CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

                This Report 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. These statements are based on many assumptions and estimates and are not guarantees of future performance.  Our actual results may differ materially from those projected 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," "will," "expect," "anticipate," "believe," "intend," "plan," and "estimate," as well as similar expressions, are meant to identify such forward-looking statements.  Potential risks and uncertainties include, but are not limited to those described below under Item 1A- Risk Factors and the following:

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

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

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

•         general economic conditions, either nationally or regionally and especially in our primary service area, becoming less

           favorable than expected resulting in, among other things, a deterioration in credit quality;

•         changes occurring in business conditions and inflation;

•         changes in technology;

•         changes in monetary and tax policies;

•         the level of allowance for loan loss;

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

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

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

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

•         changes in the securities markets; and

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

                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. 

PART I

Item 1.  Business 

General

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

                On October 26, 1999, the company sold 1,100,000 shares of its common stock at $10 per share and on November 30, 1999 sold 50,000 additional shares for a total of 1,150,000 shares (1,724,994 after adjustment of 3 for 2 stock split). The offering raised approximately $10.6 million, net of underwriting discounts, commissions and offering expenses. 

                On June 26, 2003, the Trust offered and sold $6.0 million of floating rate securities.  The company received the proceeds from the issuance of these securities and has reflected the obligation resulting from the receipt of the proceeds as junior subordinate debentures in the balance sheets.  The company invested $186,000 in the Trust.

                On November 17, 2003, shareholders of record as of November 3, 2003, received one additional share of stock for every two shares of stock owned prior to the 3 for 2 stock split.  All fractional shares were paid in cash.  The earnings per share amounts for all periods shown have been adjusted to reflect the 3 for 2 split.

On September 24, 2004, the company received $14.3 million from the sale of 800,000 common stock at a price of $17.875.  On October 15, 2004, the company's underwriter exercised its option to purchase an additional 120,000 shares at the same price.  The total gross proceeds were approximately $16.4 million.  The net proceeds to the company after offering costs and underwriter's discount were approximately $14.9 million

                On December 22, 2005, the Trust offered and sold $7.0 million of floating rate securities.  The company received the proceeds from the issuance of these securities and has reflected the obligation resulting from the receipt of the proceeds as junior subordinate debentures in the balance sheets.  The company invested $217,000 in the Trust.

Non-GAAP Financial Information

This Report also contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles ("GAAP").  Management uses these non-GAAP measures to analyze the Company's performance in comparison to prior years.   The Company incurred a one-time impairment charge of $1.5 million during 2005 which is discussed further in "Income Statement Review - Noninterest expenses."  Management uses operating measures, which exclude the impairment charge, in the calculation of certain of the Company's ratios to analyze on a consistent basis and over a longer period of time, the performance of which it considers to be its core banking operations.   These disclosures should not be viewed as a substitute for GAAP measures, and furthermore, the Company's non-GAAP measures may not necessarily be comparable to non-GAAP performance measures of other companies.  (See Item 6. Selected Financial Data.)

Marketing Focus

                Greenville First Bank commenced operations in January 2000 and at that time was the first community bank organized in the of Greenville, South Carolina in over 10 years.  During the 1990s, several community banks operating in the Greenville market were acquired by larger regional financial institutions.  We formed Greenville First to take advantage of market opportunities resulting from this continued consolidation of the financial services industry.  Responding to this opportunity, we created a marketing plan focusing on the professional market in Greenville, including doctors, dentists, and small business owners.  We serve this market with a client-focused structure called relationship teams, which provides each client with a specific banker contact and support team responsible for all of the client's 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 "Client FIRST."  We emphasize this Client FIRST culture in the training that we provide our employees, and we strive to reflect this Client FIRST culture in all aspects of our business. 

Location and Service Area

Our primary market is Greenville County, which is located in the upstate region of South Carolina, approximately midway between Atlanta and Charlotte on the heavily traveled I-85 business corridor.  It is South Carolina's most populous county with over 390,000 residents.  Greenville is also one of the state's wealthiest counties, with average household income of $61,023 in 2004.  In the past decade, Greenville County has attracted more than $6 billion in new business investments and 43,000 new jobs and is now considered the "economic engine of South Carolina."  During the same period, Greenville County was rated first in the United States by Site Selection Magazine for both new and expanding international firms and, in 2002, was ranked fifth out of America's top 50 cities for European business expansion.  Greenville was also recognized by Expansion Management Magazine in December 2000 for having the best worker training program in the United States.   

                Our primary service area consists of Greenville County, South Carolina.  We draw a large percentage of our business from the central portion of Greenville County, within a ten mile radius of our main office.  This principal service area is bounded by Rutherford Road to the north, Poinsett Highway to the west, Mauldin Road and Butler Road to the south, and Highway 14 and Batesville Road to the east.  Included in this area is the highest per capita income tract in the county. 

We opened our first branch office, located on The Parkway near Thornblade Country Club in Greenville, on March 14, 2005 and our second branch office, located in the mature and historic Augusta Road area of Greenville, on November 4, 2005.  We believe that the demographics and growth characteristics of these locations will provide us with significant opportunities to further develop existing client relationships and expand our client base. 

Lending Activities

General.  We emphasize a range of lending services, including real estate, commercial, and equity-line consumer loans to individuals and small- to medium-sized businesses and professional firms that are located in or conduct a substantial portion of their business in our market area.  Our underwriting standards vary for each type of loan, as described below.  Since loans typically provide higher interest yields than other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio.  At December 31, 2005, we had loans of $334.0 million, representing 82.4% of our total assets. 

We have focused our lending activities primarily on the professional market in Greenville, including doctors, dentists, and small business owners.  By focusing on this client base and by serving each client with a consistent relationship team of bankers, we have generated a loan portfolio with larger average loan amounts than we believe is typical for a community bank.  As of December 31, 2005, our average loan size was approximately $147,000.  Excluding home equity lines of credit, the average loan size was approximately $205,000.  At the same time, we have strived to maintain a diversified loan portfolio and limit the amount of our loans to any single client.  As of December 31, 2005, our 10 largest client loan relationships represented approximately $37.5 million, or 11.1% of our loan portfolio.

Loan Approval.  Certain credit risks are inherent in making loans.  These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.  We attempt to mitigate repayment risks by adhering to internal credit policies and procedures.  These policies and procedures include officer and client lending limits, a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies.  Our loan approval policies provide for various levels of officer lending authority.  When the amount of aggregate loans to a single borrower exceeds an individual officer's lending authority, the loan request will be considered by an officer with a higher lending limit or by the officers' loan committee, which is comprised of our three most senior lenders and our chief credit officer.  The officers' loan committee has pre-determined lending limits, and any loans in excess of this lending limit will be submitted for approval by the finance committee of our board or by the full board.  We do not make any loans to any director, officer, or employee of the bank unless the loan is approved by the board of directors of the bank and is on terms not more favorable to such person than would be available to a person not affiliated with the bank. 

                Management monitors exposure to credit risk from potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, as well as concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios.  As of December 31, 2005, approximately $44.5 million, or 13.1% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which fifty-five loans totaling approximately $11.0 million had loan-to-value ratios of 100% or more.  These types of loans are subject to strict underwriting standards and are more closely monitored than a loan with a low loan-to-value ratio.  In addition, our allowance for loan loss model considers and allocates a higher reserve for these types of loans.  Furthermore, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan's life.  For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans).  The various types of loans are individually underwritten and monitored to manage the associated risks. 

Credit Administration and Loan Review.  We maintain a continuous loan review system.  We also apply a credit grading system to each loan, and we use an independent consultant to review the loan files on a test basis to confirm the grading of each loan.  The bank has a chief credit officer who has over 35 years of banking and credit management experience that reviews and has established performance benchmarks in the areas of nonperforming assets, charge-offs, past dues, and loan documentation.  Each loan officer is responsible for each loan he or she makes, regardless of whether other individuals or committees joined in the approval.  This responsibility continues until the loan is repaid or until the loan is officially assigned to another officer. 

Lending Limits.  Our lending activities are subject to a variety of lending limits imposed by federal law.  In general, the bank is subject to a legal limit on loans to a single borrower equal to 15% of the bank's capital and unimpaired surplus.   Based upon the capitalization of the bank at December 31, 2005, we self-imposed a loan limit of $5.0 million per borrower, which represented approximately 85% of our legal lending limit at December 31, 2005.  These limits will increase or decrease in response to increases or decreases in the bank's level of capital.  We are able to sell participations in our larger loans to other financial institutions, which allow us to manage the risk involved in these loans and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.

