting, and Regulatory Matters Recently Issued Accounting Standards The following is a summary of recent authoritative pronouncements
                     that affect accounting, reporting, and disclosure of financial
                     information by us: In March 2010, guidance related to derivatives and hedging was
                     amended to exempt embedded credit derivative features related to the
                     transfer of credit risk from potential bifurcation and separate
                     accounting. Embedded features related to other types of risk and
                     other embedded credit derivative features are not exempt from
                     potential bifurcation and separate accounting. The amendments were
                     effective for the Company on July 1, 2010. These amendments will have
                     no impact on the financial statements. Income Tax guidance was amended in April 2010 to reflect an SEC Staff
                     Announcement after the President signed the Health Care and Education
                     Reconciliation Act of 2010 on March 30, 2010, which amended the
                     Patient Protection and Affordable Care Act signed on March 23, 2010.
                     According to the announcement, although the bills were signed on
                     separate dates, regulatory bodies would not object if the two Acts
                     were considered together for accounting purposes. This view is based
                     on the SEC staff's understanding that the two Acts together represent
                     the current health care reforms as passed by Congress and signed by
                     the President. The amendment had no impact on the financial
                     statements. Stock compensation guidance was updated in April 2010 to address the
                     classification of employee share-based payment awards with exercise
                     prices dominated in the currency of a market in which a substantial
                     portion of the entity's equity securities trade. The guidance states
                     that these awards should not be considered to contain a condition
                     that is not a market, performance, or service condition. Share based
                     payments that contain conditions related to market, performance and
                     service must be recorded as liabilities. These awards should not be
                     classified as liabilities if they otherwise qualify to be classified
                     as equity. The amendments in this update are effective for fiscal
                     years, and interim periods within those fiscal years, beginning on or
                     after December 15, 2010. The Company does not expect the update to
                     have an impact on the financial statements. 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. Not applicable Item 4. Controls and Procedures. As of the end of the period covered by this report, we carried out an
                     evaluation, under the supervision and with the participation of our
                     management, including our Chief Executive Officer and Chief Financial
                     Officer, of the effectiveness of our disclosure controls and
                     procedures as defined in Exchange Act Rule 13a-15(e). Based upon that
                     evaluation, our Chief Executive Officer and Chief Financial Officer
                     have concluded that our current disclosure controls and procedures
                     are effective as of June 30, 2010. There have been no significant
                     changes in our internal controls over financial reporting during the
                     fiscal quarter ended June 30, 2010 that have materially affected, or
                     are reasonably likely to materially affect, our internal controls
                     over financial reporting. The design of any system of controls and procedures is based in part
                     upon certain assumptions about the likelihood of future events. There
                     can be no assurance that any design will succeed in achieving its
                     stated goals under all potential future conditions, regardless of
                     how remote. PART II. OTHER INFORMATION Item 1. Legal Proceedings. There are no material pending legal proceedings to which the company
                     is a party or of which any of its property is the subject. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable Item 3. Defaults Upon Senior Securities. Not applicable
 46


Item 4. [Removed and Reserved] 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.
 47


SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
                     the registrant has duly caused this report to be signed on its behalf
                     by the undersigned thereunto duly authorized.  SOUTHERN FIRST BANCSHARES, INC.RegistrantDate: August 12, 2010
                           
                           
                           
                           
                           
                           /s/R. Arthur Seaver, Jr.R. Arthur Seaver, Jr.Chief Executive OfficerDate: August 12, 2010
                           
                           
                           
                           
                           
                           /s/James M. Austin, IIIJames M. Austin, IIIChief Financial Officer
 48


INDEX TO EXHIBITS Exhibit Number
                           
                           
                           
                           
                           
                           Description31.1
                           
                           
                           
                           
                           
                           Rule 13a-14(a) Certification of the Principal Executive Officer.31.2
                           
                           
                           
                           
                           
                           Rule 13a-14(a) Certification of the Principal Financial Officer.32
                           
                           
                           
                           
                           
                           Section 1350 Certifications.
 49