Real Estate Mortgage Loans.  The principal component of our loan portfolio is loans secured by real estate mortgages.  We obtain a security interest in real estate whenever possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.  At December 31, 2005, loans secured by first or second mortgages on real estate made up approximately 82% of our loan portfolio. 

These loans will generally fall into one of four categories: commercial real estate loans, construction and development loans, residential real estate loans, or home equity loans.  Most of our real estate loans are secured by residential or commercial property.  Interest rates for all categories may be fixed or adjustable, and will more likely be fixed for shorter-term loans.  We generally charge an origination fee for each loan.  Other loan fees consist primarily of late charge fees.  Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate.  Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower's cash flow, creditworthiness, and ability to repay the loan.

       Commercial Real Estate Loans.  At December 31, 2005, our individual commercial real estate loans ranged in size from approximately $9,000 to $2.7 million, with an average loan size of approximately $359,000.  These loans generally have terms of five years or less, although payments may be structured on a longer amortization basis.  We evaluate each borrower on an individual basis and attempt to determine the business risks and credit profile of each borrower.  We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 85%.  We also generally require that a borrower's cash flow exceeds 115% of monthly debt service obligations.  In order to ensure secondary sources of payment and liquidity to support a loan request, we typically review all of the personal financial statements of the principal owners and require their personal guarantees.  At December 31, 2005, commercial real estate loans (other than construction loans) amounted to $169.2 million, or approximately 49.9% of our loan portfolio.  Of our commercial real estate loan portfolio, $97.0 million in loans were not owner-occupied properties, representing 57.3% of our commercial real estate portfolio and 28.6% of our total loan portfolio.  The remainder of our commercial real estate loan portfolio, $72.2 million in loans or 42.7% of the commercial loan portfolio, were owner-occupied.  Owner-occupied loans represented 21.3% of our total loan portfolio. 

       Construction and Development Real Estate Loans.  We offer adjustable and fixed rate residential and commercial construction loans to builders and developers and to consumers who wish to build their own homes.  At December 31, 2005, our commercial construction and development real estate loans ranged in size from approximately $38,000 to $2.9 million, with an average loan size of approximately $523,000.  At December 31, 2005, our individual residential construction and development real estate loans ranged in size from approximately $50,000 to $1.4 million, with an average loan size of approximately $258,000.  The duration of our construction and development loans generally is limited to 18 months, although payments may be structured on a longer amortization basis.  Construction and development loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and usually on the sale of the property.  Specific risks include:

•         cost overruns;

•         mismanaged construction;

•         inferior or improper construction techniques;

•         economic changes or downturns during construction;

•         a downturn in the real estate market;

•         rising interest rates which may prevent sale of the property; and

•         failure to sell completed projects in a timely manner.

We attempt to reduce the risk associated with construction and development loans by obtaining personal guarantees where possible and by keeping the loan-to-value ratio of the completed project at or below 80%.  At December 31, 2005, total construction loans amounted to $20.1 million, or 5.9% of our loan portfolio.  Included in the $20.1 million was $14.7 million, or 4.3% of our loan portfolio, that were commercial construction, and $5.4 million, or 1.6% of our loan portfolio, that were consumer construction loans.

•     Residential Real Estate Loans and Home Equity Loans.  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.  At December 31, 2005, our individual residential real estate loans ranged in size from $8,000 to $1.5 million, with an average loan size of approximately $236,000.  Generally, we limit the loan-to-value ratio on our residential real estate loans to 80%.  We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years.  We typically offer these fixed rate loans through a third party rather than originating and retaining these loans ourselves.  We typically originate and retain residential real estate loans only if they have adjustable rates.  We also offer home equity lines of credit.  At December 31, 2005, our individual home equity lines of credit ranged in size from $1,400 to $952,000, with an average of approximately $91,000.  Our underwriting criteria and the risks associated with, home equity loans and lines of credit are generally the same as those for first mortgage loans.  Home equity lines of credit typically have terms of five years or less.  We generally limit the extension of credit to 90% of the available equity of each property, although we may extend up to 100% of the available equity.  At December 31, 2005, residential real estate loans (other than construction loans) amounted to $88.0 million, or 26.0% of our loan portfolio.  Included in the residential real estate loans was $50.8 million, or 15.0% of our loan portfolio, in first and second mortgages on individuals' homes, and $37.3 million, or 11.0% of our loan portfolio, in home equity loans. 

Commercial Business Loans.  We make loans for commercial purposes in various lines of businesses, including the manufacturing, service industry, and professional service areas.  At December 31, 2005, our individual commercial business loans ranged in size from approximately $500 to $2.2 million, with an average loan size of approximately $113,000.  Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because commercial loans may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate.  At December 31, 2005, commercial business loans amounted to $53.8 million, or 15.9% of our loan portfolio.

We are eligible to offer small business loans utilizing government enhancements such as the Small Business Administration's ("SBA") 7(a) program and SBA's 504 programs.  These loans typically are partially guaranteed by the government, which helps to reduce their risk.  Government guarantees of SBA loans do not exceed, and are generally less than, 80% of the loan.  As of December 31, 2005, we had not originated any small business loans utilizing government enhancements.

Consumer Loans.  We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit.  Consumer loans are underwritten based on the borrower's income, current debt level, past credit history, and the availability and value of collateral.  Consumer rates are both fixed and variable, with terms negotiable.  At December 31, 2005, our individual consumer loans ranged in size from $500 to $1.2 million, with an average loan size of approximately $18,000.  Our installment loans typically amortize over periods up to 60 months.  We will offer consumer loans with a single maturity date when a specific source of repayment is available.  We typically require monthly payments of interest and a portion of the principal on our revolving loan products.  Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.  At December 31, 2005, consumer loans amounted to $8.2 million, or 2.4% of our loan portfolio.

Our principal source of funds is core deposits.  We offer a full range of deposit services, including checking accounts, commercial accounts, savings accounts, and other time deposits of various types, ranging from daily money market accounts to long-term certificates of deposit.  Because of the historically low interest rate environment in the last three years, we have chosen to obtain a portion of our deposits from outside our local market.  Our out-of-market, or wholesale, certificates of deposits represented 32.0% of total deposits at December 31, 2005.  The deposits obtained outside of our market area generally have lower rates than rates being offered for certificates of deposits in our local market.  This funding strategy allowed us to operate in only three locations, maintain a smaller staff, and not incur significant marketing costs to advertise deposit rates, which in turn has allowed us to maintain our focus on growing our loan portfolio.  In anticipation of rising interest rates and our continued growth, we have recently begun to focus on expanding our retail deposit program.  We opened two new retail deposit offices, one in the first quarter of 2005 and the other in the third quarter of 2005, which we believe will assist us in obtaining low cost transaction accounts that are less affected by rising rates.  Deposit rates are reviewed regularly by senior management of the bank.  We believe that the rates we offer are competitive with those offered by other financial institutions in our area.  We focus on customer service and our ClientFIRST culture to attract and retain deposits.

Other Banking Services

We offer other bank services including safe deposit boxes, traveler's checks, direct deposit, United States Savings Bonds, and banking by mail.  We earn fees for most of these services, including debit and credit card transactions, sales of checks, and wire transfers.  We also receive ATM transaction fees from transactions performed by our clients.  We are associated with the Honor, Cirrus, and Master-Money ATM networks, which are available to our clients throughout the country.  Since we outsource our ATM services, we are charged related transaction fees from our ATM service provider.  We have contracted with Fidelity Integrated Financial Solutions, an outside computer service company, to provide our core data processing services and our ATM processing.  By outsourcing these services, we believe we are able to reduce our overhead by matching the expense in each period to the transaction volume that occurs during the period, as a significant portion of the fee charged is directly related to the number of loan and deposit accounts and the related number of transactions we have during the period.  We believe that by being associated with a shared network of ATMs, we are better able to serve our clients and are able to attract clients who are accustomed to the convenience of using ATMs, although we do not believe that maintaining this association is critical to our success.  We also offer Internet banking services, bill payment services, and cash management services.  We do not expect to exercise trust powers during our next few years of operation.

 Competition

The banking business is highly competitive, and we experience competition in our market from many other financial institutions.  Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits.  We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in Greenville County and elsewhere.

As of June 30, 2005, there were 23 financial institutions other than us in Greenville County.  We compete with these institutions both in attracting deposits and in making loans.  In addition, we have to attract our customer base from other existing financial institutions and from new residents.  Many of our competitors are well-established, larger financial institutions with substantially greater resources and lending limits, such as BB&T, Bank of America, Wachovia, and Carolina First Bank.  These institutions offer some services, such as extensive and established branch networks and trust services that we do not provide.  In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.

We believe our commitment to quality and personalized banking services through our Client FIRST culture is a factor that contributes to our competitiveness.

Market Share

As of June 30, 2005, the most recent date for which market data is available, total deposits in the bank's primary service area were over $7.6 billion, which represented a 3.4% deposit increase from 2004.  At June 30, 2005,the bank represented 3.0% of the market. 

Employees

                At March 28, 2006, we employed a total of 55 full-time and 3 part-time employees.  We believe that our relations with our employees are good.

SUPERVISION AND REGULATION

Both the company and the bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations.  These laws and regulations are generally intended to protect depositors, not shareholders.  The following summary is qualified by reference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations may have a material effect on our business and prospects.  Beginning with the enactment of the Financial Institutions Reform Recovery and Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and the Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have been placed on the banking industry in the past several years, and additional changes have been proposed.  Our operations may be affected by legislative changes and the policies of various regulatory authorities.  We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.  It is intended only to briefly summarize some material provisions. 

USA PATRIOT Act of 2002

In October 2002, the USA PATRIOT Act of 2002 was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington D.C. that occurred on September 11, 2001.  The PATRIOT Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts.  The potential impact of the PATRIOT Act on financial institutions is significant and wide ranging.  The PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties who may be involved in terrorism or money laundering.

Check 21

On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21.  The new law, which became effective October 28, 2004, gives "substitute checks," such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.  Some of the major provisions include:

•      allowing check truncation without making it mandatory;

•      demanding that every financial institution communicate to accountholders in writing a description of its substitute check

        processing program and their rights under the law;

•       legalizing substitutions for and replacements of paper checks without agreement from consumers;

•       retaining in place the previously mandated electronic collection and return of checks between financial institutions only

        when individual agreements are in place;

•       requiring that when accountholders request verification, financial institutions produce the original check (or a copy that

        accurately represents the original) and demonstrate that the account debit was accurate and valid; and

•       requiring recrediting of funds to an individual's account on the next business day after a consumer proves that the

        financial institution has erred.

This new legislation will likely affect bank capital spending as many financial institutions assess whether technological or operational changes are necessary to stay competitive and take advantage of the new opportunities presented by Check 21.

Greenville First Bancshares, Inc.

We own 100% of the outstanding capital stock of the bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act. 

The Bank Holding Company Act.  Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and are required to file periodic reports of our operations and any additional information that the Federal Reserve may require.  Our activities at the bank and holding company levels are limited to:

•         banking and managing or controlling banks;

•         furnishing services to or performing services for our subsidiaries; and

•         engaging in other activities that the Federal Reserve determines to be so closely related to banking and managing or

          controlling banks as to be a proper incident thereto.

Investments, Control, and Activities.  With certain limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

•         acquiring substantially all the assets of any bank;

•         acquiring direct or indirect ownership or control of any voting shares of any bank if after the acquisition it would own or

          control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or

•         merging or consolidating with another bank holding company.

In addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated there under, require Federal Reserve approval prior to any person or company acquiring "control" of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company.  Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.  Our common stock is registered under the Securities Exchange Act of 1934.  The regulations provide a procedure for rebutting control when ownership of any class of voting securities is below 25%.

Under the Bank Holding Company Act, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in, nonbanking activities unless the Federal Reserve Board, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include:

•         making or servicing loans and certain types of leases;

•         engaging in certain insurance and discount brokerage activities;

•         performing certain data processing services;

•         acting in certain circumstances as a fiduciary or investment or financial adviser;

•         owning savings associations; and

•         making investments in certain corporations or projects designed primarily to promote community welfare.

The Federal Reserve Board imposes certain capital requirements on the company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted assets.  These requirements are described below under "- Greenville First Bank, N.A. - Capital Regulations."  Subject to our capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to the bank, and these loans may be repaid from dividends paid from the bank to the company.  Our ability to pay dividends will be subject to regulatory restrictions as described below in "- Greenville First Bank, N.A. - Dividends."  We are also able to raise capital for contribution to the bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Source of Strength; Cross-Guarantee.  In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to the bank and to commit resources to support the bank in circumstances in which we might not otherwise do so.  Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of the bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiaries if the agency determines that divestiture may aid the depository institution's financial condition.

The Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act was signed into law on November 12, 1999.  Among other things, the Act repealed the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companies that become financial holding companies to engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities.  The Act also authorizes activities that are "complementary" to financial activities.  We have not elected to become a financial holding company.

The Act is intended, in part, to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis.  Nevertheless, the Act may have the result of increasing the amount of competition that we face from larger institutions and other types of companies.  In fact, it is not possible to predict the full effect that the Act will have on us.

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval of the Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so.  We must receive the Board's approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

Greenville First Bank, N.A. 

The bank operates as a national banking association incorporated under the laws of the United States and subject to examination by the Office of the Comptroller of the Currency.  Deposits in the bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to a maximum amount, which is generally $100,000 per depositor subject to the aggregation rule.

The Office of the Comptroller of the Currency and the FDIC regulate or monitor virtually all areas of the bank's operations, including

•                      security devices and procedures;

•                      adequacy of capitalization and loss reserves;

•                      loans;

•                      investments;

•                      borrowings;

•                      deposits;

•                      mergers;

•                      issuances of securities;

•                      payment of dividends;

•                      interest rates payable on deposits;

•                      interest rates or fees chargeable on loans;

•                      establishment of branches;

•                      corporate reorganizations;

•                      maintenance of books and records; and

•                      adequacy of staff training to carry on safe lending and deposit gathering practices. 

The Office of the Comptroller of the Currency requires the bank to maintain specified capital ratios and imposes limitations on the bank's aggregate investment in real estate, bank premises, and furniture and fixtures.  The Office of the Comptroller of the Currency also requires the bank to prepare annual reports on the bank's financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

Under the FDIC Improvement Act, all insured institutions must undergo regular on-site examinations by their appropriate banking agency.  The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate.  Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.  The FDIC Improvement Act directs the FDIC to develop a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution.  The FDIC Improvement Act also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

•         internal controls;

•         information systems and audit systems;

•         loan documentation;

•         credit underwriting;

•         interest rate risk exposure; and

•         asset quality.

National banks and their holding companies which have been chartered or registered or have undergone a change in control within the past two years or which have been deemed by the Office of the Comptroller of the Currency or the Federal Reserve Board to be troubled institutions must give the Office of the Comptroller of the Currency or the Federal Reserve Board 30 days prior notice of the appointment of any senior executive officer or director.  Within the 30 day period, the Office of the Comptroller of the Currency or the Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.

Deposit Insurance - The FDIC has adopted a risk-based assessment system for determining an insured depository institutions' insurance assessment rate.  The system takes into account the risks attributable to different categories and concentrations of assets and liabilities.  An institution is placed into one of three capital categories:  (1) well capitalized; (2) adequately capitalized; or (3) undercapitalized.  The FDIC also assigns an institution to one of three supervisory subgroups, based on the FDIC's determination of the institution's financial condition and the risk posed to the deposit insurance funds.  Assessments range from 0 to 27 cents per $100 of deposits, depending on the institution's capital group and supervisory subgroup.  In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry.  Our FDIC assessment rate is currently 1A or .000036 per million of insured deposits, but may change in the future.  The FDIC may increase or decrease the assessment rate schedule on a semiannual basis.  An increase in the BIF assessment rate could have a material adverse effect on our earnings, depending on the amount of the increase.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

Transactions with Affiliates and Insiders - The bank is subject to the provisions of Section 23A of the Federal Reserve Act, which places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates.  The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the bank's capital and surplus and, as to all affiliates combined, to 20% of the bank's capital and surplus.  Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.  Compliance is also required with certain provisions designed to avoid the taking of low quality assets.

The bank also is subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.  The bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

The Federal Reserve Board has recently issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.  Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate.  In addition, under Regulation W:

•         a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

•         covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms

          and conditions that are consistent with safe and sound banking practices; and

•         with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market

          value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.  The regulation limits the amount of loans that could be purchased by a bank from an affiliate to not more than 100% of the bank's capital and surplus. 

Dividends - A national bank may not pay dividends from its capital.  All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts.  In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank's net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the Office of the Comptroller of the Currency 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.

Branching - National banks are required by the National Bank Act to adhere to branch office banking laws applicable to state banks in the states in which they are located.  Under current South Carolina law, the bank may open branch offices throughout South Carolina with the prior approval of the Office of the Comptroller of the Currency.  In addition, with prior regulatory approval, the bank is able to acquire existing banking operations in South Carolina.  Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks if allowed by state law, and interstate merging by banks.  South Carolina law, with limited exceptions, currently permits branching across state lines through interstate mergers.

Community Reinvestment Act - The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the Comptroller of the Currency, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods.  These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on our bank.

The Gramm-Leach-Bliley Act - Under the Gramm-Leach-Bliley Act, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form "financial subsidiaries" that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible.  The Gramm-Leach-Bliley Act imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank's equity investment in the financial subsidiary be deducted from the bank's assets and tangible equity for purposes of calculating the bank's capital adequacy.  In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and nonbank affiliates.

The Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy.  These provisions require financial institutions to disclose their policy for collecting and protecting confidential information.  Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market an institution's own products and services.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing to the consumer.

Other Regulations - Interest and other charges collected or contracted for by the bank are subject to state usury laws and federal laws concerning interest rates.  The bank's loan operations are also subject to federal laws applicable to credit transactions, such as:

•         the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

•         the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and

          public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the

          community it serves;

•         the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in

          extending credit;

•         the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

•         the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

•         the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. 

The deposit operations of the bank also are subject to:

•         the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and

          prescribes procedures for complying with administrative subpoenas of financial records; and

•         the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which

          governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the

          use of automated teller machines and other electronic banking services.

Capital Regulations - The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items.  The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios in excess of the minimums.  We have not received any notice indicating that either Greenville First Bancshares, Inc. or Greenville First Bank, N.A. is subject to higher capital requirements.  The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses.  Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

Under these guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50%, or 100%.  In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight applies.  These computations result in the total risk-weighted assets.  Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating.  Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.

The federal bank regulatory authorities also have implemented a leverage ratio, which is equal to Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines.  The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base.  The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points.

The FDIC Improvement Act established a new capital-based regulatory scheme designed to promote early intervention for troubled banks, which requires the FDIC to choose the least expensive resolution of bank failures.  The new capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized."  To qualify as a "well capitalized" institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.  Currently, we qualify as "well capitalized."

Under the FDIC Improvement Act regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decrease, as it moves downward through the capital categories.  Institutions that fall into one of the three undercapitalized categories may be required to do some or all of the following:

•                     submit a capital restoration plan;

•                     raise additional capital;

•                     restrict their growth, deposit interest rates, and other activities;

•                     improve their management;

•                     eliminate management fees; or

•                     divest themselves of all or a part of their operations.

These capital guidelines can affect us in several ways.  If we grow at a rapid pace, our capital may be depleted too quickly, and a capital infusion from our holding company may be necessary which could impact our ability to pay dividends.  Our capital levels currently are adequate; however, rapid growth, poor loan portfolio performance, poor earnings performance, or a combination of these factors could change our capital position in a relatively short period of time.  If we fail to meet these capital requirements, our bank would be required to develop and file a plan with the Office of the Comptroller of the Currency describing the means and a schedule for achieving the minimum capital requirements.  In addition, our bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless our bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.  A bank that is not "well capitalized" is also subject to certain limitations relating to so-called "brokered" deposits.  Bank holding companies controlling financial institutions can be called upon to boost the institutions' capital and to partially guarantee the institutions' performance under their capital restoration plans.

Enforcement Powers - The Financial Institutions Reform Recovery and Enforcement Act expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain "institution-affiliated parties."  Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs.  These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financial institution crimes have been increased to twenty years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.  Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies' power to issue cease-and-desist orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Effect of Governmental Monetary Policies - Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Bank's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Proposed Legislation and Regulatory Action.  New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation's financial institutions.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Item 1A.     Risk Factors.

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth and may not even be able to grow our business at all.  Because of our relatively small size and short operating history, it will be difficult for us to generate similar earnings growth as we continue to expand, and consequently our historical results of operations will not necessarily be indicative of our future operations.  Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence.  If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business.  Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid.  The risk of nonpayment is affected by a number of factors, including:

•      the duration of the credit;

•      credit risks of a particular customer;

•      changes in economic and industry conditions; and

•      in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio.  We periodically determine the amount of the allowance based on consideration of several factors, including:

•      an ongoing review of the quality, mix, and size of our overall loan portfolio;

•      our historical loan loss experience;

•      evaluation of economic conditions;

•      regular reviews of loan delinquencies and loan portfolio quality; and

•      the amount and quality of collateral, including guarantees, securing the loans.

There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods may exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required.  Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

 Lack of seasoning of our loan portfolio may increase the risk of credit defaults in the future.

                Due to the rapid growth of our bank over the past several years and our relatively short operating history, a large portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin.  In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as "seasoning."  As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.  If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

 An economic downturn, especially one affecting the Greenville County area, could reduce our customer base, our level of deposits, and demand for financial products such as loans.

Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our markets, especially in Greenville County.  If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed.  An economic downturn would likely contribute to the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business.  Interest received on loans represented approximately 92.0% of our interest income for the year ended December 31, 2005.  If an economic downturn occurs in the economy as a whole, or especially in the Greenville County area, borrowers may be less likely to repay their loans as scheduled.  Moreover, the value of real estate or other collateral that may secure our loans could be adversely affected.  Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies.  An economic downturn could, therefore, result in losses that materially and adversely affect our business.

Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings.  Depending on the terms and maturities of our assets and liabilities, a significant change in interest rates could have a material adverse effect on our profitability.  Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions.  While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer.  After operating in a historically low interest rate environment, the Federal Reserve began raising short-term interest rates in the second quarter of 2004.  We anticipate that we will benefit from a rising interest rate environment.  However, no assurance can be given that the Federal Reserve will actually continue to raise interest rates or that the results we anticipate will actually occur.

 We are dependent on key individuals and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

                R. Arthur Seaver, Jr., our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our growth.  If we lose the services of Mr. Seaver, he would be difficult to replace and our business and development could be materially and adversely affected. 

                Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel, including Jim Austin, Fred Gilmer, III, and Eddie Terrell.  Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel.  Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect our growth strategy and seriously harm our business, results of operations, and financial condition. 

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies.  Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices.  We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability.  Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices.  We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act.  For example, for the year ended December 31, 2006, we will be required to comply with Section 404 of the Sarbanes-Oxley Act and our management will be required to issue a report on our internal controls over financial reporting. We expect these new rules and regulations to continue to increase our accounting, legal, and other costs, and to make some activities more difficult, time consuming, and costly.  In the event that we are unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.

We are evaluating our internal control systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.  If we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting, the trading price of our common stock could decline and our ability to obtain any necessary equity or debt financing could suffer.

In addition, the new rules adopted as a result of the Sarbanes-Oxley Act could make it more difficult or more costly for us to obtain certain types of insurance, including directors' and officers' liability insurance, which could make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations.  To support our continued growth, we may need to raise additional capital.  Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control.  Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us.  If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.  In addition, if we decide to raise additional equity capital, your interest could be diluted.

We face strong competition for clients, which could prevent us from obtaining clients and may cause us to pay higher interest rates to attract clients.

The banking business is highly competitive, and we experience competition in our market from many other financial institutions.  We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in our primary market areas and elsewhere.  We compete with these institutions both in attracting deposits and in making loans.  In addition, we have to attract our client base from other existing financial institutions and from new residents.  Many of our competitors are well-established, larger financial institutions.  These institutions offer some services, such as extensive and established branch networks, that we do not provide.  There is a risk that we will not be able to compete successfully with other financial institutions in our market, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability.  In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. 

We will face risks with respect to future expansion and acquisitions or mergers.

We may seek to acquire other financial institutions or parts of those institutions.  We may also expand into new markets or lines of business or offer new products or services.  These activities would involve a number of risks, including:

•         the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks

          with respect to a target institution;

•         the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices

          and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the

          expansion;

•         the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our

          results of operations; and

•         the risk of loss of key employees and customers.

Item 1B.     Unresolved Staff Comments.

None

Item 2.        Properties.

Our main office facility is located at the corner of Haywood Road and Halton Road in downtown Greenville, South Carolina.  The building is a full service banking facility with three drive-through banking stations and an automatic teller machine.  We leased this building from Halton Properties, LLC, which is 100% owned by our director Mark A. Cothran, through the end of 2005 for approximately $351,000.  On December 30, 2005, we purchased the main office building for $3.1 million.  We anticipate that we will continue to operate in this location until the third quarter of 2006, when we plans to relocate the Haywood Road branch facility and our corporate office.  We plan to aggressively market either the leasing or the sale of the Haywood Road office building.

                The bank has signed a 10 year, five-month lease on a new site for its headquarters and main office that are to be relocated in 2006.  The lease provides for a substantial reduction in the rent rate for the first five months of the lease in order to induce the bank into the agreement.  The discounted rent will be amortized over the initial lease term.  Beginning in mid-2006, the monthly rent expense will be approximately $41,000.  The lease provides for annual lease rate escalations based on cost of living adjustments and renewal options for three additional five-year periods and will be analyzed and accounted for in accordance with FASB Technical Bulletin 85-3, "Accounting for Operating Leases with Scheduled Rent Increases." 

On March 5, 2004, we received permission from the OCC to open two additional offices.  We opened our first office on March 14, 2005, which is located in the Thornblade area of Greenville, South Carolina on The Parkway, near the intersection of I-85 and Pelham Road. 

We opened our second office, which is located at 2125 Augusta Road in Greenville, South Carolina, on November 4, 2005.  We lease the land for this office from Augusta Road Holdings, LLC, which is owned by one of our directors, Mark A. Cothran, for approximately $58,000 per year.  Rental payments are subject to increase in accordance with a formula based on the Consumer Price Index.  The initial term of the lease is 20 years. 

                We believe that all of our properties are adequately covered by insurance.

                  In the ordinary course of operations, we may be a party to various legal proceedings from time to time.  We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

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

                  No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5.        Market for Common Equity and Related Stockholder Matters.

  From the date of our initial public offering on October 26, 1999 to September 24, 2004, our common stock had been quoted on the OTC Bulletin Board under the symbol "GVBK."  On September 24, 2004, our common stock began trading on the Nasdaq National Market under the same symbol "GVBK.  On March 15, 2006, we had approximately 1,000 shareholders of record. 

                  The following table shows the reported high and low bid information reported by the OTC Bulletin Board for the first three quarters of 2004 and the high and low sales prices reported by the Nasdaq National Market for the fourth quarter of 2004 and for 2005.  The prices listed by the OTC Bulletin Board are quotations, which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

                We have not declared or paid any cash dividends on our common stock since our inception.  For the foreseeable future we do not intend to declare cash dividends.  We intend to retain earnings to grow our business and strengthen our capital base.  Our ability to pay dividends depends on the ability of our subsidiary, Greenville First Bank, to pay dividends to us.  As a national bank, Greenville First Bank may only pay dividends out of its net profits, after deducting expenses, including losses and bad debts.  In addition, the bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank's net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the Office of the Comptroller of the Currency (the "OCC") will be required if the total of all dividends declared in any calendar year by the bank exceeds the bank's net profits to date for that year combined with its retained net profits for the preceding two years less any required transfers to surplus.  The OCC also has the authority under federal law to enjoin a national bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.

                The following table sets forth equity compensation plan information at December 31, 2005.  The number of shares and the exercise prices for options and warrants has been adjusted for the 3 for 2 stock split in 2003.

Equity Compensation Plan Information

(1)          The number of shares of common stock available under the 2000 Greenville First Bancshares, Inc. Stock Incentive Plan automatically increases each time we issue additional shares so that it continues to equal 15% of our total outstanding shares.  Our board of directors has approved 258,750 shares of common stock to be issued as stock options.

(2)           Each of our organizers received, for no additional consideration, a warrant to purchase one share of common stock for $6.67 per share for each share purchased during our initial public offering.  The warrants are represented by separate warrant agreements.  One third of the warrants vest on each of the first three anniversaries of the date our bank opened for business, and they are exercisable in whole or in part during the ten year period following that date.  The warrants may not be assigned, pledged, or hypothecated in any way.  The 194,175 of shares issued pursuant to the exercise of such warrants are transferable, subject to compliance with applicable securities laws.  If the South Carolina Board of Financial Institutions or the FDIC issues a capital directive or other order requiring the bank to obtain additional capital, the warrants will be forfeited, if not immediately exercised.

Item 6.  Selected Financial Data

Item 6.  Selected Financial Data, Continued

(1) Includes nonperforming loans.

(2) Adjusted for all years presented giving retroactive effect to a three-for-two common stock split in November 2003.

(3) Computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income, net of

         securities gains or losses.

(4) Return on average assets, return on average equity and the efficiency ratio, on an operating basis, are calculated using operating

         earnings and operating noninterest expense and are non-GAAP measures which are further explained in "General - Non-GAAP Financial Measures."

As used in the table above, "n/m" means not a meaningful measurement.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operation.

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 footnote 1 to our audited consolidated financial statements as of December 31, 2005.

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

                We believe the allowance for loan losses is the critical accounting policy that requires the most significant 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, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses.  Under different conditions or using different assumptions, 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.

 GENERAL

We were incorporated in March 1999 to organize and serve as the holding company for Greenville First Bank, N.A.  Since we opened our bank in January 2000, we have experienced consistent growth in total assets, loans, deposits, and shareholders' equity.  We experienced our first quarterly profit in the third quarter of 2001, and we have been profitable in each subsequent quarter.  We became cumulatively profitable in the third quarter of 2003.

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 clients.  We have also included a discussion of the various components of this noninterest income, as well as of our noninterest expense. 

The operating efficiency ratio represents the percentage of one dollar of operating expense required to be incurred to earn a full dollar of revenue.  We compute our operating efficiency ratio by dividing noninterest expense, excluding the impairment on long-lived assets, by the sum of net interest income and noninterest income.  For the year ended December 31, 2005, we spent on average $0.49 to earn each $1.00 of revenue.

              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 this report.

Effect of Economic Trends 

During the three years ended December 31, 2003 and the six months ended June 30, 2004, our rates on  both short-term or variable rate earning assets and short-term or variable rate interest-bearing liabilities declined primarily as a result of the actions taken by the Federal Reserve to lower short-term rates.  Beginning in July of 2004 and through 2005, our short-term or variable rate interest-bearing liabilities began to increase as the Federal Reserve began to increase short-term rates.

During most of 2001 and during 2002, the United States experienced an economic decline.  During this period, the economy was affected by lower returns of the stock markets.  Economic data led the Federal Reserve to begin an aggressive program of reducing rates that moved the Federal Funds rate down 11 times during 2001 for a total reduction of 475 basis points.  During the fourth quarter of 2002 and the first quarter of 2003, the Federal Reserve reduced the Federal Funds rate down an additional 75 basis points, bringing the Federal Funds rate to its lowest level in 40 years.  During the last six months of 2004 and through 2005, the Federal Reserve increased rates 13 times for a total of 325 basis points.  The Federal Reserve chose to again increase rates 25 basis points at their meeting in January of 2006.

Despite sharply lower short-term rates, stimulus to the economy during 2003 was muted and consumer demand and business investment activity remained weak.  During all of 2003 and substantially all of the six months ended June 30, 2004, the financial markets operated under historically low interest rates. As a result of these unusual conditions, Congress passed an economic stimulus plan in 2003.  During 2004, many economists believed the economy began to show signs of strengthening and the Federal Reserve began to increase the short-term interest rates.  Many economists believe that the Federal Reserve will continue to increase rates during 2006.  The following discussion includes our analysis of the effect we anticipate these rising interest rates will have on our financial condition.  However, no assurance can be given that the Federal Reserve will actually continue to raise interest rates or that the results we anticipate will actually occur.

Results of Operations

 Income Statement Review

 Summary

               Net income for the year ended December 31, 2005 was $2.5 million, a 24.9% increase from $2.0 million for the year ended December 31, 2004.  Included in net income for the year ended December 31, 2005 is a non-operating expense of $930,000, net of taxes, from an impairment charge on long lived assets.  Excluding the $930,000 non-operating expense, net operating income was $3.4 million, an increase of $1.4 million, or 71.1%, from the previous year ended December 31, 2004.

The $1.4 million increase in net operating income resulted from a $3.4 million increase in net interest income, a $64,318 increase in noninterest income, a $310,000 reduction in the provision for loan losses offset by a $1.5 million increase, excluding the impairment charge, in noninterest expense and $307,209 additional income tax expense.  Our operating efficiency ratio was 49.23% and 51.58% for the years ended December 31, 2005 and 2004, respectively. 

            Our net income in 2004 increased $1.0 million, or 100.1%, compared to our net income in 2003 of $1.0 million.  The $1.0 million increase in net income resulted from a $2.5 million increase in net interest income, a $339,779 increase in noninterest income offset by a $260,000 additional provision for loan losses, a $1.0 million increase  in noninterest expense and $617,188 higher income tax expense.  Our efficiency ratio was 51.58% and 59.04% for the years ended December 31, 2004 and 2003, respectively. 

Net Interest Income

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin.  The continuous growth in our loan portfolio is the primary driver of the increase in net interest income.  During the three years ended December 31, 2005, our loan portfolio had increased an average of $62.0 million per year.  The growth in 2005 was $57.4 million.  We anticipate the growth in loans will continue to drive the growth in assets and the growth in net interest income.  However, no assurance can be given that we will be able to continue to increase loans at the same levels we have experienced in the past. 

Our decision to grow the loan portfolio at the current pace created the need for a higher level of capital and the need to increase deposits and borrowings.  This loan growth strategy also resulted in a significant portion of our assets being in higher earning loans than in lower yielding investments.  At December 31, 2005, loans represented 82.4% of total assets, while investments and federal funds sold represented 13.7% of total assets.  While we plan to continue our focus on increasing the loan portfolio, as rates on investment securities begin to rise and additional  deposits are obtained, we also anticipate increasing the size of the investment portfolio. 

The historically low interest rate environment in the last three years allowed us to obtain short-term borrowings and wholesale certificates of deposit at rates that were lower than certificate of deposit rates being offered in our local market.  Therefore, we decided not to begin our retail deposit expansion program until the beginning of 2005.  This funding strategy allowed us to operate in one location until 2005, maintain a smaller staff, and not incur marketing costs to advertise deposit rates, which in turn allowed us to focus on the fast growing loan portfolio.  At December 31, 2005, retail deposits represented $172.7 million, or 42.6% of total assets, borrowings represented $107.6 million, or 26.5% of total assets, and wholesale out-of-market deposits represented $81.4 million, or 20.1% of total assets.

In anticipation of rising interest rates, we opened one retail deposit office in March and a second in November of 2005.  We plan to focus our efforts at these two locations on obtaining low cost transaction accounts that are less affected by rising rates.  Also, in anticipation of rising rates, during 2005, we offered aggressive promotional rates on new checking accounts and new money market accounts.  Based on prior experience, we anticipate the majority of these funds to be retained at the end of the promotion.  Our goal is to increase both the percentage of assets being funded by "in market" retail deposits and to increase the percentage of low-cost transaction accounts to total deposits.  No assurance can be given that these objectives will be achieved; however, we anticipate that the two additional retail deposit offices will assist us in meeting these objectives.  We also anticipate the current deposit promotion and the opening of the two new offices will continue to have a negative impact on earnings in the year ending 2006.  However, we believe that these two strategies will provide additional clients in our local market and will provide a lower alternative cost of funding in a higher or rising interest rate environment, which we believe will increase earnings in future periods.

As more fully discussed in the "- Market Risk" and "- Liquidity and Interest Rate Sensitivity" sections below, at December 31, 2005, 61.0% of our loans had variable rates.  Given our high percentage of rate-sensitive loans, our primary focus during the three years ended December 31, 2005 has been to obtain short-term liabilities to fund our asset growth.  This strategy allows us to manage the impact on our earnings resulting from changes in market interest rates. 

Also in anticipation of rising rates, in May 2004 we converted a total of $25.0 million of short-term deposits and borrowings with a term of less than three months into $25.0 million of deposits and borrowings with a weighted average life of five years.  At December 31, 2005,  72.2% of interest-bearing liabilities had a maturity of less than one year.  We believe that we are positioned to benefit from future increases in short-term rates.  At December 31, 2005, we had $62.1 million more assets than liabilities that reprice within the next three months. 

We intend to maintain a capital level for the bank that exceeds the OCC requirements to be classified as a "well capitalized" bank.  To provide the additional capital needed to support our bank's growth in assets, in 2003 we issued $6.2 million in junior subordinated debentures in connection with our trust preferred securities offering.  During 2004, we issued 920,000 additional shares of common stock that resulted in $14.9 million of additional capital.  In 2005, we issued an additional $7.2 million in junior subordinated debentures in a second trust preferred securities offering.  The company also has a $4.5 million unused short-term holding company line of credit that could be utilized to provide additional capital for the bank if deemed necessary. As of December 31, 2005, the company's regulatory capital levels were over $15.5 million in excess of the various well capitalized requirements.

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

Our net interest income margin for the three years ended December 31, 2005, exceeded our net interest spread because we had more interest-earning assets than interest-bearing liabilities.  Average interest-earning assets exceeded average interest-bearing liabilities by $45.8 million, $29.5 million, and $21.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.  The cost of the two additional retail offices is expected to reduce the amount by which interest-earning assets exceed interest-bearing liabilities.

During the two years ended December 31, 2004, our rates on both short-term or variable rate earning-assets and short-term or variable rate interest-bearing liabilities declined primarily as a result of the actions taken by the Federal Reserve in 2002 and 2003 to lower short-term rates.

The impact of the Federal Reserve's actions during the two years ended December 31, 2004, resulted in a decline in both the yields on our variable rate assets and the rates that we paid for our short-term deposits and borrowings.  Our net interest spread and net interest margins also declined since more of our rate sensitive assets repriced sooner than our rate sensitive liabilities during the two year period ending December 31, 2004.  Our net interest margin for the years ended December 31, 2004, and 2003 was 3.17% and 3.24%, respectively. 

During the last six months of 2004 and the twelve months in 2005, the Federal Reserve increased rates thirteen times for a total of 325 basis points. The Federal Reserve actions resulted in our net interest margin increasing during both the second half of 2004 and the 2005 year.  As a result of the Federal Reserve's actions to increase the interest rate thirteen times during the eighteen months ending December 31, 2005, our rates on both short-term or variable rate earning-assets and short-term or variable rate interest-bearing liabilities increased during 2005.  Our net interest margin was 3.45% for the year ending 2005 compared to 3.17% for the 2004 year.

We have included a number of unaudited tables to assist in our description of various measures of our financial performance.  For example, the "Average Balances" 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 2005, 2004, and 2003.  A review of these tables 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 helps demonstrate 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.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities.  We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities.  We derived average balances from the daily balances throughout the periods indicated.  During the same periods, we had no interest-bearing deposits in other banks or any securities purchased with agreements to resell.  All investments were owned at an original maturity of over one year.  Nonaccrual loans are included in earning assets 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, and Rates

For the Years Ended December 31,

Our net interest spread was 3.04% for the year ended December 31, 2005, compared to 2.93% for the year ended December 31, 2004 and 2.99% for the year ended December 31, 2003.  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 net interest margin is calculated as net interest income divided by average interest-earning assets.  Our net interest margin for the period ended December 31, 2005 was 3.45%, compared to 3.17% for the year ended December 31, 2004 and 3.24% for the year ended December 31, 2003.  During 2005, interest-earning assets averaged $350.3 million, compared to $272.5 million in 2004 and $188.5 million in 2003.  

The net interest spread and net interest margin declined during the two years ended December 31, 2004 as a result of the bank having more interest-earning assets than interest-bearing liabilities that repriced as market rates declined over most of the two year period.  The net interest spread and net interest margin began to increase during 2005 as the bank had more interest-earning assets than interest-bearing liabilities that repriced as market rates increased during the second half of 2004 and the twelve months of 2005.

 Net interest income, the largest component of our income, was $12.1 million, $8.6 million, and $6.1 million, for the years ended December 31, 2005, 2004, and 2003, respectively.  The significant increase in both 2005 and 2004 related primarily to the net effect of higher levels of both average earning assets and interest-bearing liabilities.  In 2005 and 2004, average earning assets increased $77.8 million and $84.1 million, respectively.  During the same periods, average interest-bearing liabilities increased $61.5 million and $76.3 million, respectively. 

The $3.4 million increase in net interest income for the year ended December 31, 2005 compared to the same period in 2004 resulted primarily from a $2.5 million increase related to the impact of higher average earning assets and interest-bearing liabilities during the year ended December 31, 2005 compared to the same period in 2004.  The remaining increase is largely a result of the impact of higher interest rates on both interest-earning and interest-bearing liabilities.  The $2.5 million increase in net interest income for the year ended December 31, 2004 compared to the same period in 2003 resulted from a $2.7 million increase in net interest income due to volume offset by a $120,000 decrease in net interest income due to rate.  The increase in net income was caused by higher average earning assets and interest-bearing liabilities, while the decrease in net interest income was related to lower net interest margin.

                Interest income for the year ended December 31, 2005 was $21.7 million, consisting of $19.9 million on loans, $1.6 million on investments, and $104,414 on federal funds sold.  Interest income for the same period ended December 31, 2004 was $14.0 million, consisting of $13.0 million on loans, $966,653 on investments, and $22,751 on federal funds sold.  Interest income for 2003 was $9.7 million, consisting of $9.2 million on loans, $517,005 on investments, and $18,171 on federal funds sold.  Interest on loans for the years ended December 31, 2005, 2004 and 2003 represented 92.0%, 92.9% and 94.5%, respectively, of total interest income, while income from investments and federal funds sold represented 8.0%, 7.1% and 5.5% of total interest income for the years ended December 31, 2005, 2004 and 2003, respectively.  The high percentage of interest income from loans related to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments.  Average loans represented 88.6%, 91.0% and 92.5% of average interest-earning assets for the years ended December 31, 2005, 2004 and 2003, respectively.  Included in interest income on loans for the years ended December 31, 2005, 2004 and 2003 was $604,564, $496,119 and $349,887, respectively, related to the net amortization of loan fees and capitalized loan origination costs.

Interest expense for the year ended December 31, 2005 was $9.6 million, a 80.3% increase compared to $5.3 million for the year ended December 31, 2004.  For the years ended December 31, 2005 and 2004, interest expense consisted of $6.0 million and $3.6 million, respectively, related to deposits and $3.5 million and $1.7 million, respectively, related to borrowings.  Interest expense for the year ended December 31, 2003 was $3.6 million, consisting of $2.8 million related to deposits and $850,989 related to borrowings.  Interest expense on deposits for the years ended December 31, 2005, 2004 and 2003 represented 63.0%, 67.2% and 76.5%, respectively, of total interest expense, while interest expense on borrowings represented 37.0%, 32.8% and 23.5%, respectively, of total interest expense.  The smaller increase in interest expense on deposits compared to the increase in interest on borrowings during the year ended December 31, 2004 resulted from our decision to delay our retail deposit office expansion program and instead utilize additional borrowings from both the FHLB, and from the sale of securities under agreements to repurchase with brokers.  During the year ended December 31, 2005, average interest-bearing deposits were higher by $39.5 million than for the same period in 2004, while FHLB advances and other borrowings $22.0 million higher than for the same period in 2004.  Average interest-bearing deposits were higher by $38.5 million during the year ended December 31, 2004 than for the same period 2003, while FHLB advances and other borrowings during 2004 were $37.8 million higher than for the same period in 2003. 

During the year ended December 31, 2004, we were able to pledge additional collateral to the FHLB, allowing us the ability to increase our FHLB borrowings.  Both the short-term borrowings related to the sale of securities under agreements to repurchase and the FHLB advances provide us with the opportunity to obtain low cost funding with various maturities similar to the maturities on our loans and investments. 

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.

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.

                 Included in the statement of income for the years ended December 31, 2005, 2004 and 2003 is a noncash expense related to the provision for loan losses of $1.0 million, $1.3 million and $1.1 million, respectively.  The additional provision added to our allowance for loan losses in each year resulted in a net increase in the allowance for loan losses of $772,952, $1.0 million, and $881,001 for the years ended December 31, 2005, 2004 and 2003, respectively.  The allowance for loan losses did not increase by the entire amount of each of the provisions for loan losses because we reported net charge-offs of $227,048, $298,505 and $168,999 for the years ended December 31, 2005, 2004 and 2003, respectively.  The net charge-offs during 2005 represented 0.07% of the average outstanding loan portfolio for the year ended December 31, 2005.  Net charge-offs during 2004 and 2003 represented 0.12% and 0.10%, respectively, of the average outstanding loan portfolio for the years ended December 31, 2004 and 2003.  The increases in the allowance for each of the years ended December 31, 2005, 2004 and 2003, related to our decision to increase the allowance in response to the $58.2 million, $71.6 million and $58.9 million growth in loans for the years ended December 31, 2005, 2004 and 2003, respectively.  The loan loss reserve was $4.5 million, $3.7 million and $2.7 million as of December 31, 2005, 2004 and 2003, respectively.  The allowance for loan losses as a percentage of gross loans was 1.33% at both December 31, 2005 and 2004 and 1.30% at December 31, 2003, while the percentage of nonperforming loans and assets to gross loans was 0.14%, 0.27% and 0.21% at December 31, 2005, 2004 and 2003, respectively. 

Noninterest Income

                 The following tables set forth information related to our noninterest income.   

 Noninterest income for the year ended December 31, 2005 was $825,781, an increase of $64,318 or 8.4% compared to noninterest income of $761,463 during the same period in 2004.  Noninterest income for the year ended December 31, 2003 was $421,684.  The $339,779 increase in 2004 was primarily related to a $253,699 write-down on real estate that was previously acquired in foreclosure.

Loan fee income consists primarily of late charge fees and mortgage origination fees we receive on residential loans funded and closed by a third party.  Loan fees were $169,876 and $146,986 for the years ended December 31, 2005 and 2004, respectively.  The $22,890 increase relates primarily to a $18,971 increase in mortgage origination fees.  We received $35,562 of mortgage origination fees in 2005 compared to $16,591 in 2004.  We anticipate that the level of mortgage origination fees will remain stable as the mortgage refinancing business has declined due to higher mortgage rates currently being offered.   The remaining increase is due to a net increase of $3,919 in late fees and other related loan fees 2005 compared to 2004.

Income from loan fees decreased by $36,946 to $146,986 for the year ended December 31, 2004 from $183,932 for the same period in 2003.  The decrease relates primarily to the $90,467 reduction in mortgage origination fees.  We received $16,591 of mortgage origination fees in 2004 compared to $107,058 in 2003.  As a result of our larger loan portfolio, late fees and other related loan fees increased $53,521 in 2004 compared to 2003. 

Service fees on deposits 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 $251,644 and $296,100 for the years ended December 31, 2005 and 2004, respectively.  While the number of client accounts continues to grow, the $44,456 decrease is primarily related to a significant amount of NSF fees incurred by and charged to one individual customer in the prior year.  NSF income was $151,459 and $188,880 for the years ended December 31, 2005 and 2004, respectively, representing 60.2% of total service fees on deposits in 2005 compared to 63.8% of total service fees on deposits in 2004.   In addition, service charges on deposit accounts decreased to $82,950 from $93,024 for the years ended December 31, 2005 and 2004, respectively.  The lower service charges are a result of an increase in the earnings credit paid on business checking accounts which offsets the service fees that would have been charged on these accounts.

Deposit fees were $296,100 and $251,938 for the years ended December 31, 2004 and 2003, respectively.  The additional $44,162 of income related to both higher service charges and an increase in NSF transactions which resulted from the larger number of client accounts.  NSF income was $188,880 and $160,260 for the years ended December 31, 2004 and 2003, respectively, representing 63.8% of total service fees on deposits in 2004 compared to 63.6% of total service fees on deposits in 2003.

Other income consists primarily of fees received on debit and credit card transactions, income from sales of checks, and the fees received on wire transfers.  Other income was $404,261 and $321,102 for the years ended December 31, 2005 and 2004, respectively.  The $83,159 increase resulted primarily from an increase in the volume of ATM transactions for which we receive fees.  The ATM transaction fees were $350,429 and $290,143 for the years ended December 31, 2005 and 2004, respectively.  The ATM transaction fees represented 86.7% and 90.4% of total other income for the years ended December 31, 2005 and 2004, respectively.  Included in noninterest data processing and related costs was $278,936 and $252,581 related to corresponding transaction costs associated with ATM transaction fees for the years ended December 31, 2005 and 2004, respectively.  The net impact of the fees received and the related cost of the ATM transactions on earnings for the years ended December 31, 2005 and 2004 was $71,493 and $37,562, respectively. 

Other income was $239,513 for the year ended December 31, 2003.  The $81,589 increase in 2004 from 2003  resulted primarily from an increase in the volume of ATM transactions for which we receive fees.  The ATM transaction fees were $290,143 and $213,844 for the years ended December 31, 2004 and 2003, respectively.  The ATM transaction fees represented 90.4% and 89.3% of total other income for the years ended December 31, 2004 and 2003, respectively.  Included in noninterest data processing and related costs was $252,581 and $201,970 related to corresponding transaction costs associated with ATM transaction fees for the years ended December 31, 2004 and 2003, respectively.  The net impact of the fees received and the related cost of the ATM transactions on earnings for the years ended December 31, 2004 and 2003 was $37,562 and $11,874, respectively.

Noninterest Expenses

                 The following tables set forth information related to our noninterest expenses. 

 We incurred noninterest expenses of $7.9 million for the year ended December 31, 2005 compared to $4.9 million for the year ended December 31, 2004. Of the $3.0 million increase, 50% or $1.5 million was related to the impairment of long lived assets. Noninterest expenses for the year ended December 31, 2003 were $3.9 million.  Average interest-earning assets increased 28.5% and 44.6% during the years ended December 31, 2005 and 2004, respectively, while general and administrative expense, excluding the one-time $1.5 million impairment charge, increased by 30.9% and 26.0%, respectively, for the same periods.

The $1.5 million impairment charge relates to our decision to exercise our option to purchase our main office and headquarters building in December of 2005.  We paid approximately $3.1 million for the building, a price which was calculated based on a pre-determined formula.  Purchasing the building as compared to continuing to lease the building will provide a cost benefit to the Company of approximately $90,000 per year.  We also engaged an outside appraiser to evaluate the market value of our building.  This analysis concluded that the building's market value, including leasehold improvements, was approximately $2.2 million, whereas the purchase price and leasehold improvements totaled approximately $3.7 million, providing for an impairment charge of $1.5 million.  In addition, we have decided to move our current main office and headquarters to a new location approximately one mile away to provide us with additional space.  The cost to continue to operate a branch facility at the existing location would be approximately $300,000, annually.  Our move to the new building will provide an additional savings of approximately $100,000, annually, primarily due to a reduction in rent from $25.50 per square foot to $18.00 per square foot.  We are in the process of actively marketing our building for sale. 

For the year ended December 31, 2005, compensation and benefits, occupancy, data processing and related costs, and the impairment of long lived assets accounted for 83.5% of the total noninterest expense compared to 80.6% in 2004 and 83.0% in 2003.

 The following tables set forth information related to our compensation and benefits. 

Compensation and benefits expense was $3.3 million, $2.5 million and $2.0 million for the years ended December 31, 2005, 2004 and 2003, respectively.  Compensation and benefits represented 42.5% of our total noninterest expense for the year ended December 31, 2005, and 51.5% of our total noninterest expense for the same period in both 2004 and 2003.  The $842,957 increase in compensation and benefits expense in 2005 compared to 2004 is primarily related to a $645,460 increase in base compensation and $184,591 of additional benefits cost.  In addition, incentive compensation expense increased by $24,876, offset by an increase of $11,970 in loan origination compensation expense, which is required to be capitalized and amortized over the life of the loans as a reduction of loan interest income.  Compensation and benefits expense increased by $514,241 in 2004 compared to 2003.  The increase is a result of $312,119 additional base compensation, $150,049 in additional incentive compensation, and $55,183 in higher benefits costs, offset by an increase of $3,110 in loan origination compensation expense.

The $645,460 increase in base compensation expense for the year ended December 31, 2005 compared to the same period in 2004, related to the cost of 14 additional employees as well as annual salary increases.  Seven of the new employees relate to the staff that was hired for the new retail offices that opened in the first and fourth quarters of 2005.  The remaining seven employees were hired primarily to support the growth in both loans and deposit operations.  The $312,119 increase in base compensation expense in 2004, related to the addition of 10 employees who were needed to support the growth in earning assets and related deposit expenses, plus the impact of annual salary increases.

Incentive compensation represented 20.2%, 25.0%, and 23.1% of total compensation for the years ended December 31, 2005, 2004, and 2003, respectively.  The incentive compensation expense recorded for the years 2005, 2004 and 2003 represented an accrual of the portion of the estimated incentive compensation earned during the respective year. 

Benefits expense increased $184,591 in the year ended December 31, 2005 compared to the year ended December 31, 2004 and $55,183 in 2004 compared to the year ended December 31, 2003.  Benefits expense represented 17.8%, 15.0%, and 15.7% of the total compensation for the years ended December 31, 2005, 2004, and 2003, respectively. 

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

Data processing and related costs were $919,379, $813,097 and $625,779 for the years ended December 31, 2005, 2004 and 2003, respectively.  During the year ended December 31, 2005, our data processing costs for our core processing system increased by $52,425 to $473,013 compared to $420,588 for the same period in 2004.  Data processing costs for our core processing system were $292,526 for the year ended December 31, 2003.  We have contracted with an outside computer service company to provide our core data processing services. 

Data processing costs increased $52,425, or 12.5%, for the year ended December 31, 2005 and $128,062, or 43.8%, for the year ended December 31, 2004 when compared to the same periods in 2004 and 2003, respectively.  The increases in costs were caused by the higher number of loan and deposit accounts.  A significant portion of the fee charged by the third party processor is directly related to the number of loan and deposit accounts and the related number of transactions. 

We receive ATM transaction income from transactions performed by our clients.  Since we also outsource this service, we are charged related transaction fees from our ATM service provider.  ATM transaction expense was $278,936, $252,581 and $201,970 for the years ended December 31, 2005, 2004 and 2003, respectively.  The increase relates to the higher transaction volume during the respective periods.

Occupancy expense represented 10.2%, 12.4% and 15.3% of total noninterest expenses for the years ended December 31, 2005, 2004 and 2003, respectively.  Occupancy expense increased $196,234 to $799,267 for the year ended December 31, 2005 from $603,033 for the same period in 2004.  The increase resulted primarily from increased rent expense and the increased depreciation expenses related to opening our Parkway and Augusta Road offices.  During 2004, occupancy expense increased only $15,041 from $587,992 for the year ended December 31, 2003.

The $1.5 million impairment on long lived assets charge for the year ended December 31, 2005 is related to the purchase of our Haywood Road office building.  On December 30, 2005, we purchased the main office building for $3.1 million and immediately thereafter recorded a $1.5 million write-down on the valuation of the purchased building in accordance with SFAS No. 121, "Impairment of Long-Lived Assets."  The $1.5 million impairment is based on various assumptions related to our ability to either sell or lease the building at various lease rates.  The actual results of our ability to either sell or lease the building could significantly differ from the assumption used in the impairment calculation.

                The remaining $356,612 increase in noninterest expenses for the year ended December 31, 2005 compared to the same period in 2004, resulted primarily from increases of $90,818 in professional fees, $147,903 in marketing costs, $23,783 in insurance expenses, and $94,108 in telephone and other expenses.  A significant portion of the increase in professional fees related to additional legal and accounting fees related to new SEC reporting requirements.  The increase in marketing expenses related to expanding our market awareness in the Greenville market, while a significant portion of the increase in other expenses was due to increased costs of postage and office supplies, additional staff education and training, and higher dues and subscription costs

Contributing to the increase in noninterest expenses for the year ended December 31, 2004 compared to the same period in 2003 were increases of $38,042 in professional fees, $132,557 in marketing costs, $18,759 in insurance expenses, and $84,369 in other expenses.  A significant portion of the increase in professional fees related to additional audit expenses.  The increase in marketing expenses related to expanding our market awareness in the Greenville market, while a significant portion of the increase in other expenses was due to increased costs of postage and office supplies, additional staff education and training, and higher dues and subscription costs.

                Income tax expense was $1.5 million, $1.2 million and $616,534 for the years ended December 31, 2005, 2004 and 2003.  Our effective tax rate was 38% for each of the years ended December 31, 2005, 2004, and 2003.

Balance Sheet Review

General 

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

Federal Funds Sold

                 At December 31, 2005, our $19.4 million in short-term investments in federal funds sold on an overnight basis comprised 4.8% of total assets, compared to $1.4 million, or 0.4% of total assets, at December 31, 2004.  As a result of the historically low yields paid for federal funds sold during 2004, we maintained a lower than normal level of federal funds during 2004.  In addition, the $6.4 million increase in official checks outstanding caused our federal funds sold to be higher than normal at December 31, 2005.

Investments 

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

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

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

Other investments at December 31, 2005 consisted of Federal Reserve Bank stock with a cost of $863,700, investments in Greenville First Statutory Trust I and II of $186,000 and $217,000, respectively, and Federal Home Loan Bank stock with a cost of $4.2 million.  At December 31, 2004, we owned Federal Reserve Bank stock with a cost of $485,150, Federal Home Loan Bank stock with a cost of $3.2 million, and an investment in Greenville First Statutory Trust I of $186,000.

The amortized costs and the fair value of our investments at December 31, 2005, 2004, and 2003 are shown in the following table.